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The Farm Credit Crisis of the 1980s

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					The Farm Credit Crisis of the
          1980s
     Presented by students in
       AREC 433, Fall 2004
    Taught by Howard Leathers
Sources of Funding to Farmers
• Commercial Loans
  – Operating Loans
     • Costs of day to day farming
         –   Electrical Bills
         –   Housing costs on the farm
         –   Insurance
         –   Transportation costs
  – Equipment Loans
     • Costs of inputs
         –   Live stock
         –   Home or farm improvements
         –   Equipment investments
         –   Equipment repair costs
Sources of Funding to Farmers
cont.
• Federal Loans
  – Most federal loans available are made by the
    Farm Service Agency.
  – FSA is a department located with in the USDA.
     • FSA makes and guarantees loans to family farmers
       and ranches to purchase farmland and finance
       agricultural production.
     • FSA supports two loan types
        – Direct Loans
        – Guaranteed Loans
Direct Loans

• “Direct" farm loans are made by FSA with
  Government funds.
• Farm Ownership, Operating, Emergency
  and Youth loans are the main types of
  loans available under the Direct program.
• Direct loan funds are also set aside each
  year for loans to minority applicants and
  beginning farmers
Guaranteed Loans
• FSA guaranteed loans provide lenders (e.g.,
    banks, Farm Credit System institutions, credit
    unions) with a guarantee of up to 95 percent of
    the loss of principal and interest on a loan.
•   Farmers and ranchers apply to an agricultural
    lender, which then arranges for the guarantee.
•   The FSA guarantee permits lenders to make
    agricultural credit available to farmers who do
    not meet the lender's normal underwriting
    criteria.
Guaranteed Loans cont.

• FSA guaranteed loans are for both Farm
 Ownership and Operating purposes. Like
 the Direct Loan Program, a percentage of
 Guaranteed Loan funds is targeted to
 beginning farmers and ranchers and
 minority applicants.
Farm Credit System
• Today, the Farm Credit System provides more
    than $90 billion in loans to more than a half
    million borrowers, including farmers, ranchers,
    rural homeowners, agricultural cooperatives,
    rural utility systems and agribusinesses.
•   Unlike commercial banks, farm credit system
    banks and associations do not take deposits.
    Instead, loanable funds are raised through the
    sale of Systemwide bonds and notes in the
    nation's capital markets.
How do farmers acquire available
funds?
• Examples of what farmers need to acquire Commercial
  Funding.
   –   Business tax ID
   –   Date the business was established
   –   Date of current ownership
   –   Business location address and date moved to current address
   –   Gross annual sales for the last fiscal year
   –   Net profit for the last fiscal year
   –   Number of employees
   –   List of outstanding obligations, if any (Lender, Current Loan
       Balance/Credit Limit, Monthly Payment)
• The amount of funding requested from the commercial
  lender determines the amount of collateral required, as
  well as the interest rate, and repayment period for the
  loan.
How do farmers acquire available
funds? Cont.
• What farmers need to acquire Federal Funding.
• Criteria for Guaranteed Federal Loan from FSA.
   – be a citizen of the United States (or legal resident alien), which
     includes Puerto Rico, the U.S. Virgin Islands, Guam, American
     Samoa, and certain former Pacific Trust Territories
   – have an acceptable credit history as determined by the lender.
   – have the legal capacity to incur the obligations of the loan.
   – be unable to obtain a loan without a guarantee. (For Guaranteed
     Loans ONLY)
   – be the owner or tenant operator of a family farm after the loan
     is closed. For an OL, the producer must be the operator of a
     family farm after the loan is closed. For an FO Loan, the
     producer needs to also own the farm.
   – not be delinquent on any Federal debt.
How do farmers acquire available
funds? Cont.
• Direct Loan eligibility is the same as
  guaranteed loan eligibility except Direct
  Loans require farmer to:
  – have sufficient education, training, or
    experience in managing and operating a farm
    or ranch that demonstrates the managerial
    ability needed to succeed in farming.
How do farmers acquire available
funds? Cont.
• Acquisition of funds under the Farm Credit
 System.
  – Simple 3 Step application
  – Only requirements is to provide proof that you
    are farmer.
  – Provide financial information
     • Gross income
     • Profit/Loss evidence
     • Assets & Liabilities breakdown.
History of the Farm Credit System

• The Farm Credit System is America’s first
    Government Sponsored Enterprise (“GSE”).
•   Created in 1916 when Congress chartered 12
    cooperative regional farm credit banks in order
    to increase farmers’ ability to finance the
    purchase of farms and ranches.
•   This allowed farmers and ranchers to obtain
    credit for agricultural expenses inexpensively.
Who is Served by the Farm Credit
System?
• The Farm Credit System serves all 50
 states as well as the commonwealth of
 Puerto Rico.
Hierarchy of FCS
• The Farm Credit System is composed of:
  – 4 Farm Credit Banks that provide loan funds to:
     • 79 Agricultural Credit Associations
     • 11 Federal Land Credit Associations
     • services offered by the regional banks and associations:
          –   real estate loans
          –   operating loans
          –   rural home mortgage loans
          –   credit-related life insurance
          –   crop insurance and various financially related services such as
              farm record-keeping and financial planning.
  – One Agricultural Credit Bank
     • Which has nationwide service to cooperatives.
Farm Credit
System
Banks
Chartered
Territories.
What happened in the 1980s?
• Farmers and ranchers took advantage of low
    real interest rates available to them through the
    farm credit system, and borrowed heavily from
    all lenders.
•   By 1982 the FCS had more than $64.5 billion in
    loans outstanding to American farmers and
    ranchers
•   interest rates jumped in the early 1980s, farm
    real estate values crashed and the FCS found
    itself burdened by a high number of outstanding
    loans with no payments coming in.
1980s cont.

• This combination of events forced the
  Farm Credit System into a financial
  situation that prevented the FCS from
  offering funding to farmers in need.
• Also, the events prevented the FCS from
  following through on its own financial
  obligations.
1980s cont.
• Congress responded by passing emergency
    legislation in 1985 and 1986 to help but both
    attempts failed to restore the FCS to financial
    health.
•   By 1987, it became clear that the FCS would
    default on its bonds without a cash infusion.
•   Finally, in 1987 Congress authorized a $4 billion
    line of credit rescue package for the FCS.
•   Specifically, the FCS was authorized to sell up to
    $4 billion in taxpayer-backed bonds to assist
    troubled FCS institutions.
Effects of government intervention
on the Farm Credit System.
• The 1987 legislation established new guidelines
    governing the role of the federal government
    and the role and responsibilities of the farmer
    borrower/owners of the System.
•   Provisions in the 1987 Act have a great deal of
    bearing on where the System is today, and
    where it may be going in the future:
Effects of government intervention
on the Farm Credit System cont.
• First, the legislation protected all of the FCS bondholders
    by making what had been an implied federal warranty
    on Farm Credit bonds an explicit federal guaranty since
    the Treasury backed them with a $4 billion line of credit.
•   Second, the legislation protected all of the FCS
    owner/borrowers from any loss on their FCS stock. In
    addition, the legislation reduced the required stock
    purchase that FCS borrowers had to make from 10% (or
    more in some cases) to the lesser of $1,000 or 2% of
    the amount borrowed. Today, no borrower/owner of the
    FCS has more than $1,000 invested in System stock.
•   Third, the 1987 legislation established an explicit exit
    procedure for System institutions that wanted to leave.
•   Fourth, the 1987 legislation required the FCS to establish
    an insurance fund to protect System bondholders against
    future losses.

				
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