The Farm Credit System (FCS) is America’s oldest government-sponsored enterprise (GSE), a “quasi-governmental entity established to enhance the flow of credit to specific sectors of the American economy.” In Farm Credit’s case, it was established to improve the well-being of American farmers and ranchers “by furnishing sound, adequate, and constructive credit and closely related services to them.” It’s quasi-governmental, and created for a public purpose.
Neutral ratings agencies agree.
Fitch Ratings, one of the preeminent ratings agencies in the financial world, recently upgraded its rating outlook for the Farm Credit System from negative to neutral. Taxpayers across the country should rejoice, right?
Not so fast. Fitch explains what drives its determination: “As a government-sponsored entity [sic] (GSE), the FCS benefits from implicit government support.” Explaining that Farm Credit plays a large role in American agricultural finance, it further clarifies what sort of government support Farm Credit receives: “While the government does not explicitly guarantee the debt issued by the System, Fitch believes that if needed, the government would support payments to bond holders most likely by allowing the Farm Credit System Insurance Corporation to draw on its line with the Treasury.”
This line amounts to $10 billion. That’s no small change, even if the System as a whole holds more than $450 billion in total assets as of the second quarter of 2022. Before Farm Credit would access this line of credit, it would have to exhaust the Farm Credit System Insurance Corporation’s (FCSIC) funds, which amount to $5.96 billion as of the end of 2021. That should make one think, though: if Farm Credit were in trouble, would a combined $16 billion be enough to rescue it? If not, then should Fitch rate Farm Credit as neutral?
The System, as of the second quarter of 2022, is paying only 2.5% of its income in taxes. With so much in tax savings, wouldn’t it make sense for Farm Credit institutions to divert more funds to the Insurance Corporation as premiums? Wouldn’t it be better for Farm Credit to pay for its own security rather than rely on $10 billion, at least, from American taxpayers?
Policymakers, especially Congress, ought to examine whether the System and the Insurance Corporation are capitalized enough to withstand a severe shock. If they aren’t, then they ought to consider whether Farm Credit should divert its tax savings toward safeguarding the System. America’s taxpayers deserve that consideration.
