On the heels of November’s hearing to review agricultural credit conditions, in December 2019 the House Agriculture Subcommittee on Commodity Exchanges, Energy, and Credit held another hearing to receive information from lenders directly, including from the Farm Credit System (FCS), about this important issue.
Farm Credit’s responses did not inspire confidence.
Two lines of inquiry, in particular, should leave observers concerned about Farm Credit’s record of serving underserved groups and its stability in a tough agricultural economy. Rep. Ann Kirkpatrick (D-AZ) , hailing from a region with significant Native American presence, asked: “Have any of you worked with Native American farmers or Native-owned lenders?”
To this direct and straightforward question, AgCountry Farm Credit Services’ CEO Marc Knisely replied: “Farm Credit does have and has made loans to Native Americans. It oftentimes depends on the reservation, whether they have an open or closed reservation, and depends some time on whether the property is located on the reservation or on Tribal lands or off Tribal lands.”
This has been an ongoing problem, so much so that the 2018 Farm Bill tasked the Government Accountability Office (GAO), often called Congress’s watchdog, with studying whether Farm Credit adequately serves Native American farmers and producers. The GAO found that Farm Credit is not adequately serving Native American farmers and producers, and the major reason Farm Credit provided is that Native American tribes are “distinct, independent political communities” and that they had “concerns about their ability to recover loan collateral if the borrower defaulted on a loan involving tribal lands.”
Native American farmers and producers deserve access to credit. Farm Credit receives a gargantuan tax break every year. In 2018, its effective tax rate increased to 2.3%, with Farm Credit only paying $126 million in taxes. Farm Credit receives this tax break so that it can fulfill a public need. Surely it can offset any potential unrecovered collateral with this public subsidy.
Farm Credit’s response on decreasing land values and their relation to young farmers was troubling as well. Rep. Jim Baird (R-IN) asked how financial institutions like Farm Credit can help young farmers in the face of decreasing land values and high debt-to-assets ratios. But the answer he got was unsatisfactory: “The most important thing we can do to support real estate values is to be prudent in our lending practices and not let real estate values get out of hand.”
This is nothing more than prevention after the fact, and it is the peak of contradiction for a representative of Farm Credit to advise prudence in lending practices. Unlike many other lenders, Farm Credit institutions are not required to have independent appraisers. That’s right: Farm Credit institutions can have appraisers in-house, and with that comes the possibility of internal conflicts of interest that could lead to higher land valuations.
But when external factors lead to a decline in asset values, Farm Credit will be left holding the bag. Two-thirds of its debt holdings – $108 billion – is in real estate loans. What will keep Farm Credit afloat if there’s a shock and farmers are having trouble paying their mortgages? What will happen to the young farmers when Farm Credit – which has a statutory obligation to lend to them – is in even less of a position to help them? Young farmers need a solution now, and Farm Credit’s failure to serve them adequately would only get worse under those circumstances.
There is a silver lining: members of the committee have time to submit follow-up questions. Let’s hope they take the opportunity to get real answers and hold Farm Credit accountable.