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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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