What the FCA Chairman told Congress about Farm Credit

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Last month the House Agriculture Subcommittee on Commodity Exchanges, Energy, and Credit held a hearing to review agricultural credit conditions and the Farm Credit System’s (FCS) role in creating those conditions. Testifying before the subcommittee was Glen Smith, the Chairman of the Farm Credit Administration (FCA), the FCS’s regulator.

The question: should we be worried about agricultural credit conditions?

Yes, but not as worried as Chairman Smith thinks we should be. According to Smith, credit conditions now are similar to those in the early 1980s, just before farmers and producers felt the full impact of the 1980s farm crisis: “I think we’re at a level that’s comparable to the early ’80s. At that time in the Midwest, we’d lost 15-20 percent of our land values. Guess what? Today we’ve lost 15-20 percent of our land values in the Midwest.”

That is a strong statement, one that shouldn’t be delivered or received lightly. But let’s imagine that it’s really as bad as Smith says it is. The FCS holds slightly over 40 percent of all farm debt. However, roughly two-thirds of its debt holdings – around $108 billion – is in real estate loans. The American Farm Bureau’s Chief Economist John Newton frames the problem accurately: “If we start to see things like asset values decline and bankruptcies increase, who holds that debt becomes a really important question.”

Newton has a good point, and when it’s taken together with data from the Kansas City Federal Reserve showing deteriorating credit conditions, observers should be concerned about the System. If the System’s regulator says that land values are decreasing, and two-thirds of the Farm Credit’s debt holdings are for real estate loans, then Farm Credit is in for a shock.

The FCA generally describes the System’s activities and status charitably. In his testimony, Smith described the System as “safe and financially sound.” If the System is owned by its customer-borrowers and is safe and sound, and if credit conditions are worsening at the same time, then one should question which farmers, exactly, the System is lending to. Either the System is at grave risk from land value decreases, or it loans primarily to farmers and businesses which are able to withstand that shock.

Both possibilities deserve congressional attention. For the former, Congress needs to examine how it can reform the FCS so that it can adequately withstand a shock – it should consider de-consolidating Farm Credit institutions and limiting what kinds of agricultural real estate it can extend loans for. For the latter, Congress needs to arm the FCA with the authority and resources to crack down on FCS institutions which aren’t adequately serving vulnerable farmers, especially young, beginning and small farmers. Whatever’s the case, Congress needs to hold annual oversight hearings of the FCA and FCS, before it’s too late.