I hate to admit how long I've been reporting on ag lending, but let's just say Ronald Reagan was president, Ghostbusters was a popular movie and Tina Turner belted Top 40 hits like, "What's Love Got to Do With It." One thing that hasn't seemed to go out of vogue in all those decades is the sibling rivalry between country banks and the Farm Credit System, as Texas A&M ag finance professor Danny Klinefelter writes in this week's DTN "By the Numbers" column. (See "Quit the Country Bank-Farm Credit Feud" at http://www.dtnprogressivefarmer.com/…).
Perhaps it was the 1980s Farm Credit crisis that brought hostilities to a head, and the System's $4-billion bailout. It only used a portion of that authority and the later repaid the funds in full to the U.S. Treasury. In the years since, the System implemented policies designed never to put its borrowers or the public at risk again--building stronger capital reserves, requiring big down payments on farmland and steering as many borrowers into fixed-rate mortgages when rates hit 60-year lows. For example, since 2011 Farm Credit Mid-America has capped its mortgage financing on Indiana farmland as if the land is worth $6,100, even though properties appraise closer to $10,000. Borrowers are welcome to pay market prices, they just have to pony up more cash if they do. It would take an earthquake to threaten farm mortgage holders again.
Despite more circumspect lending, rival lenders rarely miss an opportunity to complain about the system's tax status, its "unfair" access to global money markets and cheap interest or the rare incident when a high-profile Farm Credit loan turned sour. Some commercial banks actively argue that the Farm Credit System--as well as Freddie Mac and Fannie Mae--should lose their Government-Sponsored Entity status, a perk that helps all of them acquire funds at attractive interest rates.
Dr. Klinefelter outlines how many of those tax and Wall Street access "advantages" also apply to country banks in his recent column. In reality, he sees both types of farm lenders as near twins in favorable government treatment. But Rural America needs both of them, he argues, if it wants to meet the challenge of financing infrastructure and keeping U.S. agriculture vital in the years ahead.
Earlier this year I was shocked to hear about a peace offering from the Farm Credit System itself. It was launching a $150 million fund, licensed through USDA and managed by Advantage Capital Partners, which would fund private equity investments in agriculture-related businesses. Currently, USDA programs exist to help provide loans or loan guarantees to help rural businesses grow, but many small cutting-edge businesses also need equity support in addition to or instead of borrowed funds. "There's plenty of funds to jump start small businesses on the East and West coasts, but rural America is an under-served area," one of the fund managers told me. This money wouldn't provide funds to start ups, but proven mid-career businesses that need equity to grow.
Advantage Capital Partners and eight Farm Credit institutions initially pledged to invest nearly $150 million for the new effort. But they envision four more funds like this, with backing from nine Farm Credit associations and their three funding banks. Each of those five funds will invest in "anything off the farm," including rural water, telecommunications, processing plants, meat packers and grain co-ops, provided they meet criteria as a small business.
A separate but related mission is buying bonds from community hospitals, assisted living centers and nursing homes. Many of these community projects have been initiated by country banks, but are too big for private lenders to handle alone. In other words, they are partnering with their rivals to make rural America a better place to live. This sounds like a public service to me, something worth GSE status.
As Dr. Klinefelter points out, we need both country banks and Farm Credit. Their fierce competition means somebody is always vying for farmer and ranchers' business. Multiple funding avenues kept credit flowing to U.S. farms in 2008 when fears over Wall Street banks froze most other types of bond sales. What's more, the task of funding rural America's infrastructure--or even providing equity infusions--is too big for any one institution to take on solo.
The big question for Farm Credit and ag banks is why not call a truce?
Please share your thoughts on Dr. Klinefelter's column (or my own remarks).
For information on the Rural Business Investment Co. go to http://www.rurdev.usda.gov/…
For information on Advantage Capital go to http://www.advantagecap.com/…
Follow me on Twitter@MarciaZTaylor
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