Is Another Farm Credit Crisis Ahead?

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In the 1980s the Farm Credit System (FCS) needed a taxpayer-funded rescue of $4 billion. Lawmakers saw that the FCS couldn’t continue on without some drastic reforms, and they took the proper steps to put it on the right path. But the FCS will only take the right steps to preserve American agriculture if its regulator, the Farm Credit Administration (FCA), makes it do so.

Time for the FCA to step up.

AgDaily, among other trusted media outlets, has reported that the ag economy may be in trouble in 2018. And according to Farm Credit Mid-America’s Senior VP of Agricultural Lending Tara Durbin, “‘net farm cash income is projected to decline.’” With this decrease in projected farm cash income, farmers will have less cash to pay off their loans to Farm Credit, in turn decreasing Farm Credit’s cash inflow.

Some large Farm Credit institutions have decided to allow farmers to defer the payment of their loans’ principals. That is, the farmer can choose to pay only the interest on the loan, at least for a set period of time.

This may be good for some farmers in the short term by allowing them to hold onto some cash and weather tough times. But what happens if the tough times outlast the FCS’s ability to forgo payment? At that point, either the FCS institution collects what’s owed from the farmers it has lent to, or the FCS institution takes a massive loss and potentially faces bankruptcy. In either scenario, American agriculture suffers: either farmers go bankrupt or the FCS institution becomes insolvent.

The first option is by far the worst – the United States is built on the work farmers and producers do to keep feeding the nation and the world. But the second option isn’t pretty either. If even one FCS institution fails, the System as a whole is at risk. The Farm Credit System Insurance Corporation (FCSIC) was created to prevent institutions from going belly up, but it recently lowered premiums, reducing its capacity to bail out multiple failed FCS institutions. If multiple institutions fail, then the FCSIC won’t be able to help all of them. The solvent FCS institutions will have to step up to support the failed ones. And if they aren’t able to, American taxpayers will have to support a failed FCS yet again.

This isn’t fate though. Congress must crack down on the FCA and make sure that it is conducting regular, rigorous stress tests on all FCS institutions. If not, this pressing threat will loom over our heads until it comes crashing down.