The Farm Credit System (FCS) primarily serves its customers through individual associations. For the most part, each association has a defined territory, and this patchwork of different territories covers the entire country. But over the past few decades, the number of associations has dropped considerably – the result of a wave of consolidations – resulting in a loss of local control.
Consolidation is a common business practice, and whether it’s good or bad depends on external circumstances and the characteristics of whatever is consolidated. And while there are potential benefits to the consolidation of FCS associations, there are also potential and definite drawbacks to consider. Consolidation could mean greater institutional efficiency, and potentially a lower interest rate on loans for farmers. But consolidation can also mean that borrowers are cut off from their local, established lenders and locations; it also means that there’s less local control of the association, as there are a limited number of board seats for each association, and board membership provides local voices a greater opportunity to be heard.
The benefit may sound like it’s worth it, but have interest rates really declined because of consolidation? Even if there have been lower interest rates on loans offered by associations, how would anyone know whether that’s because of consolidation rather than any number of other external factors?
The drawbacks, though, are commonsense and apparent. With consolidation of associations, farmers now have to rely on non-local authorities to provide loans so that they can operate their farms and maintain their livelihoods. Disconnection from the circumstances of any particular location means that the lender might not be keyed into the struggles that farmers are facing in that location. And the board of an association serving a larger region will see the same issue. Boards can’t just add more and more members as the associations consolidate. At some point there has to be a limit on how many board members there are, and that limit will mean that the larger, consolidated association is not as representative of local farmers as the smaller associations.
Two recent examples of consolidation may shed light on what’s driving this wave. In 2014, Farm Credit Services of the Southwest announced that its financial statements since 2009 could “no longer be relied upon,” and it began the process of merging with Farm Credit West in 2015. And in 2019, Farm Credit Services of Hawaii disappeared, merging with American AgCredit, which serves Oklahoma, Kansas, Colorado, Nevada, California, and now Hawaii. The exact reason for the merger is unclear, but it’s likely that Farm Credit Services of Hawaii was a failed institution.
The consolidation of FCS associations – leading to less representation for the average farmer and less accountability – needs to be investigated. The Farm Credit Administration, which regulates the System and approves the merging of associations, has not issued any statement or taken any action to demonstrate that it deems consolidation a problem. Congress needs to step in and investigate, and if necessary, restore associations back to local control so that they’re accountable to the farmers they serve.