The Farm Credit System (FCS) has the distinction of being the original government-sponsored enterprise (GSE) – defined as a quasi-governmental entity established to enhance the flow of credit to specific sectors of the American economy. Like other GSEs including Fannie Mae and Freddie Mac, the FCS has benefited immensely from the federal government’s largesse. It raises the question of whether the FCS can stand on its own two feet.
And that question seems to have been answered. Last week, Fitch Ratings, one of the three major credit ratings agencies, made an important announcement: the FCS’s issuer default rating was of the highest quality, at AAA for the long term and F1+ for the short term. It added that “the Rating Outlook has been revised to Negative from Stable.”
On the surface, it sounds like some great news for Farm Credit! But let’s not take it on faith. How did Fitch Ratings make this determination?
Fitch Ratings spares no time in getting to the point: “As a government-sponsored entity (GSE), the FCS benefits from implicit government support.” This isn’t the first time that analysts have made this assertion. In 2016, a Brookings Institution white paper requested by the Farm Credit System Insurance Corporation (FCSIC) notes that “a $4 billion line with the Treasury…is probably seen in the market as an implicit guarantee.” Explaining further, the paper makes clear that the “line of credit is largely symbolic since $4 billion isn’t enough to provide liquidity to the entire system.”
The FCS’s claim to stability only comes from the assumption that the federal government may have to prop it up if things go awry. And that could easily happen.
As of the end of 2017, the US Department of Agriculture’s Economic Research Service reported that Farm Credit held roughly 40 percent of all agricultural debt, amounting to $159 billion. Of all agricultural real estate debt, Farm Credit held 45 percent – a whopping $108 billion of the roughly $240 billion market. That means that 68 percent of the debt held by Farm Credit is in agricultural real estate.
As long as farmers and producers pay their mortgages, everything’s fine. But what if farmers and producers see more uncertainty? What if food supply chains see disruptions? What if supply chain disruptions cause a decrease in agricultural production that, even with price increases, make it harder for farmers to make ends meet? These are all within the realm of possibility, especially with the supply chain disruptions in the spring of 2020.
If that happens, and if it happens at magnitude, then Farm Credit’s in trouble. As of 2019, the FCSIC has $5.2 billion. If the System as a whole has to write-off just 5 percent of its share of the agricultural real estate market, then the FCSIC is tapped. Then it’s up to the System to recoup its losses.
The implicit guarantee that Farm Credit carries in its pocket relies on taxpayers not taking notice and policymakers not taking action. Prudent policy requires that Farm Credit set aside more for its own insurance. To not do so, especially during turbulent times for farmers, means making taxpayers foot the bill.