Farm Credit: Mission Creep?

System Sound, Dealing With Low Prices, But Congress Questions Lending Oversight

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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Less than 1% of Farm Credit System loans are considered "non-performing" right now, according to the Farm Credit Administration. But of that $1.96 billion tied up in non-performing loans, horticulture is the area in agriculture that stands out. (Shutterstock photo)

OMAHA (DTN) -- Members of the House Agriculture Committee declared themselves as friends of the Farm Credit System at a hearing on Wednesday, but told regulators in the Farm Credit Administration that friends shouldn't let friends drift outside their mission and purpose.

The House Agriculture Committee held a hearing to review the Farm Credit System by querying the system's regulator, the Farm Credit Administration. The hearing, which was webcast, delved into issues surrounding the rural economy, lending and what bankers see as lending abuses by Farm Credit.

Kenneth Spearman, chairman and chief executive officer for the Farm Credit Administration, told lawmakers about the FCA's role as regulator for the Farm Credit System. Overall, Spearman said, Farm Credit lenders "are fundamentally safe and sound. They are well capitalized with solid earnings and strong credit quality."

Given the downturn in agricultural commodities, Spearman said his agency is updating capital rules, emphasizing internal controls at lenders and monitoring emerging risks. Spearman said the Farm Credit System was watching the "looming cloud" over agriculture as USDA projects a 36% decline in farm income over the next year. The system is sound to provide credit for farmers and ranchers, he said.

Spearman also said that while Farm Credit is one of the lending options available to agriculture, it should not be considered the lender of last resort for farmers. "Its mission is to serve American agriculture in good times and bad by providing competitive credit," Spearman said.

The Farm Credit System, made up of four specialized system banks and 75 direct lending associations, is the country's oldest government-sponsored enterprise and enjoys strong support. Still, commercial bankers frequently clash with Farm Credit and view the system as having tax benefits and soft regulatory treatment that gives Farm Credit institutions an unfair advantage borne out through lower interest rates to borrowers.

Regulators told House members less than 1% of loans are considered "non-performing" right now. But of that $1.96 billion tied up in non-performing loans, horticulture is the area in agriculture that stands out. Spearman said horticulture companies were hit hard by the housing crisis and the industry is still feeling the effects.

At the moment, low commodity prices are causing a flattening or softening of land prices in the Midwest. Regulators are watching the low prices for crops such as corn, soybeans and wheat because 18% of the Farm Credit System's entire loan volume is tied to farmers of those commodities. Farm Credit lenders in the Midwest are more heavily weighted with loans on those crops, said Robert Coleman, director of the Office of Examination for the Farm Credit Administration.

"We're certainly paying more attention to what they are doing," Coleman said, "and how, as Chairman Spearman mentioned, they have well positioned themselves in the last several years to deal with the borrowers and deal with the stress."

House Agriculture Committee Chairman Michael Conaway, R-Texas, noted the conflicts between bankers and Farm Credit lenders and said members of the committee hear the complaints from both sides. "Most of us on this panel have friends on both sides, and most of us try to stick with our friends," Conaway joked.

With that, the committee delved into loans issued by Farm Credit lenders that go beyond Farm Credit's mission to serve agriculture.

It's called "similar-entity lending authority," and it was used by one of the Farm Credit System banks, CoBank, to loan $725 million to telecommunications giant Verizon in 2014. The CoBank loan was part of a $12 billion loan package Verizon used to buy the European company Vodafone. Groups such as the Independent Community Bankers of America have frequently questioned how CoBank could make such loans to large corporations for non-agricultural, non-rural business deals.

No bankers testified at the hearing, but the ICBA issued a news release praising House members for providing some oversight for what the bankers see as a list of system abuses by Farm Credit. (To read the full ICBA news release, visit http://dld.bz/…)

Spearman and other Farm Credit Administration regulators said the entire Farm Credit System is allowed use of up to 15% of their loan portfolio for non-agricultural loans. Participation in such loans requires that the Farm Credit lender remain under 50% of the total credit investment in any such loan. Spearman defended its use. "This diversification, risk-management tool is necessary to help them (Farm Credit lenders) to be able to get involved with entities that they may not have necessarily have been able to without this rule," Spearman said.

Charles Rawls, the Farm Credit Administration's general council, said such loans account for about 6% of the system's entire loan portfolio. Also, such loans are reviewed and have been rejected at times in the past by the Farm Credit Administration.

Still, several lawmakers questioned the emphasis at Farm Credit lenders on their mission and directing regulators to ensure Farm Credit lenders aren't expanding "mission creep" with involvement in insurance and other industries.

Rep. Frank Lucas, R-Okla., questioned why the Farm Credit System bank AgriBank is allowed to keep mineral rights as assets on the books. Bankers in his state are required by law not to hold land from bad loans more than five years. "The logic is that banks should be collectors of capital, arbitrages of capitalization and loans," Lucas said. "They should not be in the long-term asset-holding business."

AgriBank holds mineral rights under lands in at least 13 states that the Farm Credit lender has maintained for decades. System entities now can't hold onto mineral rights, but AgriBank has not divested of those assets.

In an email, a spokeswoman for AgriBank stated that the mineral rights held by the lender "help to fulfill Farm Credit's mission to support rural communities and agriculture with reliable, consistent credit and financial services." AgriBank has received $45 million in mineral income through the first three quarters of this year.

AgriBank stated that requiring the lender to divest "would make it more difficult for us to fulfill our mission. It would make it harder for us to help these areas grow and thrive by financing vital infrastructure and providing farmers with the capital they need to make their businesses successful at a time when they are navigating an increasingly difficult economic environment."

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

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Chris Clayton