Farm Credit Debt Rating Downgraded

OMAHA (DTN) -- Following its downgrade of the U.S. government's credit, Fitch Ratings on Thursday also downgraded the Farm Credit System (FCS) as a government-sponsored entity that is tied to the debt and ratings of the federal government.

The immediate impact of the downgrade in ratings on farmers and agribusinesses that rely on Farm Credit lenders is likely minimal for now. But FCS's four banks and 59 lending associations nationally could see their reserve requirements affected in the future if another rating adjustment is made down the line.

MOVE ON FARM CREDIT

Citing the tie to the U.S. government, Fitch downgraded FCS's long-term issuer default rating from an AAA to an AA+. The ratings outlook is considered stable.

"As a government-sponsored entity (GSE), the FCS benefits from implicit government support. Therefore, the ratings of the FCS are directly linked to the U.S. sovereign rating," Fitch stated.

For Farm Credit system banks, Fitch downgraded the long-term ratings for AgFirst Farm Credit Bank, AgriBank Farm Credit Bank, CoBank, the Agricultural Credit Bank (ACB), and Farm Credit Bank of Texas from AA- to A+ as well.

Fitch cited that FCS's ratings will continue to move in tandem with the U.S. sovereign rating. If government support for FCS is reduced, Fitch stated it could delink the government-sponsored agencies from the U.S. government's downgrade.

SMALL IMPACT ON CAPITAL COSTS POSSIBLE

Brady Brewer, a faculty member in agricultural economics at Purdue University, responded to DTN by showing some differences in corporate bonds and the basis adjustments for those rating changes on the highest levels was minimal. The spread between an Aaa rating versus a Baa rating on bond yields, for instance, is less than 100 basis points, or 1%, except during the 2008 financial crisis when the spread between those ratings rose dramatically.

"Overall, I think the impact from this event will be fairly minimal," Brewer stated to DTN. "There is the risk that this increases the cost of capital for the Farm Credit System, but the data shows that this should be fairly insignificant. I do not believe this will impact Farm Credit's access to additional funds if they need them."

FARM CREDIT RESPONSE

The Federal Farm Credit Banks Funding Corp. issued a statement essentially reiterating the Fitch downgrade, but stated Farm Credit continues to provide credit and financial services for rural communities and agriculture.

The Farm Credit Administration, which regulates the FCS, stated to DTN that the system is sound.

"The Farm Credit System remains safe and sound. As a regulator of the System, we supervise and oversee its institutions on a regular and ongoing basis. We are confident that the System remains well positioned to continue meeting the important public mission provided by Congress," an FCA spokesperson stated.

On Wednesday, the Farm Credit System released a quarterly financial statement. FCS reported net income at $3.51 billion for the first six months of 2023, down 1.7% from $3.57 billion for the same period in 2022.

"Despite a challenging external environment, the System recognized solid financial results for the first half of 2023," stated Tracey McCabe, president and CEO of the Federal Farm Credit Banks Funding Corporation. "A strong balance sheet and seasoned underwriting professionals continue to position the System to support the needs of our member-borrowers."

GOVERNMENT DOWNGRADE

Fitch earlier this week cut the U.S. government's credit rating from AAA to AA+. Fitch cited the downgrade for the U.S. rating due to the government's constant battles over the national debt ceiling, last-minute resolutions and "the expected fiscal deterioration over the next three years, a high growing general government debt burden, and the erosion of governance" going back two decades.

There are three major agencies that influence credit ratings, Fitch, Moody's and S&P Global Ratings. Fitch's moves on the federal government follow S&P, which lowered U.S. debt from AAA to AA+ in 2011. Moody's issued a credit opinion on the U.S. government on July 13 rating it as Aaa stable -- the highest quality with minimal credit risk.

Fitch's move on the federal government led to a small drop in the 10-year Treasury bonds -- though the 10-year note was trending up slightly Thursday.

Some financial leaders, such as JPMorgan Chase CEO Jamie Dimon called the Fitch rating "ridiculous" while Berkshire Hathway's Warren Buffett said on CNBC early Thursday that Berkshire will keep buying U.S. Treasury bonds.

"There are some things people shouldn't worry about," Buffett said. "This is one."

FARM CREDIT FINANCES

In its quarterly and half-year report, FCS reported gross loans on June 30 were $378 billion, compared with $373.3 billion at the end of 2022.

Credit losses for the first half of the year at $407 million because of "higher specific reserves associated with a limited number of customers and forecasts of deteriorating macroeconomic conditions that may affect the agribusiness and rural infrastructure sectors."

Nonperforming loans -- 90 days or more past due -- were at $2.2 billion, or 0.57% of all loans on June 30, an uptick from the end of 2022 when FCS reported $1.8 billion in nonperforming loans, or about 0.47% of all loans.

Cash and investments for FCS were $92.3 billion on June 30, up from $89.9 billion at the end of 2022.

FCA REGULATIONS

CoBank -- one of the FCS's four banks -- cited in its annual report rating changes could negatively impact Farm Credit lenders. For instance, one FCA regulation requires FCS banks to exclude from their equity reserves asset-backed securities "that are no longer rated AAA by at least one major rating agency."

CoBank also noted that credit ratings for GSEs are influenced by the federal government's rating. "Any future ratings downgrades could negatively impact funding costs, earnings and funding flexibility for CoBank and other System institutions."

For more details on Farm Credit's financial report, go to https://www.farmcreditfunding.com/….

Chris Clayton can be reached at Chris.Clayton@dtn.com

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