Where Have

All the Customers

Gone?

Dispelling the Myths After 25 Years

of Changes in Agricultural Credit Markets
Where Have All The

Customers Gone?

DISPELLING THE MYTHS AFTER 25 YEARS

OF CHANGES IN AGRICULTURAL

CREDIT MARKETS

Prepared by

George D. Irwin

Risk Control Division

Office of Policy Development and Risk Control

Farm Credit Administration

November 1996

CONTENTS

Introduction ............................................................................................. 1

I. What is the current borrower base for the Farm Credit System? ............ 3

II. What are the prospective trends in numbers of farm borrowers? ........... 4

III. How is farming interrelated with rural areas? ......................................... 6

IV. Is corporate farming taking over? ............................................................ 8

V. What is the distinction between part-time and full-time farmers? ........ 10

VI. How big is the role of nonfarm landlords? ............................................ 12

VII. Are foreign owners taking over U.S. farms and farmland? .................. 14

VIII. How important are the financing of farm investments and production

expenses? ............................................................................................... 15

IX. How many farmers borrow and from whom? ....................................... 16

X. What are FCS lending patterns? ............................................................ 20

XI. What processing, marketing, and other services do farmers buy? ....... 23

XII. How big is the rural home financing market? ....................................... 24

XIII. Summary ................................................................................................ 26

INTRODUCTION

The basic legislative authorities governing farm lending1 by the Farm Credit

System (FCS) were enacted in 1971, with only minor changes since then.

Implementing regulations were established in 1972 and adjusted further in

1982 via a Farm Credit Administration (FCA) Board policy statement on eligibility and scope of financing issued after 1981 amendments were adopted.

Since 1971, three major trends have changed the customer base of the FCS:

declining farm numbers, growth and then decrease in market share, and changes

in the structure of eligible borrowing units.

This report benchmarks the primary population now eligible to borrow from

the FCS—the potential customers—and describes some of the changes since

1971. The information comes primarily from the U.S. Census of Agriculture

for 1969 and 1992.2 Special analyses of these and other data by the United

States Department of Agricultural (USDA) Economic Research Service (ERS)

are also used, along with Call Report data of FCA. The report also provides

projections for the next decade, when available.

Comparisons are in current dollars, unadjusted for inflation. This basis reflects

the size of financing accurately but does not reflect the welfare or purchasing

power of farmers or the change in the quantities of inputs. As the base of

potential customers changes, the FCA regulations defining eligibility and scope

of financing can become increasingly difficult to apply to new types of customers. It is appropriate to review them to ensure that they embody legitimate

safety and soundness or scope of authority considerations.

The material is organized under twelve topic questions and a summary.

1

1

 Authorities for lending to cooperatives were expanded in 1981 to include export financing, and

several other changes have occurred since that time. 2

 The 1969 and 1992 Census data are the nearest available to the 1971 and 1995 legislation years

and are presumed to reflect the decision environment.

3

I. WHAT IS THE CURRENT BORROWER BASE FOR THE FARM

CREDIT SYSTEM?

About 1.9 million farm operators (1.7 million of whom own some or all of the

land they farm), 1.3 million other landowners, and 4,315 farmer cooperatives

make up the core of the potential FCS customer base. The rural population

also includes 26 million households with over 57 million nonfarm rural residents, some of whom are potential customers for housing loans. We have no

comprehensive data on farm-related businesses. Other eligibles include private

owners of timberland and aquatic producers and harvesters.

Supporting facts:

1. Farm operators 1,925,300 operators in 1992, farming 945.5 mil.

acres

2. Owners of farmland 3 million owners in 19883; less than 5% of land

held by nonfamily corporations

farmer owner/operators 50%

farmer owner/operators 6%

who are also landlords

landlords not farming 44%

3. Private owners of 347 million acres in 1987

timberland

4. Aquatic producers owners of 110,000 craft with 364,000 employees and harvesters and a 1990 catch of 9.7

billion lb. liveweight of finfish and shellfish

5. Farmer cooperatives 4,315 cooperatives in 1992—off by over

25% in 10 years, $79.3 billion sales in 1992

6. Rural housing 61.6 million population in rural areas in 1990:

57.7 million nonfarm rural and 3.9 million farm

population, with 26 million housing units

3 Data are for most recent available date. Population and agricultural censuses are taken regularly, but in different years. Other data are based on special one-time surveys. The difference

in dates is not significant in gaining an overall picture.
4

II. WHAT ARE THE PROSPECTIVE TRENDS IN NUMBERS OF

FARM BORROWERS?

The total number of farms will decline significantly over the next decade.

Large numbers of operators over age 65 will be leaving farming, but their farm

units are too small to support a new entrant of the next generation. Many of

their resources will be combined into other farms. To some extent, this

downtrend will be offset by expansion of part-time and residential farms.

The combined effect of these two offsetting trends could be a net decrease of

about 38,000 farms per year for the next decade. Though the number of

owners of farmland who would be eligible to borrow has no specific limit,

specialized investments such as farmland have primarily been held by retired

farmers, widows, and descendants of farmers. The numbers of this latter group

of owners could increase.

Supporting facts:

1. The number of farms has been dropping since 1935, with the average

farm size growing.

The potential number of farm customers has decreased almost continuously

since 1935, but the dollar volume of loans outstanding to the farming sector

has increased. This increase reflects both higher prices for agricultural assets

and increased use of purchased technology on farms. Total lending and asset

values decreased briefly but very significantly during the mid-1980s, when

weakened export markets and rising real interest rates caused land values to

drop.

a. The number of farms is down 30% since 1969, and down 72% since

the peak year of 1935.

• 1.92 million in 1992

• 2.73 million in 1969

• 6.80 million in 1935

b. The average acres are up 26%, from 389 acres in 1969 to 491 acres

in 1992.

c. Average sales per farm are five times the 1969 level. The average

sales in 1969 were $13,756; in 1992, they were $67,929.

d. Farms are highly diverse in size with a wide range in average sales per

farm.
5

Number of farms Percent of farms

Sales class 1969 1992 1969 1992

Under $9,999 1,780,005 906,517 65 47

$10,000–49,999 896,159 684,918 33 36

Over $50,000 51,995 333,865 2 17

2. The declining trend in farm numbers will continue.

a. Numbers of farms dropped as fast during 1988–1992 as they did during

the mid-1980s, yet the earlier period was one of farm distress and the

later was one of relative prosperity.

The earlier drop was dominated by fewer new entries, while the later

drop reflected increased numbers of operators reaching retirement age.

Number per year

Time period Entrants Exits Net change

1978–1982 100,000 103,000 -3,000

1982–1987 75,000 105,000 -30,000

1987–1992 67,000 99,000 -32,500

b. The reduction in numbers is likely to continue due to the current age

structure of farm operators.

In 1992, 25% of all farm operators (477,650 operators) were age 65 or

older, and they tended to be concentrated on farms too small to be standalone units for a new entrant. USDA estimates suggest a net decrease of

38,000 per year for 1992–1997 and 39,000 per year for the following 5

years. A decrease of 385,000 would result in farm numbers of 1.54 million

in the year 2002, a 20% drop. Many of the retirement-age operators are

debt free, while their replacements are likely to require debt financing.

Sources: ERS Agr. Econ. Rept 645, April 1991; Statistical Abstract of the U.S.; and USDA Agricultural Statistics.
6

III. HOW IS FARMING INTERRELATED WITH RURAL AREAS?

They are increasingly interdependent. One-fourth of farmers do not live on

their operations. Nearly 45% of farmers report a primary occupation other than

farming, and 92% have some income from nonfarm sources. One-fifth are

located in areas where the primary business is farming, but one-third are in

metropolitan areas.

Supporting facts:

1. One-fourth of farm operators who responded to the 1992 Census do not

live on the place they operate.

Percent of

Place of residence Number Respondents All operators

On place operated 1,378,701 73 72

Elsewhere 406,560 27 21

Not reported 138,309 0 7

2. Only about one-fourth of the 2,276 rural (nonmetropolitan) counties are

farming-dependent.

a. Rural credit markets have become much broader than just farming. In

1992, just 556 counties depended on farming for 20% or more of the

proprietor and labor income earned in those counties. The number of

farming-dependent counties had dropped 40% since 1969, when 941

counties were farming-dependent.

Rural counties depending on Percent

Farming 24.4

Manufacturing 22.2

Nonspecialized 22.1

Services 14.2

Government 10.7

Mining 6.4

b. This finding continues a long-time trend. Most rural counties in the

United States have become far less dependent on farming income over

a period tracing back over two centuries.

Sources: USDA ERS Rural Devel. Research Report 89, Dec. 1994; Agricultural Outlook, Sept.

1994; and Agricultural Information Bulletin, 710 Feb. 1995.
7

3. Most farming is conducted in counties that are not farming-dependent.

 Fewer than one-fifth of all farms and less than one-fifth of farm output

are in these farming-dependent counties.

4. Farming also takes place in counties that are defined by the Census as

metropolitan.

a. In 1991, almost 30% of all farms, some 627,000 farm operations, were

in nonrural counties.

b. Metropolitan farms differ from farms in rural counties in one of two

ways. A total of 54% are residential farms, having agricultural sales

under $10,000 (compared to 43% in rural counties). The other 46%

are full-time, intensive, business-oriented operations producing highvalue crops.
8

IV. IS CORPORATE FARMING TAKING OVER?

Those who ask this question may use the term “corporate farming” in any of

three different ways: (1) farm businesses legally organized as corporations; (2)

big business, including nonfamily farming corporations and integrated corporate businesses controlling farm production by contract; or (3) commercial

farm businesses of large size, regardless of how they are owned or organized.

Legally incorporated farms are not a major concern. They were only 4% of the

number of farm businesses in 1992. Growth in numbers has been mostly a

slow evolution from the family farm to corporate farming, done for business

or estate-planning reasons. Individual proprietorships continue to be the dominant business type, some 85% of all farms. Nine out of 10 corporate farms are

also family held, and 19 out of 20 have fewer than 10 shareholders.

But “corporate farming” becomes far more significant if we use either of the

other definitions. This situation is based in two facts:

First, farming is very diverse consisting of—

(1) a large number of units, perhaps 1.5 million farms, producing a relatively small share of total output, ranging from rural residences with

almost incidental output ($1,000 or more in sales) to part-time farmers

with more significant farm output. These farm units are more involved in

use of farming resources and farm finance than other rural residents but

much less than full-time commercial farmers. Farm sales can be quite

important to their personal incomes, and their use of farm inputs is significant.

(2) a much smaller number of commercial units (around 400,000) producing most of farm sales. Corporate farms tend to be concentrated among

the larger farm sizes and are very important in some commodity sectors.

Fewer than 62,000 of the 1.9 million farms produce half of all farm sales,

and fewer than 250,000 account for three-fourth of sales. However, this

calculation distorts the picture. Measuring size by gross sales tends to

emphasize farms producing high-value output and does not provide an

accurate picture of value added in farm production.4

4 A cattle feeder buying 800-pound animals, feeding them, and selling fat animals at 1,100

pounds has gross sales equal to the value of an 1,100-pound animal but has produced only 300

pounds of value added. A rancher-feeder may have both gross sales and value added of the

entire 1,100 pounds. This failure to net between separate farm businesses means that farm

enterprises in which stages of production are carried out by different owners are over-weighted

in comparisons using gross sales as a measure of concentration.
9

Second, a significant portion of individual farmers have contract relationships

with vertical integrators in some commodities, especially poultry, specialty

crops, and hogs. Data are not readily available on the extent of these practices.

 Supporting facts:

1. Corporate legal organizations are small in numbers but larger in output.

a. Over 85% of all farming operations are proprietorships.

Business type Number Percent of farms

Individual or family 1,653,491 85

Partnership 186,806 10

Corporate 72,567 4

Other 12,436 1

b. Most (89% of the 72,567) corporate farms are family held.

c. Almost all farm corporations are closely held (96% of all farm corporations, both family-held and other, have fewer than 10 shareholders).

Type of corporation Number Percent of corporations

Family held

10 or fewer shareholders 62,755 86.0

more than 10 1,773 2.5

Other

10 or fewer shareholders 6,914 10.0

more than 10 1,125 1.5
10

V. WHAT IS THE DISTINCTION BETWEEN PART-TIME AND

FULL-TIME FARMERS?

There is no clear distinction between part-time and full-time farming. A significant majority of persons engaged in farming also have some form of nonfarm earnings. Earnings may be from employment off the farm of the operator

or family members, from business interests, from investments, or from pension

sources. The size of farming operations also varies from those that are incidental to a rural residence, but produce the more than $1,000 in sales required

to be counted a farm, to those that are very large, employing both operator and

hired workers full time. Part time is not necessarily a way station into or out

of farming. It may be a permanent choice of occupation.

Supporting facts:

1. The population of farm operators is bimodal.

a. Fewer than one-fifth of farms produce over three-fourths of product

sales. Over three-fourths of farms produce less than one-tenth of

sales.

b. They have a different mix of farm and nonfarm credit needs.

1992 percentage of

Sales class farm numbers value of farm sales

Under $9,999 47.1 1.9

$10,000–49,999 25.8 7.3

$50,000–99,999 9.8 8.3

$100,000–499,999 14.9 36.6

Over $500,000 2.4 45.9

2. Many operators engaged in farming also have major nonfarm employment.

a. A large majority (92% of the 1.92 million farm operators) have offfarm income from some source.

b. Nearly half (45%) reported in 1992 that their principal occupation was

not farming.
11

c. More than one-third (35%) worked off farm full time (200 days or

more).5

d. Nearly half (49%) reported nonfarm employment by operator and/or

spouse in 1988.

Operator 17.9

Both 27.6

Spouse only 3.7

3. Farm income is a minor source of household income for all farm operators as a group (1991 data).

Source of household income Percent of income

Wages and salaries 43

Business income 24

Other off-farm sources 14

Farm income 11

Interest and dividends 8

4. Both dependence on farm income and kind of nonfarm income vary with

farm size.

a. Small farms averaged $34,022 household income in 1991, typically

consisting of a small farm loss and positive earnings from other

sources.

b. Farms with sales over $500,000 had household incomes over $150,000,

88% from farm sources.

c. Household income was much higher for farm operators whose primary occupation is not farming—$45,633 vs. $29,088 for those who

are primarily farmers.

Sources: USDA ERS Agricultural Income and Finance, June 1993 and Dec. 1993; USDA ERS

Agr. Econ. Rept 645, April 1991.

5 A farm is defined as a business producing $1,000 or more in sales, while full-time off farm is

defined in average days of nonfarm work. Either the farm production occurs outside the nonfarm work hours or family members do the farm work.
12

VI. HOW BIG IS THE ROLE OF NONFARM LANDLORDS?

They provide over one-third of the real estate assets used in farm production.

The number of tenant farmers (those who rent all the land they operate) has

decreased over the past generation to fewer than 200,000. A majority of farmers (1.7 million) are now owners or part owners of the land they operate. Some

owners even have additional land that they rent out to other farmers.

However, nonfarm landlords remain key players in providing investment capital to the part-owner farmers, by owning and renting out 36% of all farmland

(84% of rented acres). The landlord population is highly varied. About 180,000

are active farm operators who own additional land. Another 1.3 million are

not engaged in farming, but this group includes a large number of widows and

children of farmers, or their heirs.

Supporting facts:

1. Most farm operators own at least some of the land they operate.

A total of 58% are full owners of the property farmed, and nearly 90% of

farm operators own part of the land they operate. Decreases in the proportion of tenants and increases in part owners have been occurring since

1940.

2. Full-owner farms on average have fewer acres than the farms of part

owners and tenants.

Percent of Average

Type of operator operators acres

Full owner 58 266

Part owner 31 882

Tenant 11 566

3. Farmers own 64% of all farmland.

4. Nonfarmer landlords own 36% of all farmland and 84% of the land rented

by farm operators.

5. Farm operators who rent out some of their land to other farm operators

own 7% of farmland.
13

Land

Type of owner Acres (mil.)Percent of farm acres

Farm operator

Farming all owned acreage 540.7 57

Rented to other farmers 62.6 7

Nonfarmer landlord 342.3 36

All owners 945.6 100

Sources: Bureau of Census Statistical Brief SB93/10, May 1993, and Census of Agriculture, 1992,

Table 46.

6. Ownership is somewhat concentrated, but this fact is more related to intensive vs. extensive farming enterprises than to income-producing capacity.

Only 8%, or just over 100,000, of the 1.3 million nonfarm landlords, own

over half of the 342.3 million acres owned by all landlords. Some of this

concentration is due to the large acre size of range cattle operations.

7. Landlords are a diverse group but tend to have farming links.

a. A total of 85% of nonfarm landlords live within 150 miles of the farm

operation.

b. A total of 40% are female sole owners; another 30% are female coowners.

c. Two-thirds are at least 60 years old.

8. Farmland prices are determined in thin markets.

a. Only 3.5% of farmland changes ownership in an average year.

b. Only 51% of land acquisition transactions qualify as arm’s-length. The

rest are by inheritance, gift, within-family sales, and other methods.

Nonoperators are more likely to acquire by inheritance or gift than are

farm operators.

c. Thus, transfers of only 1.8% of the farmland (51% of 3.5%) in a

normal year establish the “market price” for all farmland.
14

VII. ARE FOREIGN OWNERS TAKING OVER U.S. FARMS AND

FARMLAND?

Not at all. U.S. citizens who are farm operators are the dominant influence.

Foreign ownership of agricultural land is only about 1%. It is concentrated

in a few areas and products, and the extent has not changed much in the 20

years that data have been reported. Even these percentages may overstate

foreign influence. With the development of the North American Free Trade

Agreement (NAFTA), it has been suggested that farming and ownership of

farming assets may become more diversified among the three NAFTA countries.

Supporting facts:

1. Total ownership by foreigners is a tiny share.

Noncitizens owned just over 1%, or 14.5 million acres, of U.S. privately

held farmland at the end of 1992.

2. Even this overstates the foreign impact.

a. Over half (54%) of “foreign” ownership is actually land owned by

U.S. corporations but it must be counted as foreign because 10% or

more of the corporate stock is foreign owned.

b. Most is in extensive uses, not high-value products.

• A total of 49% is forest, 31% is pasture and other, 17% is cropland,

and 3% is nonagricultural.

• The greatest acreage is in Maine timberland (14% of privately held

acreage), and 90% of this is owned by four companies (two of

which are U.S. corporations having some foreign owners).

c. A total of 25% of foreign owners are Canadian, another 49% are

European, and 3% are Japanese.

Sources: U.S. Bureau of Census Statistical Brief 93-10, May 1993; USDA ERS Agricultural

Information Bulletin 682, Sept. 1993; USDA ERS Summary Report 23 on Foreign Ownership,

Statistical Bulletin 653, June 1993.
15

VIII. HOW IMPORTANT ARE THE FINANCING OF FARM

INVESTMENTS AND PRODUCTION EXPENSES?

Both kinds of farm capital requirements have quintupled since the 1971 Farm

Credit Act was enacted. This has made reinvestment into expanding the business very important both as a use of farm business funds and as a use for credit.

It has also made entry into farming even more dependent on renting or leasing

assets. This growing interdependence between farmers and their input suppliers, along with the increased access the latter have to commercial paper sales

and other financial markets, has made supplier financing an expanding alternative to traditional sources of institutional credit for farmers.

Supporting facts:

The following data on per-farm resource requirements are in current dollars, not deflated, because we are interested in financial requirements rather

than changes in the quantity of these resources being used.

Dollars per farm

Category 1969 1992

Land and buildings $75,714 $357,056

Machinery and equipment 9,770 48,605

Annual production expense 13,756 67,927
16

IX. HOW MANY FARMERS BORROW AND FROM WHOM?

Equity continues to be the dominant source of financing for both farm operations and ownership of agricultural assets. Fewer than half of farm operators

have any debt. Typically, the rate of return on farmland assets will not selffinance a mortgage debt that even approaches the 85% lending limit of the

FCS. So income from other sources is required to fully amortize such debt.

The great increase in investments and operating costs means that both the

amount of debt and the amount of equity financing have grown substantially

over the past 20 years. Dollar volume is much higher for all lenders.

Debt market shares have shown significant cycles. During the 1970–1985

period, FCS mortgage volume increased because of the rising price of farmland

based on growing world markets and the increased ability of the FCS to finance farmers who had smaller amounts of their own equity to invest. Loan

limits were changed in 1971 from 65% of normal agricultural value to 85% of

fair market value. Although few loans were made at the maximum, borrowers

with less equity could participate. In fact, the proportion of farm operators

who were pure tenants declined during this period. FCS operating loan share

grew between 1979 and 1983 because of illiquidity of commercial banks and

high interest rates.

Both short- and long-term market share dropped for the FCS after the land

price correction of the mid-1980s and the financial problems of FCS institutions. During this same period, commercial banks enjoyed strong liquidity and

grew in market share in both real estate and operating credit areas.

Total farm business debt peaked at $194 billion in 1984, fell to a low of $137

billion in 1989, and was $148 billion at the end of 1994, 23.6% below the peak.

Supporting facts:

1. Equity financing is more dominant in agriculture than other industries.

a. The debt-to-asset ratio for the agricultural sector as a whole fluctuates

around the level of 20% on a current value basis. Even adjusting for

the fact that most industry data are on a book or cost basis, this means

that agriculture uses more equity, or is less leveraged financially.
17

b. The sector data include both the equity of owners who are farmers and

the farm equity of nonfarm landlords. Much of this equity is in farmland and can be accessed only by selling or borrowing against the

land.

2. Fewer than half of farm operators have any debt.

a. Just 45% of all farm operators reported any interest paid on farm debt

in 1992.

b. Full-time farmers are more likely to have debts. Two-thirds of the

operators with debt consider their primary occupation to be farming.

By primary

All occupation (%)

Category of Farm Operator operators (%) Farming Other

All farm operators 100 55 45

Operators with no interest expense 55 26 29

Operators with interest expense

on real estate debt 32 20 12

on non-real estate debt 26 18 8

on either or both 45 29 16

c. Type of debt varies by primary occupation.

Those who list farming as a primary occupation are about equally

likely to have real estate and non-real estate debt. Those who list

another primary occupation are less likely to have any debt. When

they do, it is more likely to be real estate debt.

d. Young farm operators (age 35 or under) are more likely to have debt.

They made up 11% of all farm operators: 57% had interest paid on

debt and 43% did not, almost the reverse of percentages for all farmers.
18

By primary

All occupation

Category of Farm Operator operators Farming Other

Percent of all farm operators

All farm operators 100 55 45

Operators age 35 or under 11 6 5

Percent of farm operators age 35 or under

With interest expense

for real estate loan 33 20 13

for non-real estate loan 38 26 12

3. Sources of debt financing are changing.

a. Sources continue to be dominated by commercial banks, which were

gaining market share in the first half of the 1990s while the FCS was

losing share. This trend in market share appears to have ended in

1995.

b. Agricultural supplier credit has increased and insurance company mortgages have decreased.

Suppliers of credit include farm supply cooperatives and farm machinery companies. Some have broadened their financing services well

beyond financing the inputs they sell and have innovated in simple,

quick- response service.

c. Vertical integration, especially in hog and broiler production, has made

it difficult to identify the “farm operator–producer” for determining

eligibility from the FCS.

4. Shares of farm debt have shown both trends and cycles.

a. The FCS is still the largest farm mortgage lender, but it has been

yielding share to commercial banks.

b. Commercial banks have long been the dominant supplier of shorter

term loans, and that share has been increasing.
19

Market Shares of Farm Business Debt

Year FCS Banks Life Farmers Home Indiv.

ins. Administration

1960 16.6 27.1 11.8 4.4 40.1

1970 24.0 28.3 10.5 5.9 31.2

1980 31.8 22.6 7.2 10.5 28.0

1985 31.6 25.0 6.3 13.8 23.2

1990 25.9 24.5 7.0 12.3 20.2

1995 24.3 40.7 6.2 6.7 22.0

Sources: Nontraditional Lenders in Agricultural Credit Markets. Agribusiness, vol 10:4:341ff.

1994; Bruce Sherrick, Steve Sonka, James Monke, and USDA ERS; Farm Income and Finance.

c. The FCS has been the dominant lender to farmer cooperatives, with

over 60% of the market. However, the most recent data available on

cooperative borrowing are for 1987.

5. The FCS plays an important role in ensuring competition among lenders

serving farmers.

a. USDA ERS reports that 25% of U.S. rural counties are served by only

one or two commercial banks. These banks may be able to earn excessive profits and operate inefficiently. (Source: Agricultural Outlook. May 1994, pg. 19.)

b. The Federal Reserve Bank of Dallas reported in 1995 that most rural

counties in Texas have three or fewer commercial banks, and a significant number have only one. Statewide branch banking had reduced

concentration of assets in both urban and rural markets, but concentration remained high in rural areas.
20

X. WHAT ARE THE FCS LENDING PATTERNS?

Loan volume outstanding from the FCS at midyear 1995 was $55.7 billion in

gross loans, up slightly from the mid-1984 volume of $54.7 billion. By year-end

1995 gross volume was $58.6 billion.

Almost three-fourths of this volume is to farmers and other borrowers under Titles

I and II of the Farm Credit Act. Over two-thirds of the farmer loans are secured

by real estate, but not all of these loans are used to purchase land.

The other one-fourth is to farmer cooperatives under Title III. More than fourfifths of the cooperative loans are domestic, with the remainder supporting agricultural exports.

Supporting facts:

1. The FCS has become more diversified in its loan portfolio.

As a result of nearly a decade of limited growth in farm mortgage lending,

currently just half the portfolio is long-term real estate loans, compared with

67% at the end of June 1985. In contrast, lending to cooperatives has grown

from 10.9% to 26% of outstanding volume from June 1985 to June 1995.

FCS Loans Outstanding on June 30, 1995

Loans by Percent of FCS

Customer type volume

$ billions

To cooperatives $ 14.6 26

domestic $ 11.9 21

international 2.7 5

To farmers and others 41.1 74

long-term real estate 28.0 50

short/intermed. 00.0 13.1 24

All loans 55.7 55.7 100
21

2. Loans to farmers continue to be the dominant lending under Titles I and II

of the Farm Credit Act.

a. Over 91% of the loans under Titles I and II are farm loans, either secured

by agricultural real estate or for eligible short- and intermediate-term farm

purposes. Some of these funds may be used for residence, family, and

other needs of farm operators as well as for farm operations.

b. About 4% are for rural housing, and the remaining 5% are for processing

and marketing, aquatic, or other purposes.

FCS Loans Outstanding to Farmers and Others

Under Titles I and II on June 30, 1995

$ Billions Percent share

Agricultural real estate 25.8 63

Agricultural non-real estate 11.7 28

Rural housing 1.6 4

All other 1.2 3

processing/mktg. 0.261 0.6

farm-rel. business 0.136 0.3

aquatic 0.078 0.2

other 0.759 1.9

Unidentified* 0.751 2

Total Title I and II loans 41.089 100

* Loans that are bank assets reported in Call Reports, but not identified by type in the Loan Account

Reporting System (LARS) database.

3. Type of security on loans is a fairly good, but imperfect, measure of the primary use of the funds.

(NOTE: The following data are based on FCA’s Loan Accounting and Reporting

System (LARS), but exclude the $0.75 billion in unidentified amounts reported above.)

a. About four-fifths of the number and almost seven-eighths of the amount

of loans secured by real estate are used primarily for agricultural real

estate. Rural housing purposes bring the totals to well over 90% of both

number and amount of Title I lending for real estate purposes.

b. Nearly 96 of every 100 loans and nine-tenths of the amount of loans not

secured by real estate are used for agricultural non-real estate purposes.
FCS Loans by Purpose and Title, June 30, 1995

Based on LARS Data*

Percent of number Percent of amount

Loan purpose Title I Title II All loans Title I Title II All loans

Ag real estate 82.1 1.3 49.5 87.5 4.9 63.9

Rural housing 12.1 1.2 7.7 5.5 0.5 4.1

Ag non-real estate 4.6 95.9 41.4 4.3 90.6 28.9

Processing/mktg. 0.0 0.3 0.1 0.3 1.6 0.6

Farm-rel. bus. 0.1 0.5 0.3 0.2 0.7 0.3

Aquatic 0.1 0.3 0.2 0.1 0.5 0.2

Other 1.0 0.5 0.8 2.2 1.2 1.9

*Percentages of amounts differ from the previous table because the LARS loan account data do not

include $0.75 billion of loans included in Call Report data.

4. The FCS supplied slightly less than a proportionate share of its financing to

young farmers.

a. 6.2% of farm operators in 1992 were 35 or younger and had debt.

b. 4.7% of the number and 3.9% of the volume of FCS loans in 1994 were

to this group.

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XI. WHAT PROCESSING, MARKETING, AND OTHER SERVICES

DO FARMERS BUY?

Available data give only an incomplete picture. In 1992, $130.8 billion in farm

production expenses were incurred. A large proportion of these purchases were

made from agricultural businesses or from other farms. However, Census of

Agriculture data do not identify processing and marketing activities conducted

as part of a farming business.

Category of production expense $ Billions in 1992

Livestock purchased $23.0

Feed purchased 24.1

Fertilizer/chemicals/seed 18.6

Labor—hire and contract 15.3

Energy 8.7

Interest expense 8.1

Other 33.0
XII. HOW BIG IS THE RURAL HOME FINANCING MARKET?

The potential appears to be very large. The number of people living in rural

areas is nearly 16 times the number living on farms, even though the definition

of farms includes some units that are primarily rural residences. Rural people

reside in some 26 million housing units of all types and have varying needs for

housing- related finance. Rural residences have enjoyed less favor in housing

finance because they are more diverse than urban properties, offering less

uniform collateral. This makes them less easily merged into the various programs of Fannie Mae and Freddie Mac for securitizing such loans.

Rural housing loans have become relatively significant for the FCS in the

North Central and Southeastern parts of the United States, but are subject to a

15% portfolio limit in each lending institution. All persons identified in Census

data reported for rural areas are potentially eligible, because Census rural areas

by definition contain only villages of under 2,500 population. Housing loans

made to farm operators are considered to be part of farm financing, not rural

home financing.

Supporting facts:

1. A large portion of the U.S. population lives in rural areas, and most of

them are not farm operators.

a. One-fourth of the U.S. population, 61.6 million people, lived in rural

areas, according to the 1990 U.S. Census. Of these, 3.9 million lived

on farms.

• Numbers of rural population are up from 53.9 million in 1970, but

percentage of total population that is rural is down from 27% in

1970.

b. A rural area is anything not classified as urban. Urban generally

includes all places of 2,500 or more population that are incorporated,

but excludes rural portions of extended cities.

• In 1990, 13,307 incorporated places under 2,500 population were

counted. This represented 69% of all incorporated places but only

6.4% of the U.S. population. Residents are currently eligible for

FCS loans.

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• Another 16,929 incorporated places had 2,500 to 9,999 population,

making up 19% of places and 12% of the U.S. population. Going

to 20,000 population, as proposed in the Clayton Bill (H.R. 4379)

in 1994, would add 1,038 places, making up 5.4% of number and

9.6% of population. Neither of these groups is FCS-eligible currently.

2. One-fourth of U.S. housing units, some 26.0 million units, were in rural

areas.

3. The FCS has loans on only a small portion of rural residences.

a. The FCS had 49,126 rural home loans as of June 30, 1993, with a

1994 year-end outstanding balance of $1.749 billion.

b. A total of 98% of the number and 93% of the amount were in loans

of under $100,000. Just 43 loans, totaling $12.8 million, exceeded

$200,000.
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XIII Summary

• Agriculture’s profile is not as clearly defined as it once was.

• Farmers and other borrowers are a heterogeneous group. Nonfarm

landlords and rural residents, as well as farm operators, are important

groups. The result is a diverse mix.

• Future trends are going to create more changes, as exemplified by the

large numbers of farm operators who have passed the age of 65 and

by the increase in concentration and vertical integration.

• Equity financing overwhelmingly dominates the agricultural sector.

Over half of all farms have no debt. But to the other half, debt

financing is very important.

• The FCS and commercial banks have been the dominant suppliers of

farm loans. But trade credit and nontraditional sources have gained in

recent years. Some of this gain is associated with vertical integration

and contract production.

• Market shares in real estate-secured financing are larger in the FCS

than for commercial banks, but the reverse is true for debt not secured

by real estate.

• The security offered on farm debt is not the same as the purpose for

which the borrowed funds are used. Significant amounts of operating

debt are secured by real estate.

• Lending to cooperatives has gained in FCS portfolio in the past decade, while farm mortgage lending has dropped.

• These changes require periodic adjustments in FCA policies and regulations to keep them workable as the customer base changes.
Copies of this publication are available from:

Office of Congressional and Public Affairs

1501 Farm Credit Drive

McLean, VA 22102-5090

Phone: 703-883-4056

Fax: 703-790-3260

1196/2000
Farm Credit Administration

1501 Farm Credit Drive

McLean, VA 22102-5090