FCA Covers Up the Unfair Advantages of the Farm Credit System

Too often, the Farm Credit System’s (FCS) regulator, the Farm Credit Administration (FCA) defends the FCS when it should be rigorously regulating it. It doesn’t matter whether the FCS is under Congress’s, the news media’s or even taxpayers’ scope – the FCA always seems to have the System’s back and consistently covers for it.

On April 2, the House Appropriations Subcommittee on Agriculture held a hearing titled “The Rural Economy,” featuring none other than the FCA’s Chairman and CEO Dallas Tonsager. Though Chairman Tonsager dealt with most questions handily, he tripped up on one which gets to the heart of policymakers’ skepticism about the FCS.

Ranking Member Jeff Fortenberry (R-NE) asked: “Many of us receive complaints from the commercial banking sector that the Farm Credit System has an unfair advantage. Just a rough calculation – you’ve had about a 20 percent increase in assets in the last five years. Are they correct in saying that the Farm Credit System has an unfair advantage?”

Ranking Member Fortenberry’s question is reasonable, simple and direct: does the FCS have an unfair advantage? His question is even charitable, as the FCS’s growth actually exceeds his estimate. But how did Chairman Tonsager’s respond to this softball question?

Chairman Tonsager: “The Farm Credit System has roughly 40 percent of the agricultural credit, the banking industry has roughly 40 percent of the agricultural credit…The System was established a hundred years ago as a cooperative system, so there’s 500,000 farmer-owners of the System that are the beneficiaries of the Farm Credit System. The cooperative structure generally allows for the profit of the System to be given to the producers who in turn pay the tax on it. Many of the banking industry participate in a subchapter S structure that also allows the profits to pass through. The profits of the long-term credit lending for particularly real estate are not taxed. The banking industry has access to the community banking system as well and gets some advantages that way. So, I would argue: yes, there’s debates that occur, but by and large this is a hundred year old institution that benefits producers and there are offsetting issues in some cases, and I’m not aware of any analysis that’s been done in recent time that would compare the two.”

It’s ok if you need to read that over again, or even a few times. If you do, you’ll notice that Chairman Tonsager never answers the question. He gets close, to his credit, with “yes, there’s debates that occur,” and “The profits of the long-term credit lending for particularly real estate are not taxed.” But he never gets down to it: does the Farm Credit System have an unfair advantage?

Yes, it does! The Farm Credit System has extensive advantages. Its real estate loans are tax exempt, and it dominates the agricultural real estate lending market. In 2018, the Farm Credit System reaped $5.45 billion in income from these loans and others, but it paid only $126 million in income taxes. That’s a tax rate of approximately 2.3 percent. And the System’s advantage is so clear that Rep. Steve Watkins (R-KS) has introduced H.R. 1872, the Enhancing Credit Opportunities in Rural America (ECORA) Act, which would put other lenders on an equal footing with the FCS in real estate lending.

It’s obvious that the System has unfair advantages over other lenders, but the System’s own regulator won’t admit it. That isn’t right – the regulator’s job is to be critical of the System and look for ways to improve it. The regulator should not be defending the System with non-answers like the one Chairman Tonsager gave. Congress needs to ask again, and keep asking: does the Farm Credit System have an unfair advantage?

Sooner or later, the FCA will have to give the real answer: yes.

 

 

FCA Covers Up the Unfair Advantages of the Farm Credit System

Too often, the Farm Credit System’s (FCS) regulator, the Farm Credit Administration (FCA) defends the FCS when it should be rigorously regulating it. It doesn’t matter whether the FCS is under Congress’s, the news media’s or even taxpayers’ scope – the FCA always seems to have the System’s back and consistently covers for it.

On April 2, the House Appropriations Subcommittee on Agriculture held a hearing titled “The Rural Economy,” featuring none other than the FCA’s Chairman and CEO Dallas Tonsager. Though Chairman Tonsager dealt with most questions handily, he tripped up on one which gets to the heart of policymakers’ skepticism about the FCS.

Ranking Member Jeff Fortenberry (R-NE) asked: “Many of us receive complaints from the commercial banking sector that the Farm Credit System has an unfair advantage. Just a rough calculation – you’ve had about a 20 percent increase in assets in the last five years. Are they correct in saying that the Farm Credit System has an unfair advantage?”

Ranking Member Fortenberry’s question is reasonable, simple and direct: does the FCS have an unfair advantage? His question is even charitable, as the FCS’s growth actually exceeds his estimate. But how did Chairman Tonsager’s respond to this softball question?

Chairman Tonsager: “The Farm Credit System has roughly 40 percent of the agricultural credit, the banking industry has roughly 40 percent of the agricultural credit…The System was established a hundred years ago as a cooperative system, so there’s 500,000 farmer-owners of the System that are the beneficiaries of the Farm Credit System. The cooperative structure generally allows for the profit of the System to be given to the producers who in turn pay the tax on it. Many of the banking industry participate in a subchapter S structure that also allows the profits to pass through. The profits of the long-term credit lending for particularly real estate are not taxed. The banking industry has access to the community banking system as well and gets some advantages that way. So, I would argue: yes, there’s debates that occur, but by and large this is a hundred year old institution that benefits producers and there are offsetting issues in some cases, and I’m not aware of any analysis that’s been done in recent time that would compare the two.”

It’s ok if you need to read that over again, or even a few times. If you do, you’ll notice that Chairman Tonsager never answers the question. He gets close, to his credit, with “yes, there’s debates that occur,” and “The profits of the long-term credit lending for particularly real estate are not taxed.” But he never gets down to it: does the Farm Credit System have an unfair advantage?

Yes, it does! The Farm Credit System has extensive advantages. Its real estate loans are tax exempt, and it dominates the agricultural real estate lending market. In 2018, the Farm Credit System reaped $5.45 billion in income from these loans and others, but it paid only $126 million in income taxes. That’s a tax rate of approximately 2.3 percent. And the System’s advantage is so clear that Rep. Steve Watkins (R-KS) has introduced H.R. 1872, the Enhancing Credit Opportunities in Rural America (ECORA) Act, which would put other lenders on an equal footing with the FCS in real estate lending.

It’s obvious that the System has unfair advantages over other lenders, but the System’s own regulator won’t admit it. That isn’t right – the regulator’s job is to be critical of the System and look for ways to improve it. The regulator should not be defending the System with non-answers like the one Chairman Tonsager gave. Congress needs to ask again, and keep asking: does the Farm Credit System have an unfair advantage?

Sooner or later, the FCA will have to give the real answer: yes.

 

 

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