Farm Credit Sets Itself up for Disaster

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Leave it to the Farm Credit System (FCS) and its defenders to make the same mistake over again – and now the deferral of principal payments is back.

The FCS needed a bailout by America’s taxpayers in 1987, following the 1980s Farm Crisis.  Four billion dollars later, but still, few lessons were learned. One of the primary drivers of the Farm Credit crisis was the deferral of payments on the principal of loans.

When a financial institution extends a loan, it expects to be paid back over time, with interest on the original amount loaned. And when the borrower pays back the loan, their total payment is composed of one portion, the original amount loaned, and another portion, the amount of interest owed. A deferral of payments on the principal of a loan means that the borrower is only paying the interest on a loan. If it’s a non-predatory loan, the amount paid on the principal will be more than the amount paid to cover interest.

One can imagine, then, that a deferral of payments on the principal of loans would greatly affect the bottom line of the financial institution issuing the deferral. If it goes on for long enough, the financial institution might be less stable, and its instability would affect other institutions with which it has a financial relationship. This is what happened during the 1980s Farm Crisis, leading to the Farm Credit crisis.

The deferral of principal payments is back.

Farm Credit Services of America, one of the largest FCS associations and with more than $27 billion, has issued letters to certain borrowers, noting that they “are eligible to participate in the program, whereby we can defer the principal portion of all payments due in 2018 on your fixed or variable rate real estate loan(s).”

It starts out with just a few borrowers, and only for 2018. But what happens if there’s another bad year for farm commodity prices? Will the program be extended? Will there come a time when this $27 billion financial institution is starved for cash because its borrowers aren’t paying back the principal of their loans?

We all know what happens after that. The loans aren’t repaid, Farm Credit Services of America tanks, the rest of the FCS suffers, and taxpayers come to the rescue.

And by all accounts, the FCS’s regulator, the Farm Credit Administration (FCA), supports this idea despite its potentially disastrous effects. In a speech in late January 2018, FCA Chair Dallas Tonsager spoke about it glowingly: “This is exactly the type of service that will build confidence in your cooperative and ensure the best possible outcome for your members.”

That’s a nice sentiment, but history has shown that this sort of policy can be dangerous for the health of the System. Congress needs to step in and nip this practice in the bud. We’ve seen how this plays out before. Let’s not let another Farm Credit crisis happen on our watch.