~ CONGRESSIONAL Universi of Mi ssss ri - CCCCC bia 3 RESEARCH CCCCCC SS S ERVICE lllllll Ill /I/II// lrllllllllllllllllllllllllllllllll I/I///II/Ill//I I 03940014 AGRICULTURAL CREDIT: EXPANDING LENDING AUTHORITY OF THE PARK‘! CREDIT SYSTEM ISSUE BRIEF NUHBER IB80033 AUTHOR: Honach, Jasper Environzlent and Natural Resources Policy Division THE LIBRARY OF CONGRESS CONGRESSIONAL RESEAEH SERVICE HAJOR ISSUE SYSTEH nus ORIGINATED Qggzggg DATE UPDATED Qgggggg FOR EDDITIONAL INFORMATION CALL 287-5700 01429 CRS- 1 IBBOOB3 UPDATE-04/28/80 l§3U3 22 lllilo The Farm Credit System, a Federally chartered and regulated lending institution, is the single largest source of credit to the farm sector. The System is nade up of Federal Land Banks and Land Bank Associations, Federal Intermediate Credit Banks and Production Credit Associations, and Banks for Cooperatives. The banks and associations of the System are organized as cooperatives and are entirely farmer-owned. The System uses no Federal funds but raises money in theenational and international money markets by selling securities- Legislation has been initiated, at the request of the System itself, that would expand its lending authority. Suppcrting the legislation are the member associaflions which represent the borrower clients of the System. It is the agricultural borrowers who would benefit from expanded lending authority andafinproved operating efficiency of the Systen. There is some opposition to an expansion in the System's lending authority from competitive lending institutions, from some farm groups who question the purpose of going beyond the present scope of activities, and from farm organizations that consider some insurancea services offered to borrowers unfair competition. The bills under ccnsideration are H.R. 11762 and S. 1065. §AQKG§Q-ND_A§2.EQLl§I-AEALYS § ORGANIZATION AND HISTORY The Fara Credit System (FCS) is a farmer owned and controlled lending institution. 0rganized.as cooperatives, there are three separate banking groups within the FCS: (1) Federal Land Banks (FLBs) make 5 to no years farm mortgage loans through their 505 locally officed Federal Land Bank Associations (FLBAS); Federal Intermediate Credit Banks (FICBs) make up to 7-year loans through their #25 locally officed Production Credit Associations (PCAS); and (3) Banks for Cooperatives (BCs) make loans to farmer cooperatives. The Farm Credit Administration (FCA) is the independent Federal agency that supervises and examines all participating banks in the system. In each of 12 Farm Credit Districts throughout the United States there is a Federal Land Bank, a Federal Intermediate Credit Bank, and a Bank for Cooperatives. There is also a Central Bank for Cooperatives in Denver. These 37 banks belonging to the System raise funds by selling consolidated bonds and discount notes in the national and international money markets. The Federal Governnent does not provide loans or loan guarantees to the System. Even the cost of the Far: credit Administratio is assessed upon the banks and associations it supervises. Permanent authority for the Farm Credit Systen is contained in the Farm Credit Act of 1971 (P.L. 92-181). This Act supersedes all previous 1 Vislation governing the Systen. In fact, the System has its origin in the F leral Far: Loan Actibf 1916, which created the Federal Land Banks and their aenber associations. The Agricultural Credit Act of 1923 created the Federal Intermediate Credit Banks. In 1933, the Farm Credit Act established the Banks for Cooperatives and authorized the Production Credit Associations- Initially, all of the banking groups were capitalized by the Federal Government- Provisions of the law allowed borrower nembers to retire the CRS- 2 IBBO033 UPDATE-O 4/28/80 Federal capital and to acquire full ownership of the banks. This was conpletely accomplished in 1968 for all parts of the System. LENDING ACTIVITIES The Far: Credit System is the single largest source of credit to the farm sector. At the end of 1979, the System had $50.4 billion in loans outstanding to farmers and $8.1 billion to cooperatives. The Federal Land Banks hold 35.5% of the outstanding farm real estate debt. Production Credit Associations and Pede1:‘al Intermediate Credit Banks hold 25.9% of the naz-real estate debt. Preliminary data place the total combined far: debt at $157.9 billion at the beginning of 1980, so the Farm Credit System holds 30 .296 of total farm debt. It is estimated that the Banks for Cooperatives provide some tworthirds of all financing used by the cooperatives. cns- 3 IB0033 UPDATE-04/28/80 Total Far: Debt Outstanding, as of January 1, 1980 (1) Amount Percentage Leeds: .(§..zn.i.l.li.<2I_1). ._e£...n1-2;. 13§2_.-;l§E.a.2 Federal Land Banks 29,540 18.7 Life insurance companies 11,900 7.5 Commercial banks 8,972 5.7 Farmers Home Administration 4,400 2.8 Others (including sellers) 28,310 17.9 Total 83,122 52.7 I12n:.Isee.l..§§.t§.-e Production Credit Associations 17,570 11.1 Federal Intermediate Credit Banks(2) 650 .4 Commercial banks 30,400 19.3 Farmers Home Administration 9,900 6.3 fierchants, dealers and others 11,720- 7.4 Total 3 7o,2uo uu.5 Real Estate and Nonrneal Estate Debt 153,362 97.1 CCC nonrecourse loans 6 4,500 2.9 Total.Farn Debt 157,862 100.0 (if 1930 pi:EI'i"ninary est1E§'€5f'"""'"""""""""""""""""""'""""""" (2) Discounts to financial institutions other than Pcns. SOURCE: Economics, Statistics and Cooperatives Service, gggigglgggal giggngggggglook, November 1979. " CRS- l-I IB80033 UPDATE-Oil/28/80 During 1979 the Farm Credit System made new loans totaling $58.0 bzillio This was a record volume, $13 billion more than was borrowed during 1978. The large loan volume =‘was in part a reflection of the increased borrowing capacity or strength dff the farm economy in 1979. Farm assets increased from $820.2 billion to $950.0 billion, largely due to a 16% increase in real estate values. Farm debt also increased by $20 .3 billion. Farm equity increased by $109 .5 billion and the debt-to-equity ratio dropped from 20.1 to 19.9. Farm income, which provides the means to make the payments on the debt, was $33.3 billion in 1979. This was an increase of $5.1 billion over 1978 and was equal to the record set in 1973. Projections of reduced farm income in 1980, along with high interest rates and generally tight credit, should reduce Farm Credit System lending in the coming year. The System has historically been able to raise funds at very favorable terms but the current market conditions are making it difficult for all issuers of bonds to raise money. The money that is obtained carr:i.es a high interest rate that increasingly fewer farm borrowers may be able or willing to afford. ‘ PROPOSED LEGISLATION AND ITS BENEFITS The Farm Credit Act of 1971 stands today as the basic authority for the Farm Credit System. Only on two occasions during the past eight years have minor changes been made to the basic law (amendments were added in 1979 ---== 13.1.. 94-184, and 1978 <- P.I.. 95-M43). Now, a proposal from policy officiai within the System recommends a number of substantial changes. The recommended legislation was introduced as S. 1465 and H.R. 4782. As summarized by the Farm Credit Administration, the proposed legislation would do the following: ‘- (a) Permit Federal Land Banks to make loans for more than 85% of the appraised value of farm real estate when these loans are guaranteed by a Federal agency such as Farmers Home Administration or by a State government. This would make it possible for FI.Bs to expand financing to limited-equity farmers -- especially young farmers -- and would keep pace with FmHA's current sh:i.i':t in emphaisis from making its own loans to guaranteeing loans by other lenders. (b) Require that 60% or more of the members of cooperatives borrowing from Banks for Cooperatives be farmers. The current minimum is 80% except for rural electric and telephone co-ops -- it is 70% for them. The change would mean Bcs could finance more co—ops but they still would be controlled by farmers. District farm credit boards still would be able to set higher minimums for their Bcs’.-7. (c) Broaden the authority of FLBs and Production Credit Associations to finance processing and marketing directly related to the farming, ranching, or aquatic operations of eligible applicants and other bona-fide producers. District boards would set limits on this authority, subject to FCA approva’ FLBS and PCAs would not finance new classes of borrowers, but would be ab.. , to more fully finance those presently eligible to borrow. (d) Authorize Bcs to finance agricultural export transactions that benefit 0.5. cooperatives. Bcs would be able to offer exporting co-ops the financial services necessary to expand international trade. Bcs would be permitted ‘to make deposits in foreign banks, receive and hold credit balances from banks cns-— 5 11380033. UPDATE-0 4/28/80 and borrowers, buy and sell bankers’ acceptances, buy time drafts payable by foreign buyers of farm products, take part in currency exchange, and make loans to facilitate transactions of borrowing cooperatives. The expected 1: ult: co-ops would be able to gain a greater share of the farm product export business; their farmer-members would benefit. (e) Expand aquatic financing by the Farm Credit System. Allow FLBS to make long-term loans to producers and harvesters of aquatic products. Clarify that cooperatives solely engaged in furnishing aquatic business services are eligible ‘to borrow from BIB. Permit Federal Intermediate Credit Banks to discount aquatic loans of other financial institutions. (f) Allow System institutions to participate in loans of other- System institutions. A (g) Allow FIBS to participate in loans by lenders outside the system. (h) Permit Production Credit Associations to issue participation certificates to commercial banks and other lenders. This would streamline a program under which PCAs participate in farm loans originated by commercial banks. (i) Permit the Federal Farm Credit Board to set salaries, within limits, for the FCA governor and deputy governors. Allow FCA to manage salaries below the deputy governor level, employee qualification requirements, and travel, procurement, and property regulations. Make it easier for employees to move from farm credvit banks and associations to KIA by providing for transfer of sick leave and retirement benefits. v The thrust of the legislative proposal is to update the lending authority of the Farm Credit System to meet the current credit needs of the farm sector. Changes in farm structure, marketing practices, and even the rural population have altered the credit needs of farmers and their cooperativesi. The legislative proposal would give the System the lending authority it feels would best serve today's agriculture. i OPPOSITION TO THE LESISLRTIVE PROPOSAL Host of the proposed revisions to the Farm Credit Act would expand the lending authority of the Farm Credit System. Competing private lenders could be expected to oppose such an expansion. Competitors would be adversely affected in two ways. First, some existing and new loans business would likely shift to the Farm Credit system. Second, as the Farm Credit System expands its lending, competition in the money markets could increase, thereby making it more costly for all lending institutions to raise capital. The concern over more costly loan funds weighs also upon existing borrowers. As the Farm Credit System raises money by selling bonds and notes it will be paying increasingly higher interest rates (at least under present economic conditions). The higher interest rates will not only affect new lran accounts but also the older outstanding loans. The older longrterm 1 ins will have adjustments made in their terms because of variable interest rate provisions in the loan contracts. offsetting the concern of ex:i.sting borrowers over higher ointerest rates is the fact that the new authority will increase the amount and types of loans for which these borrowers are eligible. CRS- 6 IB80033 UPDATE-01-I/28/80 An important elenemt among the proposed revisions is the authority to finance agricultural export transactions of marketing cooperatives. It . argued that financing from the Banks for Cooperatives would make the marketing co-ops more competitive with the private international trading companies. To the extent this is true it might be expected that the private trading companies would oppose the expanded lending authority, but they have so far not raised objection. The private banking industry to which the co-ops must now turn for export financing would also lose some business and face increased competition. The American Bankers Association has raised objection to the export financing authority as being greater than that allowed national banks’. A compromise that is being pursued would give BCs no greater lending authority than is given to other export financing institutions. There was some initial cnncern from scme farm groups that export financing might be beyond the intent and purposes of the Farm Credit System to meet the credit needs of farmers and ranchers. The most vocal and strongest opposition to the legislation relates not to any proposed revisions but to the present insurance services being offered by some Farm Credit institutions. The Farm Credit Act of 1971 authorizes System banks and associations to provide finance-related services to the member borrowers. Under this authority many of the Production Credit Associations and Federal Land Bank «;Associations offer credit life insurance to their borrowers. some Associations have also sold crop hail, collateral, and credit disability insurance. The Farm Credit Systan does not own any insurance companies itself but simply acts as an agent in selling the insurance of other private carriers. the revenue earned from insurance sales is used tooffset other expenses, thereby benefiting member borrowers. all cases, borrowers are free to purchase insurance from competing agents. The purchase of insurance through the Farm Credit System is never a condition of a loan. A The American Farm Bureau Federation (the nation's largest general farm member organization) is leading the opposition to insurance sales through the Farm Credit System. The Farm Bureau sees these insurance services as unfair competition with its own insurance operations because of the apparent captive position of borrowers. with the exception of its concern over insurance the Farm Bureau is otherwise a supporter of the legislation. L§§£5L§IlQ! S. 1ll65 (Talmadge et al.)/H.R. lI782 (Jones, E... et al.) The Farm Credit Act Amendments. Developed by and submitted to the Congress at the reguestt of the Farm Credit System to revise the Farm Credit Act of 1971. Expands ,the lending authcrity of the system. The Senate bill introduced July 9, 1979; the House bill introduced July 13, 1979. The Agriculture Subcommittees on Credit in both Senate and House held hearings during 1979 and 1980. A §§ABl!§§ 0.5. Congrss. Ho-use. Committee an Agriculture. Subcommittee on Conservation and Credit. Farm Credit Act Amendments. Hearings, 96th Congress, 2d session; on 11.12. 1:782. Bar. 5, 6, 1980. Hashington, 0.5. Govt. Print. Off., 1980. cns- 7 1330033 UPDATE-04/28/80 (not yet available) UCS C 9. Congress. and Forestry. Electrification. 96th Congress, 1979. Senate. Conittee on Agriculture, Nutrition, Subcommittee on Agricultural Credit and Rural Farm Credit Act amendments of 1979. Hearings, 1st session, on S. 1u65. Oct. 4, 5, and Washington, U.S. Govt. Print. Off., 1980. 290 p. §§2QRT§-lN2-§Q§§§§§§lQE1L-D0CQ§§§$§ Jones, Ed. Correspondence and summary of the Farm Credit Act Amendments submitted at the request of the Farm Credit Administration; record Talmadge, Herman. of the Senate . S9015. In Extension of Remarks. Congressional [daily ed.], July 13, 1979: E3590. Supporting statement, materials, and text Farm Credit Act Amendments. Remarks in the Congressional record [daily ed.], July 9, 1979: §§F0N0LQ§X.Q§-E!§N-§ 07/13/79 07/09/79 06/29/79 10/10/78 12/31/75 12/10/71 H.R. 4782, the Farm Credit Act Amendments, was introduced by Congressman Ed Jones at the request of the Farm Credit Administration. 5. 1u6S, the Farm Credit.Act.Amendments, proposed by the Farm credit Administration, was introduced by Senator Talmadge. The Farm Credit Administration transmitted a draft bill to the House Agriculture Committee that would expand the lending authority of the Farm Credit System (Executive Communication 1917) . S. 3045 was enacted into law as P.L. 95-443. This amended the Farm Credit Act to allow PCA loans to producers or harvesters of aquatic products for up to 15 years (as compared to the previous 7 years). H.R. 7862 was enacted into lav as P.L. 9H-184. This amended the Farm Credit Act to allow loans to public utility cooperatives with far: membership of at least 70% (as compared to the previous 80%). S. 1483 was enacted into lav as P.L. 92-181. This legislation provides the basic permanent authority for the Farm Credit System and is titled the Farm Creditimct of 1971. A22l2lQEéL_§§§§§§§Q§-§9E§§§§ Economics, Statistics, and Cooperatives Service. Agricultural finance outlook.l Washington, U.S. Department of Agriculture, CRS- 8 IB80033 UPDATE-O ll/28/80 novenberi1Q79.*i41 p.>s Far: Credit Administration. flSth annual report. 1977+1978. Washington, June 30, 1979. 105 p. ’ 0.5. General Accounting Office. The Farm Credit system: some opportunities for improvement. A report to the Congress by the Comptroller General. Washington, Jan. 25, 1980. 67 p. (CED-80-12) E.» ..—‘:. M V21 EJ_._~ (:4; Q - Aijkaga ,nr -2 ‘X.’ :1.‘ _v.:»%_..'-‘ ";tr.5:..:.wr_-2:;-:.:I-.:_ 1 5 . 77 '»$..,-W ' .; :4 ¢:=:='A;'4n, r; r«m"Js‘°, q ~ ¢=s'4-';v;,;i. '« 1' \Li.fi fu 5;: fig , ,7‘ _‘,~‘.1:.-.—_ If ‘-"—1'.a.l‘;".« -u.. ‘:1 ‘E’ .. ,. ‘ , .,- _.- » I"(“'\1 V“ ‘ "'7 ; ‘-U1 _.1 K’: ,5‘-' A sea . 1* —'~-£v~,.>~ —.2 -- :r.=1.,.v. .;, .. - H _. _ F