CONTENTS

Statement of the Chairman and CEO 2

Farm Credit Administration 4

The Mission 4

The Board 4

Farm Credit System—An Overview of Events and Conditions 8

FCS Role and Structure 8

	 Financial Condition of the FCS	 10

Borrowers Served 18

	 Funding for Other Lenders	 20

	 Market Share of Farm Debt	 23

	 Farmer Mac as a Secondary Market	 25

Serving Young, Beginning, and Small Farmers and Ranchers 26

	 YBS Lending Results	 26

	 Assessment of YBS Results for Individual Associations	 28

YBS Borrowing Trends, 2001–2008 29

	 YBS Programs	 29

Regulatory Policy and Approvals 33

	 Regulatory Activity in 2008 33

	 Corporate Activity in 2008	 35

	 Funding Activity in 2008	 35

	 Mission-Related Investments	 38

Maintaining a Dependable Source of Credit for Farmers and Ranchers 40

	 Conducting a Risk-Based Examination and Oversight Program	 40

	 Meeting Statutory Examination Requirements	 40

	 Identifying and Responding to Potential Threats

	 	 to Safety and Soundness	 41

	 Measuring the System’s Safety and Soundness	 41

	 Providing Differential Supervision and Enforcement	 42

	 Working with Financially Stressed Borrowers	 44

Condition of Farmer Mac 45

Capital 45

	 Program Activity	 47

	 Asset Quality	 48

	 Earnings		 50

Challenges Facing Agriculture and the FCS 52

	 Prospects for the General Economy	 52

	 Economic Setting for Agriculture	 53

	 Uncertainty over Policy and Trade	 54

	 Renewable Fuels	 56

	 New Dimensions to Portfolio Risk	 56

	 Other Challenges 58

Appendix 59

	 Farm Credit Administration Offices	 59

	 Agency Officials	 61

	 Glossary		 64

	 Acronyms and Abbreviations	 67

	 Additional Information	 68

The Farm Credit 

Administration 

ensures a safe, 

sound, and 

dependable source 

of credit and 

related services for 

agriculture and rural 

America.
2

Farm Credit Administration 2008 Annual Report on the Farm Credit System

STATEMENT OF THE CHAIRMAN AND CEO

May 2009 

Dear Reader, 

On behalf of the Board and the dedicated employees of the Farm Credit Administration, I present the 2008 Annual 

Report on the Farm Credit System (FCS or System). 

I am pleased to report that the overall condition and performance of the System remained safe and sound during 

2008. The FCS experienced another year of solid earnings and asset growth. Also, the System has good credit quality, 

adequate capital, and sufficient liquidity. However, stresses from the general economy, the financial and credit crisis, 

and shocks in commodity prices increase risks to the System and affect the outlook for 2009. 

It is in times such as these that the System, as a Government-sponsored enterprise (GSE) devoted to agriculture and 

rural America, must continue to stand tall in the marketplace and be there for America’s farmers, ranchers, agricultural cooperatives, and rural communities. In fact, the System did much during the year to help producers and 

rural America. When commodity prices soared in early 2008, System institutions stepped forward to meet the critical 

financing needs of the grain elevator industry. The System also helped borrowers affected by floods, worked with 

livestock producers as they made difficult choices, and made critical infrastructure projects possible through innovative bond financing. 

Following is a sampling of the measures FCA took in 2008 to ensure that the System remains safe and sound and 

continues to meet the purpose for which it was created: 

• FCA completed a final rule that revised the eligibility and scope-of-lending regulations for processing and marketing operations to make them more responsive to the changing ownership structures of these operations. 

• The FCA Board approved a final rule that revised FCA regulations governing the Risk-Based Capital Stress Test 

for the Federal Agricultural Mortgage Corporation (Farmer Mac). 

• FCA increased the System’s discount note ceiling to $60 billion from $40 billion to give it more flexibility to raise 

funds if financial markets are not open to term debt. 

• The FCA Board adopted a Market Emergency Standby Resolution that would go into effect only in the event of 

a serious market disruption. It would temporarily allow Farm Credit banks to fund their assets with short-term 

liabilities even if doing so would cause the liquidity reserve of one or more System banks to drop below the 

90-day minimum requirement. 

• Throughout the year, FCA provided guidance to System institutions by issuing Informational Memorandums 

addressing such issues as collateral evaluation requirements, and asset growth, market volatility, and best practices for fast-growing institutions. 
3

The System is required to provide credit to young, beginning, and small (YBS) farmers and ranchers. In 2008, lending by the System to YBS producers continued to show solid gains. Nevertheless, YBS results as a percentage of 

total loans have either dipped a few points or remained relatively flat over the past several years. However, since 

the percentage of young and small farmers is decreasing in general, the System’s YBS dollar results are noteworthy 

because institutions have managed to expand YBS loan volume. FCS institutions may use a variety of tools to fulfill 

their commitment to YBS lending. Many associations revised their YBS policies and procedures in the past year, or 

reported plans to do so in 2009, in response to guidance issued in an August 2007 FCA Bookletter. This indicates that 

FCA’s oversight activities are accomplishing the goal of helping institution management and boards stay focused on 

this important mission area. 

The System is a GSE with solid financial performance. It has been able to maintain its financial strength and to serve 

its mission despite the economic and financial market turmoil. However, the System is finding it increasingly difficult to access the financial markets, its primary source of liquidity. Specifically, the crisis in the financial markets has 

caused the spread between Treasuries and the System’s longer-term debt issuances to increase. While the System has 

been able to endure the financial market uncertainties, continuing weaknesses in the financial markets and potential 

Government actions will likely make 2009 another difficult year for System debt issuance. In addition, the lending 

environment for the FCS going forward will be more challenging than the System has faced for many years. 

As the regulator of the FCS, FCA will focus on continuing to ensure that the System remains safe and sound by providing appropriate guidance and maintaining strong examination and supervisory programs. With the dynamics and 

risks in the agricultural and financial industries, FCA must ensure that FCS institutions have the culture, governance, 

policies, procedures, and management controls to effectively identify and manage risks. 

As agriculture and rural America contend with the challenges of these difficult and uncertain times, we are mindful 

that the System was designed to be a dependable lender to agriculture and rural communities in both good times 

and bad. FCA remains committed to ensuring that the System can fulfill its mandate to both current and future generations of farmers and ranchers and the rural areas in which they live. 

Sincerely, 

Leland A. Strom

About the photo: The picture in the background was taken on the Strom Family Farm in Lily Lake, Illinois, around 

1938. The two farmers are cutting oats. The man on the cutter is Elof Strom, father of Leland Strom; the man on the 

tractor pulling the cutter is Otto, Elof’s brother. Today, the third-generation farm produces corn and soybeans. It has 

been dedicated to permanent agricultural use through a farmland preservation program.
4

Farm Credit Administration 2008 Annual Report on the Farm Credit System

The Mission

The Farm Credit Administration 

(FCA or Agency) is an independent 

agency in the Executive branch of the 

U.S. Government. FCA is responsible 

for regulating and supervising the 

banks, associations, and related entities in the Farm Credit System (FCS 

or System), including the Federal 

Agricultural Mortgage Corporation 

(Farmer Mac). The FCS is a nationwide network of borrower-owned 

financial institutions that provide 

credit to farmers, ranchers, residents 

of rural communities, agricultural 

and rural utility cooperatives, and 

other eligible borrowers. 

FCA was created by a 1933 Executive order of President Franklin D. 

Roosevelt; the Agency now derives 

its powers and authorities from the 

Farm Credit Act of 1971, as amended 

(Farm Credit Act). The U.S. Senate 

Committee on Agriculture, Nutrition, 

and Forestry and the U.S. House of 

Representatives Committee on Agriculture oversee FCA and the FCS. 

FCA is responsible for ensuring that 

the System remains a dependable 

source of credit for agriculture and 

rural America. The Agency does this 

in two specific ways: 

1. It ensures that FCS institutions, 

including Farmer Mac, comply 

with applicable law and regulations. FCA’s examinations and 

oversight strategies focus on 

an institution’s financial condition and any material existing 

or potential risk, as well as on 

the ability of its board of directors and management to direct 

its operations. The Agency also 

evaluates each institution’s compliance with laws and regulations 

to serve all eligible borrowers, 

including young, beginning, and 

small farmers and ranchers. If 

a System institution violates a 

law or regulation or operates in 

an unsafe or unsound manner, 

FCA uses its supervisory and 

enforcement authorities to ensure 

appropriate corrective action. 

2. It develops policies and regulations that govern how System 

institutions conduct their business and interact with customers. FCA’s policy and regulation 

development focuses on protecting System safety and soundness; implementing the Farm 

Credit Act; providing minimum 

requirements for lending, related 

services, investments, capital, and 

mission; and ensuring adequate 

financial disclosure and governance. The policy development 

program includes approval of 

corporate charter changes, System 

debt issuance, and other financial 

and operational matters. 

The Agency maintains its headquarters and a field office in McLean, 

Virginia. FCA also has field offices 

in Bloomington, Minnesota; Dallas, 

Texas; Denver, Colorado; and Sacramento, California. 

FCA does not receive a Federal 

appropriation. The Agency is funded 

through assessments paid by System 

institutions and by reimbursable 

activities. 

The Board

FCA policy, its regulatory agenda, 

and supervisory activities are established by a full-time, three-person 

Board, whose members are appointed 

by the President of the United States, 

with the advice and consent of the 

Senate. Board members serve a 

six-year term and may not be reappointed after serving a full term or 

more than three years of a previous 

member’s term but may remain on 

the Board until a successor is nominated by the President and confirmed 

by the Senate. The President designates one member as Chairman of 

the Board, who serves in that capacity until the end of his or her own 

term. The Chairman also serves as 

FCA’s Chief Executive Officer (CEO).

FCA Board members also serve as 

members of the Farm Credit System Insurance Corporation board of 

directors. 

FARM CREDIT ADMINISTRATION
5

Mr. Strom studied agriculture business at Kishwaukee College and 

business administration at Northern 

Illinois University. He was a member 

of the Illinois Agricultural Leadership 

Program Class of 1988. His community involvement includes having 

served as vice president of his local 

K–12 school district, chairman of his 

church council, 4-H parent leader, 

and coach of boys’ and girls’ sports 

teams. Mr. Strom owns a thirdgeneration family farm in Illinois that 

produces corn and soybeans. He and 

his wife, Twyla, have two sons, a 

daughter, and a daughter-in-law.

Leland A. Strom is Chairman of the 

Board and CEO of FCA. Mr. Strom 

was appointed to the FCA Board by 

President George W. Bush on December 12, 2006, and was designated 

Chairman and CEO on May 22, 2008. 

His term expires on October 13, 2012. 

Mr. Strom also serves as a member 

of the board of directors of the Farm 

Credit System Insurance Corporation (FCSIC), which is responsible 

for ensuring the timely payment 

of principal and interest on obligations issued on behalf of FCS banks. 

Before being named FCA Chairman 

and CEO, he had served as chairman 

of the board of directors of FCSIC 

since December 2006.

For more than 30 years he has been 

active in the agriculture industry. He 

served for more than 25 years on the 

board of 1st Farm Credit Services, 

an FCS institution in Illinois, holding 

Leland A. “Lee” Strom

Chairman and CEO

various positions, including chairman. During the agriculture crisis of 

the 1980s, he was selected to sit on 

the Restructuring Task Force of the 

Sixth Farm Credit District. 

From 2000 to 2006, he was on the 

Federal Reserve Bank of Chicago 

Advisory Council on Agriculture, 

Labor, and Small Business. Part of 

this time he also served on the Country Mutual Fund Trust Board, an 

investment fund of the Illinois Farm 

Bureau and its Country Financial 

organization. 

Other boards Mr. Strom has served 

on include Northern F.S., Inc., a 

farm service and supply cooperative 

serving farmers in Northern Illinois; 

AgriBank, FCB; and the Farm Credit 

Council, the national trade organization representing FCS in Government 

affairs. 

Mr. Strom has served in several 

capacities with the Illinois Farm 

Bureau. He also served on his 

county Farm Bureau board. He was 

a member of the State Young Farmer 

Committee from 1981 to 1985. For his 

overall involvement in agriculture, 

he received an Outstanding Young 

Farmer Award. 

In his community of Kane County, 

Illinois, which lies at the edge of 

suburban Chicago, Mr. Strom helped 

develop a farmland preservation 

program. The original Strom family 

farm was the first to be dedicated to 

permanent agricultural use under the 

program. 
6

Farm Credit Administration 2008 Annual Report on the Farm Credit System

Nancy C. Pellett

Board Member

Nancy C. Pellett was appointed to 

the FCA Board by President George 

W. Bush on November 26, 2002. She 

was designated Chairman on May 

22, 2004, and served in that capacity until her term expired on May 

21, 2008. She continues to serve as a 

member of the Board until a successor is nominated by the President 

and confirmed by the Senate. 

Ms. Pellett also serves as chairman 

of the board of directors of the Farm 

Credit System Insurance Corporation, which is responsible for ensuring the timely payment of principal 

and interest on obligations issued on 

behalf of FCS banks. 

Ms. Pellett brings to her position 

on the FCA Board extensive experience in production agriculture and 

agribusiness. In partnership with 

her husband, she managed Prairie 

Hills, Ltd., a feedlot, cow-calf, and 

row-crop operation in Atlantic, Iowa, 

from 1966 until her appointment to 

the Board. While she serves her term 

on the FCA Board, her husband, 

son, and daughter-in-law continue to 

operate this fifth-generation family 

farm. 

For more than 20 years, she also 

served as president and treasurer of 

Fredrechsen Farms, Ltd., a familyowned swine and row-crop operation 

in Walnut, Iowa. 

A long-time beef industry leader, Ms. 

Pellett has held State and national 

leadership positions in cattle industry 

organizations. As a member of the 

National Cattlemen’s Beef Association, she served as chairman of the 

check-off division, as chairman of 

the consumer marketing group, and 

most recently as a member of the 

Cattlemen’s Beef Board. She also was 

president of the Iowa Beef Industry 

Council. 

She is a partner in Premium Quality 

Foods, Inc., which markets precooked 

beef entrees. Previously, she served 

as president and consumer marketing 

director for the company. 

Ms. Pellett served a six-year term as 

a member of the Board of Regents 

for the State of Iowa, which oversees 

the three State universities as well 

as the University of Iowa Hospital 

and its affiliated clinics. She was also 

selected as a member of the Governor’s Student Aid Commission. 

Dedicated to the future of agriculture, Ms. Pellett worked with 4-H at 

the local and State levels and served 

on the Iowa 4-H Foundation board. 

She is a founding member of the 

4-H/FFA “Sale of Champions” committee for the Iowa State Fair. 

Ms. Pellett is on the Iowa State 

University Foundation Board of 

Governors and was a member of the 

advisory committees for the College of Agriculture and the College 

of Family and Consumer Sciences. 

She is past president of the university’s Alumni Association and was 

awarded the Alumni Medal in 1987. 

The Pellett family was honored as the 

“Family of the Year” by the university in 1997. 

The Pellett family also received the 

“Friends of Youth Award” in 2000 

from the Knights of AkSarBen, a 

foundation that supports education, 

youth programs, and rural development in Nebraska and western Iowa. 

A native of Walnut, Iowa, Ms. Pellett 

holds a B.S. from Iowa State University at Ames. She and her husband 

have four children. 
7

Dallas P. Tonsager was appointed to 

the FCA Board by President George 

W. Bush on November 30, 2004, for a 

term that expires May 21, 2010. 

Mr. Tonsager also serves as a member of the Board of Directors of 

the Farm Credit System Insurance 

Corporation, which is responsible 

for ensuring the timely payment of 

principal and interest on obligations 

issued on behalf of FCS banks. 

Mr. Tonsager brings to his position on the FCA Board extensive 

experience as an agriculture leader 

and producer and a commitment to 

promoting and implementing innovative development strategies to benefit 

rural residents and their communities. As executive director of the 

South Dakota Value-Added Agriculture Development Center in Huron 

from 2002 until his appointment 

to the FCA Board, he coordinated 

initiatives to better serve producers 

interested in developing value-added 

agricultural projects. Services provided by the center include project 

facilitation, feasibility studies, busiDallas P. Tonsager

Board Member

ness planning, market assessment, 

technical assistance, and education. 

In 1993 he was selected by President William J. Clinton to serve as 

the State director in South Dakota 

for rural development for the U.S. 

Department of Agriculture. Mr. Tonsager oversaw a diversified portfolio 

of housing, business, and infrastructure loans in South Dakota totaling 

more than $100 million. In 1999, he 

was recognized as one of two outstanding State directors in the nation 

by then-USDA Under Secretary Jill 

Long Thompson. His term concluded 

in February 2001. 

A long-time member of the South 

Dakota Farmers Union, Mr. Tonsager 

served two terms as president of 

the organization from 1988 to 1993. 

He served on the board of National 

Farmers Union Insurance from 1989 

to 1993, and he was a member of the 

advisory board of the Commodity 

Futures Trading Commission from 

1990 to 1993. 

From 1988 to 1993, Mr. Tonsager was 

a board member of Green Thumb, 

Inc., a nationwide job training 

program for senior citizens. Until 

recently he served on the board of 

Lutheran Social Services of South 

Dakota. 

Mr. Tonsager grew up on a dairy 

farm near Oldham, South Dakota. 

In partnership with his brother, he 

owns Plainview Farm in Oldham, 

a family farming operation that 

includes corn, soybeans, wheat, and 

hay. 

Mr. Tonsager is a graduate of South 

Dakota State University, where he 

earned a B.S. in agriculture in 1976. 

He and his wife, Sharon, have two 

sons and a daughter-in-law.
8

Farm Credit Administration 2008 Annual Report on the Farm Credit System

FARM CREDIT SYSTEM—

AN OVERVIEW OF EVENTS AND CONDITIONS

FCS Role and Structure

The Farm Credit System is a network of borrower-owned cooperative financial institutions and service organizations. Together, these 

institutions are often viewed as the 

largest agricultural lender in the 

United States, serving all 50 States 

and the Commonwealth of Puerto 

Rico. Created by Congress in 1916 to 

provide American agriculture with a 

dependable source of credit, the FCS 

is the oldest financial Governmentsponsored enterprise (GSE).1

 

FCS institutions provide credit and 

financially related services to farmers, 

ranchers, producers or harvesters of 

aquatic products, and farmer-owned 

cooperatives. They also make credit 

available for agricultural processing 

and marketing activities, rural housing, certain farm-related businesses, 

agricultural and aquatic cooperatives, rural utilities, and foreign and 

domestic entities in connection with 

international agricultural trade. The 

System raises funds for its business 

activities by selling securities in the 

national and international money 

markets, subject to approval by 

FCA. The U.S. Government does not 

guarantee the securities issued by the 

System. 

As of December 31, 2008, the System was composed of 95 banks and 

associations. Five Farm Credit banks 

provided loan funds to 82 Agricultural Credit Association (ACA) parent 

organizations2 and 8 stand-alone 

Federal Land Credit Associations 

(FLCAs). An ACA can make short-, 

intermediate-, and long-term loans. 

An FLCA can make only long-term 

loans and, under the Farm Credit 

Act, the FLCA is exempt from State 

and Federal income taxes. 

Each ACA contains two subsidiaries, a Production Credit Association, 

which can make only short- and 

intermediate-term loans, and an 

FLCA. The parent-subsidy structure, with an ACA as parent and its 

wholly owned PCA and FLCA as 

subsidiaries, accounted for 91 percent 

of all associations as of December 31, 

2008. The ACA and its two subsidiaries operate with a common board 

of directors and staff, and each of 

the three entities is responsible for 

the debts of the others. As a result, 

for most regulatory and examination 

purposes, FCA views the ACA and 

its subsidiaries as a single entity.

This parent-subsidiary structure 

enables the ACA to preserve the 

tax-exempt status of the FLCA. The 

ACA structure offers several other 

benefits. It allows the ACA to build 

and use capital more efficiently and 

enables members to be stockholders of one entity—the ACA—and to 

be borrowers of the ACA or of one 

or both subsidiaries. This gives the 

ACA and its subsidiaries greater 

flexibility in serving their customers 

and allows credit and related services 

to be delivered to borrowers more 

efficiently. Further, the structure 

allows an association to provide a 

broader range of specialized services 

to its member-borrowers. It enables 

one-stop borrowing—borrowers 

can obtain long-, intermediate-, and 

short-term loans from the same institution. 

One of the five Farm Credit banks is 

an Agricultural Credit Bank (ACB), 

which has a nationwide charter 

to make loans to agricultural and 

aquatic cooperatives and rural utilities, as well as to other persons or 

organizations that have transactions 

with, or are owned by, these cooperatives. The ACB finances U.S. agricultural exports and imports and provides international banking services 

for farmer-owned cooperatives. In 

addition to making loans to cooperatives, the ACB provides loan funds 

to five affiliated ACAs, which serve 

New York, New Jersey, Connecticut, 

Rhode Island, Maine, Massachusetts, 

New Hampshire, Vermont, Alaska, 

Oregon, Washington, Montana, and 

Idaho.

FCA also examines and regulates the 

Federal Farm Credit Banks Funding Corporation (Funding Corporation), an institution established under 

the Farm Credit Act. The Funding 

Corporation issues and markets debt 

securities on behalf of the banks to 

raise loan funds.

In addition, FCA examines and 

regulates the following five service 

corporations organized under section 

4.25 of the Farm Credit Act:3 

1. The Federal Land Banks were created in 1916, when the System was originally established. Other major parts of the FCS were created in 1923 and 

1933.

2. Although legally separated, the ACA, the PCA, and the FLCA operate an integrated lending business, with loans made through the subsidiaries 

possessing the appropriate authority. The ACA, the PCA, and the FLCA are jointly and severally liable on the full amount of the indebtedness to the 

bank under the bank’s General Financing Agreement. In addition, the three associations agree to guarantee each other’s debts and obligations, pledge 

their respective assets as security for the guarantee, and share each other’s capital. 

3. Section 4.25 of the Farm Credit Act provides that one or more FCS banks or associations may organize a service corporation to perform functions and 

services on their behalf. These federally chartered service corporations are prohibited from extending credit or providing insurance services.
9

1. AgVantis, Inc., which provides 

technology-related and other support services to the associations 

affiliated with U.S. AgBank, FCB 

(Farm Credit Bank). AgVantis is 

owned by the bank and 18 of its 

affiliated associations. 

2. Farm Credit Leasing Services 

Corporation, which provides 

equipment leasing services to 

eligible borrowers, including agricultural producers, cooperatives, 

and rural utilities, and is wholly 

owned by CoBank, ACB. 

3. Farm Credit Financial Partners, 

Inc. (FPI), which provides support services to CoBank, ACB; 

CoBank’s five affiliated associations; two associations affiliated 

with U.S. AgBank, FCB; one association affiliated with AgriBank, 

FCB; and two System-related 

entities. FPI is owned by CoBank, 

ACB, and the eight associations 

to which FPI provides services.

4. The FCS Building Association, 

which acquires, manages, and 

maintains facilities to house 

FCA’s headquarters and field 

office staff. The FCS Building 

Association is owned by the FCS 

banks. The FCA Board oversees 

the Building Association’s activities on behalf of its owners. 

5. Farm Credit Finance Corporation of Puerto Rico (FCFCPR), 

which previously offered tax 

incentives to investors to provide 

low-interest funding (other than 

that from the Funding Corporation) to Puerto Rico Farm Credit, 

ACA. Because of changes in the 

tax treatment of the corporation, 

AgFirst Farm Credit Bank, the 

sole owner of FCFCPR, suspended operations of FCFCPR 

as of December 31, 2005. The 

service corporation remains inactive, although the charter is still 

outstanding. 

FCA also examines and regulates 

the Federal Agricultural Mortgage 

Corporation (Farmer Mac).4 Farmer 

Mac provides a secondary market 

arrangement for agricultural real 

estate loans, Government-guaranteed 

portions of certain loans, and rural 

housing mortgage loans. These 

secondary market activities provide 

greater liquidity and lending capacity to agricultural lenders. Under 

the Farmer Mac I program, Farmer 

Mac guarantees prompt payment of 

principal and interest on securities 

representing interests in, or obligations backed by, mortgage loans 

secured by first liens on agricultural 

real estate or rural housing; it also 

purchases, or commits to purchase, 

qualified loans or securities backed 

by qualified loans directly from 

lenders. Under the Farmer Mac II 

program, Farmer Mac guarantees 

securities backed by the Governmentguaranteed portions of farm ownership and operating loans, rural 

business and community development loans, and certain other loans 

guaranteed by the U.S. Department 

of Agriculture (USDA). Farmer Mac 

II does not duplicate the Federal 

Government’s guarantee; it simply 

ensures timely compensation for 

losses on guaranteed investments. 

Farmer Mac received new authorities 

from Congress in 2008 to purchase 

and guarantee securities backed by 

rural utility loans.

When Congress established the FCS 

as a GSE, its purpose was to provide 

a permanent, reliable source of credit 

and related services to agriculture 

and aquatic producers, their cooperatives, and related businesses in 

rural America. Congress intended 

the farmer-owned cooperative FCS to 

improve the income and well-being 

of American farmers and ranchers. It 

also encouraged the participation of 

farmer- and rancher-borrowers in the 

management, control, and ownership 

of these cooperative institutions to 

help the institutions remain focused 

on serving their members’ needs. 

The System helps to meet a broad 

public need by preserving liquidity 

and competition in rural credit markets in both good and bad economic 

times. The accomplishment of this 

public goal benefits all eligible borrowers, including young, beginning, 

and small (YBS) farmers, as well as 

rural homeowners.

FCA’s regulations, policy statements, 

examinations, chartering activities, and other regulatory activities 

(discussed in later chapters of this 

report) support and facilitate the 

4. Farmer Mac is established in law as an FCS institution. However, Farmer Mac has no liability for the debt of any other System institution, and the 

other System institutions have no liability for Farmer Mac debt. Farmer Mac is organized as an investor-owned corporation, not a member-owned 

cooperative. Investors in voting stock may include commercial banks, insurance companies, other financial organizations, and FCS institutions. 

Nonvoting stock may be owned by any investor. Farmer Mac is regulated and examined by FCA through the Office of Secondary Market Oversight, 

whose director reports to the FCA Board on matters of policy.
10

Farm Credit Administration 2008 Annual Report on the Farm Credit System

accomplishment of the System’s mission by ensuring that FCS institutions 

operate in a safe and sound manner, without undue risk to taxpayers, investors in System securities, or 

borrower-stockholders. 

The sections in this chapter first 

assess the System’s financial strength 

and then its service to rural America. 

The discussion relies on commonly 

used measures, including trends in 

volume by a variety of loan types, 

volume of funding for non-System 

rural lenders and participations with 

other lenders, and the System’s share 

in the marketplace. Discussion in 

the next chapter also covers lending 

activities and programs that benefit 

YBS farmers and ranchers and the 

use of Government guarantee programs in supporting loans to farmers who are unable to meet normal 

underwriting requirements.

Financial Condition of the

FCS5 

As selected financial indicators show 

(tables 1 and 2), the overall condition 

and performance of the Farm Credit 

System remained safe and sound 

during 2008. Earnings, asset quality, 

and capital levels indicate that the 

System is in strong financial condition. However, in the second half of 

2008 and into 2009, the global recession was beginning to reduce the 

demand for farm products, causing 

commodity prices to decline and thus 

raising the risk environment of the 

System.

Although all banks and associations 

continued to maintain capital ratios 

well in excess of minimum regulatory requirements, the turmoil in the 

U.S. and global markets during the 

latter half of 2008 has limited the 

System’s ability to raise third-party 

capital and its flexibility to access 

the capital markets for the issuance 

of term debt. The System relies on 

access to the capital markets to raise 

the funds it needs for making loans 

to farmers and other eligible borrowers.

The System has benefited, and is 

expected to continue to benefit, from 

the financial strength and overall profitability of the farm sector, 

which had record earnings in 2008. 

Nonetheless, earnings are expected 

to decline in 2009 because of tighter 

margins for most producers, nega5. The information presented in this section pertains to all Farm Credit Banks, the Agricultural Credit Bank, and the affiliated associations of the System 

banks. The FCS institutions provided the data used in the overall FCS analysis to FCA or to the Federal Farm Credit Banks Funding Corporation. The 

analysis in this report is based on publicly available information and, except where noted, is based on the 12-month period ended December 31, 2008, 

and is presented on a combined basis reflecting eliminations of transactions between System entities. 

tive profitability for many livestock 

producers, and overcapacity in the 

ethanol industry. Farm land values 

have also begun to weaken in some 

areas with the changing outlook for 

commodity prices. In addition, rising 

unemployment is reducing repayment capacity for many part-time 

farmers.

These factors are expected to lead 

to some decline in System financial indicators going forward. For a 

discussion of how these stresses and 

others are likely to affect the agricultural economy and the System in 

2009 and beyond, see “Challenges 

Facing Agriculture and the FCS” on 

pages 52 to 58. 
11

Table 1	 	 	 	 	 	

Farm Credit System Major Financial Indicators, Annual Comparison 

As of December 31

Dollars in Thousands 

FCS banksa 2004 2005 2006 2007b 2008

Gross loan volume	 85,411,707	 94,865,873	 112,260,474	 131,191,826	 149,491,137

Accruing restructured loansc 7,050 6,131 5,378 4,301 5,125

Accrual loans 90 or more days past due	 5,420	 1,322	 5,439	 12,917	 21,594

Nonaccrual loans 227,003 152,223 107,556 46,069 582,160

Nonperforming loans/total loansd 0.28% 0.17% 0.11% 0.05% 0.41%

Cash and marketable investments	 23,089,548	 27,788,225	 31,680,712	 34,408,807	 41,358,881

Capital/assetse 6.79% 6.20% 5.65% 5.43% 4.89%

Unallocated retained earnings/assets	 3.54%	 3.28%	 2.95%	 2.69%	 2.50%

Net income	 733,012	 740,785	 845,191	 981,688	 1,231,430

Return on assets 0.68% 0.61% 0.60% 0.60% 0.65%

Return on equity	 9.82%	 9.48%	 10.24%	 10.59%	 12.44%

Net interest margin	 0.92%	 0.84%	 0.80%	 0.83%	 0.97%

Operating expense ratef 0.36% 0.33% 0.33% 0.30% 0.31%

Associations 

Gross loan volume	 75,619,681	 83,253,781	 93,413,704	 105,620,488	 114,026,858

Accruing restructured loansc 68,439 53,885 51,384 47,212 30,381

Accrual loans 90 or more days past due	 15,375	 13,156	 19,504	 43,840	 70,622

Nonaccrual loans 419,312 371,703 425,545 465,414 1,699,245

Nonperforming loans/gross loansd 0.67% 0.53% 0.53% 0.53% 1.58%

Capital/assetsg 17.72% 17.19% 16.27% 15.57% 15.47%

Unallocated retained earnings/assets	 15.28%	 14.79%	 13.89%	 13.58%	 13.52%

Net income	 2,420,251	 1,613,346	 1,662,255	 1,934,968	 1,811,667

Return on assets 3.10% 1.85% 1.75% 1.74% 1.57%

Return on equity	 18.22%	 10.55%	 10.44%	 10.82%	 9.86%

Net interest margin	 2.72%	 2.71%	 2.64%	 2.57%	 2.49%

Operating expense ratef 1.58% 1.53% 1.58% 1.49% 1.45%

Total FCSh 

Gross loan volume	 96,367,000	 106,272,000	 123,436,000	 142,906,000	 161,423,000

Nonperforming loans	 743,000	 600,000	 615,000	 621,000	 2,416,000

Nonaccrual loans 646,000 524,000 533,000 512,000 2,282,000

Nonperforming loans/gross loansd 0.77% 0.56% 0.50% 0.43% 1.50%

Bonds and notes 100,330,000 113,576,000 134,466,000 155,295,000 179,769,000

Capital/assetsi 17.13% 16.28% 15.00% 14.17% 12.65%

Surplus/assets	 13.69%	 13.30%	 12.25%	 11.52%	 10.80%

Net income	 2,993,000	 2,096,000	 2,379,000	 2,703,000	 2,916,000

Return on assets 2.46% 1.58% 1.56% 1.53% 1.41%

Return on equity	 14.85%	 9.38%	 9.99%	 10.38%	 10.70%

Net interest margin	 2.56%	 2.58%	 2.48%	 2.43%	 2.41% 

Sources: Farm Credit System Call Reports as of December 31 and the Farm Credit System Annual Information Statements provided by the Federal 

Farm Credit Banks Funding Corporation. 

a. Includes Farm Credit Banks and the Agricultural Credit Bank.

b. Some of the data for 2007 have been corrected from the amounts reported in the 2007 FCA Annual Report on the Farm Credit System.

c. Excludes loans 90 days or more past due. 

d. Nonperforming loans are defined as nonaccrual loans, accruing restructured loans, and accrual loans 90 days or more past due.

e. Capital excludes mandatorily redeemable preferred stock. 

f. Operating expenses are divided by average gross loans, annualized. 

g. Capital excludes protected borrower capital. 

h. Cannot be derived through summation of above categories because of intradistrict and intra-System eliminations used in Reports to Investors.

i. Capital includes restricted capital (amount in Farm Credit Insurance Fund) and excludes mandatorily redeemable preferred stock and protected 

borrower capital. 
12

Farm Credit Administration 2008 Annual Report on the Farm Credit System

Table 2	 	 	 	 	 	 	 	 	 	

Farm Credit System Major Financial Indicators, by Districta 

As of December 31, 2008		 	 	 	 	 	 	 	 	

Dollars in Thousands	 	 	 	 	 	 	 	 	 	

 

 Allowance Cash

Gross for and

Total loan Nonaccrual loan marketable Capital Total

FCS Banks assets volume loans losses investmentsb stockc Surplusd capitale

 

AgFirst 29,911,050 21,239,330 176,410 44,565 8,288,340 834,929 763,354 1,241,091 

AgriBank 63,285,845 52,753,649 60,811 13,883 9,510,636 1,624,615 1,537,851 2,767,212 

CoBank 61,162,057 44,549,872 217,797 329,198 14,801,371 2,101,192 1,638,596 3,594,849 

Texas	 14,760,501 11,403,113 109,661 12,549 3,230,043 427,212 343,113 744,542

U.S. AgBank 25,413,761 19,545,173 17,481 3,202 5,528,491 797,710 586,127 1,170,717 

 

Total 194,533,214 149,491,137 582,160 403,397 41,358,881 5,785,658 4,869,041 9,518,411 

 

Associations 

AgFirst 18,372,616 16,848,927 374,172 124,523 624,322 180,112 2,586,817 2,740,868 

AgriBank 54,324,405 49,345,292 768,172 194,290 2,087,199 213,347 8,248,763 8,462,250 

CoBank 13,060,950 12,401,042 119,051 88,353 83,092 25,581 1,942,670 1,911,895 

Texas	 13,969,126 13,349,561 212,820 39,102 186,411 64,620 1,860,307 1,933,547

U.S. AgBank 23,666,200 22,082,036 225,030 83,451 616,258 285,682 3,742,305 4,036,303 

 

Total 123,393,297 114,026,858 1,699,245 529,719 3,597,282 769,342 18,380,862 19,084,863 

 

Total FCS 214,353,000 161,423,000 2,282,000 936,000 43,807,000 1,423,000 23,148,000 27,124,000 

 

Sources: Farm Credit System Call Reports as of December 31, 2008, and the Farm Credit System Annual Information Statement provided by the Federal 

Farm Credit Banks Funding Corporation.

 

a. Aggregations of district data may not equal totals because of eliminations.

b. Includes accrued interest receivable on marketable investments.

c. Includes capital stock and participation certificates, excludes mandatorily redeemable preferred stock and protected borrower capital.

d. Includes allocated and unallocated surplus.

e. Includes capital stock, participation certificates, perpetual preferred stock, surplus, accumulated other comprehensive income, and restricted capital 

(amount in the Farm Credit Insurance Fund, for Farm Credit System total only). Excludes mandatorily redeemable preferred stock and protected 

borrower capital.
13

Earnings

The FCS earned $2.9 billion in 2008 

compared with $2.7 billion in 2007. 

This 7.9 percent increase in net 

income was largely driven by continued high loan growth and investments. See figure 1. The $642 million 

increase in net interest income was 

attributable to the more favorable 

funding and net interest spread. 

Net interest spread increased by 26 

basis points to 1.99 percent from 1.73 

percent. 

Despite substantial asset growth, 

net income was sufficient to keep 

the return on average assets and the 

return on average capital at acceptable levels. As table 1 shows, the 

System’s return on average assets 

declined to 1.41 percent in 2008 

from 1.53 percent the prior year. The 

return on average capital, however, 

increased to 10.70 percent in 2008 

from 10.38 percent in 2007. 

As cooperative institutions, the FCS 

banks and associations pass a portion of their earnings on to their 

borrower-owners as patronage distributions. During 2008, System institutions declared a total of $958 million 

in patronage distributions, 33 percent 

of Systemwide net income. Of that 

amount, $589 million was paid in 

cash, $275 million was issued in the 

form of allocated retained earnings, 

and $94 million was issued as stock. 

The System also distributed $121 million in cash from patronage allocations of earlier years. 

Asset Growth

The System experienced substantial 

loan and asset growth in 2008, as 

shown in table 3. FCS assets grew 

to $214.4 billion, up $27.9 billion 

(15.0 percent) from year-end 2007. 

This increase was led by continued growth in gross loans, which 

increased from $142.9 billion in 2007 

to $161.4 billion at year-end 2008 

(figure 2). 

Generally high agricultural commodity prices stimulated loan demand, 

especially for seasonal agribusiness 

loans. These higher prices, particularly for corn, were the result of 

strong demand from foreign buyers 

and the domestic biofuels industry 

during the first half of 2008. However, later in 2008, many of these 

factors shifted. Oil prices and consumption dropped, which reduced 

the demand for ethanol. Crop production improved in certain regions 

of the world, and the U.S. dollar 

strengthened in the latter half of 

2008, decreasing exports. The combination of these factors produced a 

dramatic drop in commodity prices 

in late 2008 to levels more in line 

with commodity prices at December 

31, 2007. While the System’s loan 

growth rate was much higher in the 

year’s first half than in the second, 

generally increasing farm land prices, 

volatile but higher commodity prices, 

and higher input costs caused the 

demand for farm lending to continue 

to increase during all four quarters 

of 2008. The FCS was able to meet 

the demand even when other financial institutions were affected by the 

credit crunch of the fourth quarter. 

The AgriBank, U.S. AgBank, AgFirst, 

and CoBank districts experienced 

at least 10 percent growth as gross 

loans increased by 19.9 percent, 16.9 

percent, 11.1 percent, and 10.0 percent, respectively. The Farm Credit 

Bank of Texas grew by 4.9 percent. 

The AgriBank district had the largest 

dollar growth at $8.7 billion, followed by the CoBank district at $4.1 

billion. Asset growth from 2005 to 

2008 averaged more than 14 percent. 

The growth rates of the past four 

years are higher than any experienced by the System over the past 

25 years. However, we anticipate 

2009 will be a year of much slower 

growth given the state of the general economy and the weaker farm 

economy. 

Investment Assets

Investments available for sale (based 

on fair value) grew from $31.1 billion 

in 2007 to $35.1 billion in 2008, with 

the greatest increases in money market instruments and U.S. Government 

securities (see table 4). The System’s 

portfolio of mortgage-backed securities available for sale grew by only 

2.5 percent compared with 17.7 

percent in 2007 (table 4). The overall 

weighted average yield decreased 

appreciably since year-end 2007 

from 5.0 percent to 2.8 percent for 

available-for-sale securities as a result 

of the lower interest rate environment. The overall weighted average 

yield on held-to-maturity securi-
14

Farm Credit Administration 2008 Annual Report on the Farm Credit System

As of December 31 Change

2007 2008 Dollars Percent

Cash 718 3,758 3,040 423.4

Federal funds sold and repossessed	 1,907	 1,029	 (878)	 (46.0)

Investments	 	 	 	 	 	

	 Available for sale (fair value)	 30,378	 35,144 	 4,178 	 13.8

	 MRIs available for sale (fair value)	 683 	 588	 (95) 	 (13.9)

	 MRIs held to maturity (amortized cost)	 2,774	 3,876	 1,102 	 39.7

Total investments	 33,835	 39,020	 5,185 	 15.3

Gross loans	 142,906	 161,423 	 18,517 	 13.0

	 ALL	 (781)	 (936)	 (155) 	 19.8

Net loans 142,125 160,487 18,362 12.9

Accrued interest receivable	 2,013	 1,970	 (43) 	 (2.1)

Premises and equipment	 552	 605	 53 	 9.6

Other assets	 2,702	 4,569 	 1,867 	 69.1

Restricted assets 2,599 2,915 316 12.2

Total assets 186,451 214,353 27,902 15.0

Sources: Federal Farm Credit Banks Funding Corporation Annual Information Statements.

MRI = mission-related investment

ALL = allowance for loan losses

Table 3

FCS Assets

Dollars in Millions

Figure 1

FCS Net Income, 2001–2007

As of December 31

Sources: Federal Farm Credit Banks Funding Corporation Annual Information Statements. 

Note: The net income for 2004 includes $1.167 billion in net reversals of the allowance for loan losses.
15

Table 4

FCS Investments Dollars in Millions	 	 	 	 	 	 	 	 	 	

As of December 31 Change

2007 2008 Amount WAY

Dollars WAY % Dollars WAY % Dollars % bp

Available for sale (fair value)	

	 Money market instruments	 1,878 	 5.1 	 4,613 	 1.7	 2,735 145.6 (343)

	 U.S. Government securities	 1,337 	 4.7 	 3,033 	 3.8	 1,696	 126.9	 (91)

	 Mortgage-backed securities	 24,926 	 5.1 	 25,544	 3.0	 618 2.5 (215)

	 Other asset-backed securities	 2,237 	 5.1 	 1,366 	 2.1	 (871) (38.9) (297)

Mission-related 

	 	 and other investments	 683 	 5.2 	 588	 3.9	 (95) (13.9) (135)

Total 31,061 5.0 35,144 2.8 4,083 13.1 (218) 

 

Held to maturity

(amortized cost)	

	 Money market instruments	 162 	 6.4 	 234 	 6.2	 72 	 44.4	 (24)

	 Mortgage-backed securities	 2,302 	 5.7 	 2,447	 5.4	 145 6.3 (31)

	 Other asset-backed securities	 310 	 6.5 	 1,195 	 4.3	 885 285.5 (224)

Total 2,774 5.8 3,876 5.1 1,102 39.7 (71)

Sources: Federal Farm Credit Banks Funding Corporation Annual Information Statements. 

 

WAY = weighted average yield 

bp = basis point (1 /100 of 1 percent)

Figure 2

FCS Loans Outstanding, 1978–2008

As of December 31

Sources: Federal Farm Credit Banks Funding Corporation Annual Information Statements. 

 
16

Farm Credit Administration 2008 Annual Report on the Farm Credit System

ties declined from 5.8 percent to 5.1 

percent as a result of the decrease in 

yield on all held-to-maturity securities. 

The quality of System investments 

has been adversely affected by the 

historic declines in the Nation’s 

mortgage markets. System banks are 

restricted by regulation to acquiring only investments with a triple-A 

rating from at least one major rating 

agency. If an investment loses its triple-A rating, the investing bank must 

dispose of the investment within six 

months or receive written approval 

from FCA to divest the investment 

over a longer period of time. FCA 

approved divestiture plans that 

allowed the FCS to hold 43 securities 

that became ineligible because of a 

ratings downgrade. Of the ineligible 

investments, the FCS had 14 securities for $529 million, with recognized 

losses of $82 million. These otherthan-temporarily-impaired investments were small in comparison 

to the available-for-sale investment 

portfolio of $35.1 billion. 

Asset Quality

The quality of FCS assets declined 

in 2008 from the very high level of 

2007. Nonperforming loans increased 

to 1.49 percent of gross loans by 

year-end 2008 from 0.44 percent at 

the end of 2007 (figure 3). In 2008, 

nonaccrual loans rose to $2.3 billion 

from the 2007 year-end total of $512 

million. Loan delinquencies (that is, 

total accruing loans that are 30 days 

or more past due) remained relatively low at 0.53 percent of accruing 

loans at year-end 2008. With the economic slowdown, we do anticipate 

the level of nonperforming loans to 

increase in 2009, but the overall level 

will remain well within the System’s 

risk-bearing capacity.

The FCS established a provision for 

loan losses of $408 million in 2008 

compared with $81 million in 2007. 

The significant increase in the 2008 

provision resulted primarily from 

credit deterioration caused by volatility in commodity prices, which 

adversely impacted the livestock, 

poultry, and ethanol sectors. Another, 

though lesser, cause of the increase 

in the provision for loan losses was a 

decline in the condition of the overall 

economy.

Net charge-offs increased in 2008 to 

$99 million from $34 million in 2007. 

Also, the allowance for loan losses 

increased to $936 million in 2008 

from $781 million the year before. 

Although the System’s asset quality 

is strong, the current riskier lending environment may lead to further 

deterioration in coming years. 

Liabilities, Funding, and Liquidity

In 2008, the System’s funding composition remained relatively constant. 

Short-term debt securities made up 

36.9 percent of total Systemwide 

debt securities at December 31, 2007, 

and 36.8 percent at December 31, 

2008. Debt securities due within a 

year increased by 15.2 percent in 

2008, and those due after one year 

increased by 15.6 percent. Although 

the System continues to have regular 

and flexible access to the short-term 

debt markets, issuance of securities 

with maturities greater than one year 

became more challenging in the latter half of 2008, and the cost of such 

term issuances has increased as a 

result of the more limited access to 

the debt capital markets. (See section titled “Funding Activity in 2008” 

(page 35) for further discussion of 

how the System’s funding environment has changed.) 

As noted in figure 4, the System’s 

liquidity position remained significantly above the regulatory minimum6

 and widened somewhat from 

122 days at year-end 2007 to 177 

days at year-end 2008. The liquidity position widened because the 

System’s banks extended the maturities of Systemwide debt securities. 

This extension of maturities and the 

additional liquidity provide each 

bank with a cushion against significant negative events in the U.S. and 

global markets, and also create financial flexibility to address a challenging funding environment.

The duration7 gap (that is, the gap 

between the estimated duration of 

interest-earning assets and the estimated duration of interest-bearing 

liabilities) is a primary measure of 

asset-liability risk exposure. A positive duration gap (that is, a gap in 

which asset duration exceeds liability 

duration) of more than three months 

indicates a greater exposure to rising 

6. The regulatory liquidity standard requires each FCS bank to maintain a minimum of 90 days of liquidity on a continuous basis to guard against a possible interruption in its access to the capital markets. The number of days of liquidity is calculated by comparing maturing Systemwide debt securities 

and other bonds for which the bank is primarily liable with the total amount of cash, investments, and other liquid assets maintained by that bank. 

For purposes of calculating liquidity, liquid assets are subject to discounts that reflect potential exposure to adverse market value changes that might 

be recognized upon liquidation or sale.

7. Duration is the weighted average maturity of cash flows. It is a useful way to estimate the direction and size of changes in the value of a financial 

instrument when market interest rates change. When the duration gap is small, changing market interest rates pose less interest rate risk than when 

the gap is large. The Funding Corporation considers a gap of no more and no less than three months to be small.
17

Figure 4

FCS Liquidity, 2005–2008

Sources: Federal Farm Credit Banks Funding Corporation Annual Information Statements.

Note: The regulatory liquidity standard requires each FCS bank to maintain a minimum of 90 days of liquidity on a continuous 

basis, with no access to capital markets. 

Figure 3

FCS Nonperforming Loans, 2002–2008

As of December 31

Sources: Federal Farm Credit Banks Funding Corporation Annual Information Statements. 

 
18

Farm Credit Administration 2008 Annual Report on the Farm Credit System

interest rates. A duration gap within 

the range of a positive three months 

to a negative three months generally 

indicates a small exposure to changes 

in interest rates. Since the duration 

gap for the FCS was a positive 0.2 

months on December 31, 2008 (down 

slightly from a positive 1.4 months at 

December 31, 2007), the interest rate 

risk is still limited. 

Capital

Capital levels were strong and 

increased slightly during 2008, going 

from $26.4 billion at year-end 2007 

to $27.1 billion at year-end 2008. The 

increase was the result of increases 

in net income earned and retained, 

as well as from the issuance of 

preferred stock. As figure 5 shows, 

surplus accounts for the overwhelming majority of capital (85.3 percent), 

compared with 81.3 percent as of 

December 31, 2007. Overall, the 

System’s capital-to-assets ratio fell 

from 14.2 percent at year-end 2007 

to 12.7 percent at year-end 2008, 

caused principally by the growth in 

loans and investments. In addition, 

accumulated other comprehensive 

losses increased to $2.1 billion, which 

consisted primarily of net unrealized 

losses on investments available for 

sale and pension and other benefit 

plans. 

System banks, both as a whole and 

as individual institutions, are capitalized in excess of the System’s regulatory requirements. The minimum 

permanent capital ratio is 7.0 percent, and, as of December 31, 2008, 

the permanent capital ratio ranged 

between 14 percent and 18.9 percent 

for the System’s banks and between 

10.1 percent and 27.5 percent for 

the associations. Despite their strong 

capital positions, the banks and 

associations are evaluating further 

opportunities to improve and diversify their capital positions in light of 

their significant asset growth and the 

current difficulty in raising thirdparty capital.

Borrowers Served

The System fulfills its overall mission by lending to agriculture and 

rural America. Through changes in 

the law since the first part of the FCS 

was established in 1916, the System’s 

lending authorities have evolved to 

include the following loan products: 

• Long-term agricultural real estate 

loans and rural home loans

• Short- and intermediate-term 

agricultural loans 

• Loans to producers and harvesters of aquatic products 

• Loans to certain farmer-owned 

agricultural processing facilities 

and farm-related businesses 

• Loans to farmer-owned agricultural cooperatives 

• Loans that finance agricultural 

exports and imports 

• Loans to rural utilities

• Limited portions of loans to 

entities that qualify under the 

System’s similar-entity authority8

Nationwide, the System had $161.4 

billion in gross loans outstanding as 

of December 31, 2008, (see table 5). 

Agricultural producers represented 

by far the largest borrower group, 

with $109.4 billion, or 67.7 percent, 

of the total dollar amount of loans 

outstanding.9 As required by law, all 

borrowers own stock or participation 

certificates in System institutions. The 

FCS had more than 840,000 loans 

and approximately 476,000 stockholders at the end of 2008. Approximately 

84 percent of the stockholders were 

farmers, or their cooperatives, with 

voting stock. The remaining voting 

stockholders were cooperative associations. (The System also has nonvoting stockholders, including other 

financing institutions (OFIs) that 

borrow from the System and rural 

homeowners.) 

The aggregate total of loans outstanding at FCS banks and associations (net of intra-System lending) 

grew by $18.5 billion, or 13.0 percent, 

during the year ended December 31, 

2008. Both the dollar volume and 

the percentage growth in 2008 were 

less than the gain in 2007. In 2007, 

gross loans grew 15.8 percent, which 

followed gains of 16.2 percent in 

2006 and 10.3 percent in 2005. Since 

year-end 2004, total System loans 

outstanding have increased by $65.1 

8. A similar-entity borrower is not eligible to borrow directly from an FCS institution, but because the similar-entity borrower’s operation is functionally 

similar to that of an eligible borrower, the System can participate in these loans (the participation interest must be less than 50 percent).

9. This amount does not include loans to “rural homeowners” (as defined in section 613.3030 of the FCA regulations) and leases. 
19

Figure 5

FCS Capital, 2002–2008

As of December 31

Sources: Federal Farm Credit Banks Funding Corporation Annual Imformation Statements.

Table 5

FCS Gross Loans Outstanding, 2004–2008

As of December 31

Dollars in Millions

 Percent 

 change 

2004 2005 2006 2007 2008 from 2004

Production agriculture

	 Long-term real estate

	 	 mortgage loans	 47,695	 51,690	 56,489	 63,458	 71,892	 50.7

	 Short- and intermediate-

	 	 term loans	 22,789	 24,935	 28,731	 32,267	 37,468	 64.4

Agribusiness loans*	 12,053 	 14,673 	 21,141 	 28,091	 26,901	 123.2

Rural utility loans	 7,200	 8,063	 9,569	 10,846	 13,931	 93.5

Rural residential and

real estate loans 2,482 2,950 3,408 3,965 4,611 85.8

International loans	 2,624	 2,277	 2,183	 2,135	 4,077	 55.4

Lease receivables	 1,168	 1,290	 1,489	 1,708 	 1,952	 67.1

Loans to other financing

	 institutions	 356	 394	 426	 436	 591	 66.0

Total 96,367 106,272 123,436 142,906 161,423 67.5

Sources: Federal Farm Credit Banks Funding Corporation Annual Information Statements.

* At December 31, 2008, agribusiness loans consisted of loans to cooperatives of $12.2 billion, processing and marketing loans of $12.2 

billion, and farm-related business loans of $2.5 billion.
20

Farm Credit Administration 2008 Annual Report on the Farm Credit System

billion, or 67.5 percent. However, 

we expect loan growth to slow more 

significantly in 2009 because of the 

effects of a weakening farm economy 

and recessionary conditions on loan 

demand.

As of December 31, 2008, 44.5 percent of the dollar volume of the System’s loans outstanding was in longterm real estate loans, 23.2 percent in 

short- and intermediate-term loans to 

agricultural producers, and 16.7 percent in agribusiness loans. Agribusiness loans are broken down further 

into 7.6 percent for loans to cooperatives, 7.5 percent for processing 

and marketing enterprises, and 1.6 

percent for farm-related businesses. 

Loans to finance rural utilities represented 8.6 percent of the System’s 

loan volume, while rural residential 

real estate loans made up about 2.9 

percent of the System’s total loans. 

International loans (export financing) represented 2.5 percent of the 

System’s loan portfolio, and lease 

receivables accounted for 1.2 percent 

of the overall portfolio. Finally, loans 

outstanding to OFIs represented a 

small but important and growing 

segment of the System’s portfolio. 

The System’s increased loan volume 

over the past 12 months stemmed 

primarily from long-term real estate 

loans (up $8.4 billion, or 13.3 percent) and short- and intermediateterm loans (up $5.2 billion, or 16.1 

percent). However, while less significant in absolute dollars, several loan 

categories posted notable percentage 

increases in 2008. Rural utility loans 

(energy, water, waste disposal, and 

communication loans) were up 28.4 

percent ($3.1 billion), while processing and marketing loans (a subcategory of agribusiness loans) increased 

by 24.4 percent ($2.4 billion) mostly 

because of the expansion in biofuel 

production. The international loans 

category reversed the steady downtrend of recent years to post a 91.0 

percent increase ($1.9 billion) during 

2008. To some degree, this growth 

resulted from the tightening of world 

credit markets in the latter part of 

2008.10 

As a group, the agribusiness loans 

category was the only segment of 

the FCS portfolio that experienced a 

decrease in loan volume (down $1.2 

billion, or 4.2 percent) during 2008. 

The largest decline occurred in the 

loans to cooperatives subcategory, 

which decreased by $3.6 billion, or 

23.0 percent, from year-end 2007, 

mainly because of the decline in 

commodity prices in late 2008. As 

commodity prices collapsed, grain 

cooperatives realized profits in their 

hedging operations and used the proceeds to repay loans taken out earlier 

to cover their margin requirements 

when prices were skyrocketing. 

Several factors facilitated the System’s lending activity in 2008. The 

key driver was strong farm income, 

which not only produced cash to 

support debt repayment capacity 

but also increased the upward pressure on land values, which boosted 

the demand for mortgage debt. In 

both absolute and relative terms, 

long-term real estate loans increased 

sharply last year. However, the 

upsurge in production costs, especially during the first half of the year, 

also created strong credit demands to 

finance fuel, fertilizer, feed, and farm 

equipment purchases. The decline 

in agribusiness loans was offset, in 

part, by a moderate pickup in business from non-System lenders as the 

financial crisis widened, along with 

the System’s new business in rural 

utility and international loans. Many 

of these aspects of the agricultural 

economy will likely not be factors in 

2009, and we do anticipate growth to 

slow in 2009.

In 2008, System institutions continued to mount effective marketing 

campaigns to finance a broad range 

of activities and to expand their 

patronage programs. Despite considerable turmoil in the capital and 

credit markets last year, the FCS was 

able to meet its mission as a reliable source of reasonably priced debt 

capital for U.S. agriculture and rural 

America.

FUNDING FOR OTHER LENDERS 

Other Financing Institutions 

Under the Farm Credit Act, System 

banks may further serve the credit 

needs of rural America by providing funding and discounting services 

to non-System lending institutions 

known as “other financing institutions” (OFIs). OFIs include com10. A majority of the System’s international loan portfolio is guaranteed by the Commodity Credit Corporation through USDA’s GSM-102 and GSM-103 

export credit programs. Overall, 81 percent of the System’s international loans in 2008 carried a CCC guarantee.
21

mercial banks, thrifts, credit unions, 

trust companies, agricultural credit 

corporations, and other specified 

agricultural lenders. System banks 

can fund and discount short- and 

intermediate-term loans for OFIs that 

are significantly involved in lending 

to agricultural and aquatic producers 

and harvesters if these OFIs demonstrate a need for additional funding 

to meet the credit needs of eligible 

borrowers. OFIs benefit by using 

the System as an additional source 

of liquidity for their own lending 

activities and by capitalizing on the 

System’s expertise in agricultural 

lending to make safe, sound, and 

constructive loans. 

As of December 31, 2008, the System 

served 27 OFIs, up from 26 the year 

before. Outstanding loan volume to 

OFIs was $591 million at year-end, 

up $155 million, or 35.6 percent, from 

2007. While that increase appears 

dramatic, OFI loan volume continues to be less than one percent of 

the System’s loan portfolio. About 

77 percent of the System’s OFI loan 

volume is in the Midwest. 

Rising Loan Participations and 

Syndications with Non-FCS Lenders 

Under conditions prescribed by the 

Farm Credit Act, System banks and 

associations have authority to work 

with other financial institutions, 

including commercial banks, in making loans to agriculture and rural 

America. System institutions generally work with these financial institutions through loan participations and 

syndications.

• A loan participation is a large 

loan in which two or more lenders share in providing loan funds 

to a borrower to manage credit 

risk or overcome a legal or internally established lending limit 

for a single credit. One of the 

participating lenders originates, 

services, and documents the loan. 

Generally, the borrower deals 

with the institution originating 

the loan and is not aware of the 

other participating institutions.

• A loan syndication (or “syndicated bank facility”) is a large 

loan in which a group of financial institutions works together 

to provide funds for a borrower. 

Usually one financial institution takes the lead, acting as an 

agent for all syndicate members 

and serving as the focal point 

between them and the borrower. All syndicate members 

are known at the outset to the 

borrower and they each have a 

contractual interest in the loan.

Financial institutions primarily use 

loan participations and syndications 

to reduce credit risk and to resolve 

lending limit issues, but they also 

use them to manage and optimize 

capital, earnings, and liquidity. For 

example, a financial institution with 

a high concentration of production 

loans for a single commodity could 

use participations or syndications 

to diversify the loan portfolio, or it 

could use them to sell loans that are 

beyond its credit limit. As Figure 6 

shows, activity from loan participations and syndications with non-System lenders has grown over the past 

five years. 

The first group of bars shows gross 

loan syndication activity by FCS 

banks and associations.11 Gross loan 

syndications by the System with 

non-System lenders totaled $11.8 

billion at year-end 2008, almost 36 

percent higher than the $8.7 billion 

in gross syndication volume at yearend 2007, and almost twice the $6.1 

billion figure posted for 2006. As a 

result, syndication volume continued 

to expand in relation to the System’s 

loan portfolio, rising from 6.1 percent 

of gross loans at the end of 2007 to 

7.3 percent a year later. This development reflects general market trends 

in which commercial credits are 

becoming more complex. In effect, 

lenders are switching from singlelender originators with participation 

sales to other institutions to syndicates where a group of lenders originates the loan. This allows multiple 

lenders to have a direct contractual 

agreement with the customer as a 

way to manage risk while satisfying 

the credit needs of their customers. 

The second and third groups of bars 

show net loan participation activity 

involving non-System lenders for two 

lending categories for the past five 

years. 

• The second group shows net loan 

participations with institutions 

that are originating loans with 

11. Typically, some of the syndication volume is sold and often reported as part of net loan transactions (purchases less sales) with non-FCS lenders (see 

second group of bars). Net loan transactions include traditional loan participations and assignments or other interest in loans.
22

Farm Credit Administration 2008 Annual Report on the Farm Credit System

Figure 6

Syndications and Net Loan Participations Involving Non-System Lenders, 2004–2008

As of December 31

Dollars in Billions

Note: A similar-entitiy borrower is not eligible to borrow directly from an FCS institution, but because the borrower’s operation is functionally 

similar to that of an eligible borrower, the System can participate in some of these loans (the participation interest must be less than 50 

percent).
23

customers who are also eligible 

to borrow from the FCS. The net 

total of these participations was 

$9.0 billion, up $2.4 billion, or 

36 percent, from 2007. However, 

much of the lending activity in 

this group probably results from 

gross loan syndications (the first 

group of bars in this figure) and 

the subsequent sale of pieces to 

other System institutions. 

• In addition to participating in 

loans to eligible borrowers, FCS 

institutions have authority to 

work with non-System lenders 

that originate “similar-entity” 

loans (third group of bars in Figure 6). A similar-entity borrower 

is not eligible to borrow directly 

from an FCS institution, but 

because the operation is functionally similar to that of an eligible 

borrower, the System can participate in these loans (the participation interest must be less than 

50 percent). At the end of 2008, 

the net amount of similar-entity 

participations in the System 

amounted to $9.9 billion, up $2.5 

billion, or 34 percent, from 2007.

The net total of all loan participations was $18.9 billion at year-end 

2008, compared with $14.0 billion the 

year before.

While the unsettled situation in 

credit markets that is expected 

through 2009 may slow new activity, 

the partnering between System and 

non-System lenders is an important 

development that is expanding the 

availability of credit to rural America.

MARKET SHARE OF FARM DEBT 

According to USDA preliminary 

data, total farm business debt for the 

year ended December 31, 2008, was a 

record $215.1 billion (nominal dollar 

basis), up less than 2 percent from 

year-end 2007.12 After accounting for 

inflation, farm debt is still well below 

the peak level of 1980. Only in recent 

years has farm debt reached recordhigh levels on a nominal basis. Farm 

debt previously peaked at $189 

billion at the end of 1984 and then 

fell during the farm financial crisis 

to $131 billion by the end of 1989. 

After the crisis, farm debt increased 

steadily, eventually surpassing the 

1984 nominal record at the end of 

2005 when it rose to $193.2 billion. Farm debt has been increasing 

modestly in recent years in response 

to rising land values and higher 

production costs. USDA expects farm 

debt to reach $217.1 billion in 2009, 

a modest increase over 2008 but 

an estimate subject to change if the 

demand for farm loans softens more 

than expected from a weak economy. 

The most current market share information from USDA is for year-end 

2007.13 The information for 2008 will 

not be available until USDA issues 

its planned update in August 2009. 

Total farm business debt was $211.5 

billion at the end of 2007. USDA 

estimated debt by lenders shows that 

commercial banks held 45.4 percent 

of this debt, while the System’s share 

was 36.7 percent. Both lender groups 

enjoyed market share increases in 

2007 as they expanded their business more than other lenders, such 

as life insurance companies, the Farm 

Service Agency, and merchants and 

dealers, did. As a result, the two 

groups now represent more than 80 

percent of the total farm business 

debt market, 15 percentage points 

above their 1999 market share. When 

the information is released for 2008, 

the System’s overall market share 

will likely show another increase, 

given the 14 percent increase in 

its farm real estate and production 

credit loans in 2008. (Figure 7 shows 

market share shifts for the major 

lenders since 1980.)

Except for the unusual period of 

the 1980s and a brief time in the 

1990s, the FCS has typically been the 

dominant lender for farm real estate 

mortgages, enjoying the largest market share. Commercial banks have 

always dominated non-real estate 

lending. The System’s share of debt 

secured by farm real estate increased 

to 42.1 percent at year-end 2007, continuing the steady upward trend of 

the past 10 years. The System’s share 

of non-real estate farm debt was 31.1 

percent at year-end 2007, again continuing a solid upward trend and up 

sharply from the late 1990s when it 

was slightly less than 20 percent. 

In 2000, after several years of steady 

gains, commercial banks edged ahead 

of the System in the debt market 

12. In 2007, USDA revised its farm debt estimates, beginning with 2000, after obtaining data that enabled it to adjust for the non-farm use of reported 

farm debt. The revision lowered the earlier estimates of farm debt by between 7.7 and 10.7 percent, depending on the year. 

13. Market share is calculated by USDA for farm business debt only. Market share information is not available for the other portions of the System’s 

portfolio, such as agribusiness lending, rural utility lending, or rural home lending.
24

Farm Credit Administration 2008 Annual Report on the Farm Credit System

Figure 7

Market Shares of U.S. Farm Business Debt, 1980–2007

Sources: USDA, Economic Research Service.

Note: Year-end 2007 figure is a preliminary estimate.
25

secured by farm real estate, with a 

35.1 percent share. However, their 

share slipped during the next couple 

of years before stabilizing and climbing to 37.7 percent at the end of 

2007, a few percentage points behind 

the System. In the non-real estate 

market, the market share held by 

commercial banks was 53.5 percent at 

the end of 2007, down slightly from 

2006 and from 56.6 percent in 2000, 

when the FCS was still regaining its 

financial footing from the crisis of 

the mid-1980s.

Farmer Mac as a Secondary

Market

FCA also examines and regulates 

the Federal Agricultural Mortgage 

Corporation (Farmer Mac). Farmer 

Mac provides a secondary market 

arrangement for agricultural real 

estate, Government-guaranteed portions of certain loans, rural housing 

mortgage loans, and rural utility 

loans; in doing so, it provides greater 

liquidity and lending capacity to 

rural lenders. Under the Farmer 

Mac I program, Farmer Mac guarantees prompt payment of principal 

and interest on securities representing interests in, or obligations backed 

by, mortgage loans secured by first 

liens on agricultural real estate or 

rural housing; it also purchases, or 

commits to purchase, qualified loans 

or securities backed by qualified 

loans directly from lenders. Under 

the Farmer Mac II program, Farmer 

Mac purchases and securitizes portions of certain loans guaranteed 

by the U.S. Department of Agriculture, including farm ownership and 

operating loans and rural business 

and community development loans. 

Farmer Mac also guarantees the 

timely payment of principal and 

interest on the securities created 

from these loans. In May 2008, the 

Food, Conservation, and Energy Act 

of 2008 (2008 Farm Bill) expanded 

Farmer Mac’s program authorities by 

allowing it to purchase and guarantee securities backed by eligible rural 

utility loans made by cooperative 

lenders.
26

Farm Credit Administration 2008 Annual Report on the Farm Credit System

SERVING YOUNG, BEGINNING, AND SMALL FARMERS AND RANCHERS

Providing financially sound and constructive credit and related services 

to young, beginning, and small (YBS) 

farmers and ranchers is a statutory 

mandate and a high priority for the 

System. Loans to YBS borrowers help 

ensure a smooth transition of agribusiness to the next generation and a 

continued diversified customer base, 

from very small enterprises to large 

commercial operations, for the FCS. 

Through its regulatory agenda, special reports, disclosure requirements, 

and examination activities, FCA is 

strongly committed to ensuring that 

the System fulfills its responsibility 

to support this important segment of 

the agricultural industry. 

As the percentage of retirement-age 

farmers continues to rise, the System’s potential role in helping young 

and beginning farmers finance the 

purchase of agricultural assets sold 

by those who are exiting the business 

becomes more important. USDA’s 

2007 Census of Agriculture found 

that 29.7 percent of principal operators are 65 years old or older, compared with 21.4 percent in 1987. The 

census also reported a continuing 

sharp decline in the percentage of 

young operators. Principal operators 

aged 34 or younger declined from 

13.3 percent in 1987 to 5.4 percent 

in 2007.14 The 2007 results show 

that almost 13 percent of all farm 

operators are not principal operators. 

Moreover, 20 percent of the members 

in this group are young. Therefore, 

when everything is included, young 

operators represented 8.0 percent of 

the total number of farm operators in 

2007, as compared with 8.6 percent 

in 2002.

Other USDA surveys and studies 

show that potential YBS borrowers 

have a heavy and increasing reliance on off-farm income, plus a wide 

range of credit needs beyond their 

agricultural production activities. 

Such changing demographics and 

economic conditions in many areas 

of rural America pose challenges for 

System institutions in meeting their 

YBS program goals. 

Each System bank is required to 

adopt written policies that direct each 

association board to have a program 

for furnishing sound and constructive credit and financially related 

services to YBS borrowers. The Farm 

Credit Act stipulates that associations 

must coordinate with other Government and private sources of credit in 

implementing their YBS programs. In 

addition, each institution is required 

to report yearly on its operations and 

achievements in its YBS program. 

FCA’s oversight and examination 

activities encourage System institutions to assess their performance and 

market penetration in the YBS area. 

This self-assessment increases the 

mission awareness of System institutions and prompts them to earmark 

resources to serve this important 

market segment. Finally, FCA continues to review and consider various 

policy options for supporting the 

System’s YBS programs. 

YBS Lending Results

In calendar year 2008, the overall 

trends for YBS lending for each of 

the three borrower categories continued to be positive, with loans made 

during the year and year-end loans 

outstanding showing solid gains 

from 2007 levels.15 Table 6A contains 

information on loans outstanding 

in each category at the end of 2008; 

table 6B provides information on 

loans made during the year. 

In the section on YBS borrowing 

trends (page 29), FCA provides information on the progress in YBS lending activity since 2001. That was the 

first year institutions were required 

to report their results using the current definitions for young, beginning, 

and small farmers and ranchers. 

Young—The System’s extension of 

credit to young farmers, those aged 

35 or younger, consisted of 153,380 

loans totaling $19.5 billion at the 

end of 2008. During 2008, 52,856 

loans totaling $7.7 billion were made 

to young borrowers. These loans 

represented 16.7 percent of all loans 

the System made for the year, which 

totaled 316,000, and 11.1 percent of 

the dollar volume of loans made, 

which totaled $69.0 billion for the 

associations. The average loan size 

of loans made in 2008 was $144,892. 

Loans made during the year, rather 

than loans outstanding at year-end, 

are a good measure of current service to YBS borrowers. The number 

of loans made to young farmers dur14. The System’s definition of a young farmer differs slightly from USDA’s definition. See the note below table 6B.

15. System data on service to YBS farmers and ranchers cover the calendar year and are reported at year-end. The statistics show loans made during the 

year (both number of loans and dollar volume of loans), as well as loans outstanding at year-end (both number of loans and dollar volume of loans). 

The volume measure includes loan commitments to borrowers, which typically exceed actual loan advances. 
27

Table 6A

YBS Loans Outstanding

As of December 31, 2008

Dollar 

Number Percentage volume Percentage Average

of of total of loans of total loan

loans numbera in millionsb volumea sizeb

Young farmers/ranchers 153,380 18.2 $19,529 11.4 $127,324

Beginning farmers/ranchers 216,674 25.8 $32,977 19.3 $152,194

Small farmers/ranchers, by loan sizec 

 $50,000 or less 256,659 64.8 5,030 64.4 19,597

 $50,001–$100,000 99,425 60.1 6,937 59.6 69,776

 $100,001–$250,000 87,648 52.7 13,180 51.7 150,379

 More than $250,000 31,546 27.9 17,542 13.9 556,061

Total loans to small farmers/ranchersd 475,278 56.5 $42,689 25.0 $89,819

Table 6B

YBS Loans Made During 2008

As of December 31

Dollars in Millions

 Dollar 

Number Percentage volume Percentage Average

of of total of loans of total loan

loans numbera in millionsb volumea sizeb

Young farmers/ranchers 52,856 16.7 $7,658 11.1 $144,892

Beginning farmers/ranchers 66,559 21.1 $11,958 17.3 $179,664

Small farmers/ranchers, by loan sizec 

 $50,000 or less 84,938 63.8 1,594 62.8 18,763

 $50,001–$100,000 29,514 49.5 1,986 50.7 67,281

 $100,001–$250,000 24,908 40.8 3,818 42.5 153,287

 More than $250,000 11,429 18.4 6,831 12.7 597,728

Total loans to small farmers/ranchersd 150,789 47.7 $14,229 20.6 $94,363

Sources: Annual Young, Beginning, and Small Farmer Reports submitted by each System lender through the Farm Credit banks.

Note: A “young” farmer/ rancher is defined as 35 years old or younger when the loan is made; a “beginning” farmer /rancher has been operating 

for not more than 10 years; and a “small” farmer/rancher generates less than $250,000 in annual sales of agricultural or aquatic products. Since 

the totals are not mutually exclusive, one cannot add across young, beginning, and small categories to count total YBS lending.

a. The first two percentages and the last percentage in these columns indicate the percentage of the total number of loans and the percentage of the 

total volume of loans outstanding for loans made by the associations as of year-end 2008. Each of the four percentages in the other rows indicates 

percentages for loans to small farmers in the respective loan size range. 

b. The volume figures for loans made and loans outstanding include both advances and commitments.

c. The small farmers and ranchers group is broken into categories according to the size of their loans, not according to the amount of their annual 

sales. 

d. Total loans represent all lending by associations.
28

Farm Credit Administration 2008 Annual Report on the Farm Credit System

ing 2008 was 4.6 percent higher than 

in 2007, and the volume of loans 

made was 22.1 percent higher.

Beginning—Beginning farmers, 

defined as those with 10 or fewer 

years of farming experience, constituted 216,674 of the System’s loans, 

totaling $33.0 billion at year-end 

2008. During 2008, 66,559 loans 

totaling $12.0 billion were made to 

beginning borrowers. Loans made 

to beginning farmers in 2008 represented 21.1 percent of all loans made 

in 2008 and 17.3 percent of the dollar 

volume of loans made. The average 

loan size of loans made in 2008 was 

$179,664. The number of loans made 

during 2008 was 3.7 percent higher 

than in 2007, and the volume of 

loans made was 15.1 percent higher 

than in the previous year. 

Small—FCS institutions had 475,278 

outstanding loans, totaling $42.7 

billion, to small farmers (those 

with gross annual sales of less than 

$250,000) at the end of 2008. During 

2008, 150,789 loans were made to 

small borrowers for a total of $14.2 

billion. Loans made in 2008 to small 

farmers represented 47.7 percent of 

all loans made in 2008 and 20.6 percent of the volume of loans made in 

2008. The average loan size of loans 

made in 2008 was $94,363. Although 

the number of loans made during 

2008 was 2.8 percent lower than in 

2007, the volume of loans made was 

9.5 percent higher than in the previous year. Many producers moved 

out of the small farm category in 

2008 because of the sharp run-up 

in commodity prices, which pushed 

farm marketings above the $250,000 

threshold.

The YBS information is reported 

separately for each of the three YBS 

borrower categories because, depending on a borrower’s characteristics, 

a loan may be counted two or even 

three times. Therefore, the YBS categories should not be added together 

because the final figure would be 

a misleading measurement of the 

System’s YBS lending involvement. 

Loans outstanding to YBS farmers 

include real estate loans and shortand intermediate-term loans. 

Assessment of YBS Results

for Individual Associations

Individual associations vary significantly in their YBS lending results. 

Some institutions may have a high 

number or dollar volume of loans in 

one category and be low in another, 

while activity levels for other institutions may be just the opposite. However, every FCS institution reported 

at least some activity in each category in 2008. The lowest figure was 

from an association reporting that 

only 2.3 percent of the loans it made 

in 2008 went to young farmers, while 

the highest figure came from an association reporting that 82.9 percent of 

its outstanding loans were to small 

farmers. Beginning with 1999, specific 

YBS data by institution, by district, 

and for the System as a whole are 

available on FCA’s Web site at 

www.fca.gov.

The significant diversity in farm 

types and sizes and farmer demographics across the United States 

inevitably leads to wide differences 

among institutions’ YBS results. For 

example, in 2007, the average value 

of farm production in three States 

was more than $250,000 per farm, 

compared with 21 States with average production values of less than 

$100,000 per farm. Census of Agriculture data also show that the average 

age of farmers varies by State, ranging from 52.8 years in Pennsylvania 

to 57.1 years in New Mexico. Such 

differences make comparisons among 

individual associations difficult and 

explain why YBS regulations do not 

specify fixed goals but require individual institutions to establish YBS 

targets appropriate for their lending 

territories. Other factors—such as the 

competitiveness of the local lending market, the availability of State 

and USDA/Farm Service Agency 

(FSA) guarantees, and local economic 

conditions—play a role in individual 

association results. 

The structure of agriculture in an 

association’s territory can affect its 

YBS lending results. For example, the 

2007 Census of Agriculture classified 90.5 percent of all U.S. farms as 

small, using the same definition for 

a small farm as that used for YBS 

reporting. However, less than a third 

of all small farms show interest paid 

as a farm business expense, which 

means that more than two-thirds of 

all small farms have no farm debt 

and likely would not be FCS bor-
29

rowers. An interesting fact is that, 

according to the new census, more 

than 40 percent of all farms had 

annual sales of $2,500 or less in 2007. 

Most of these farms would have little 

or no need for agricultural credit.

As noted earlier, the System reported 

that loans to small farmers represented 56.5 percent of the total 

number of loans in association portfolios at the end of 2008. Moreover, 

47.7 percent of System loans made 

in 2008 were to small farmers. Since 

small farms are less likely to carry 

debt than large farms, these statistics 

reveal a strong commitment by the 

System to serve the credit needs of 

small producers. 

YBS Borrowing Trends, 

2001–2008 

FCA now has eight years of System 

YBS results under the definitions and 

reporting requirements that became 

mandatory in 2001. In addition, all 

institutions have had examinations of 

their YBS reporting. In some cases, 

these examinations have resulted in 

corrections of previously reported 

YBS data. The information in figures 

8A, 8B, and 8C shows fairly strong 

upward trends in dollars of loans 

outstanding and dollars of loans 

made for each of the three categories 

from 2001 to 2008. (Similar trends 

exist for the number of loans in each 

category.)

Although the volume of outstanding 

YBS loans over the past eight years 

points to a good upward trend, YBS 

results as a percentage of total loans 

outstanding present a different picture. Basically the percentages for all 

three categories have either dipped a 

few points or remained relatively flat 

over the past several years. However, 

given the downward trend in the 

percentages of young and small farm 

operators in agriculture, the System’s 

YBS dollar results are noteworthy 

in that institutions have managed to 

expand loan volume in a shrinking 

market segment. What’s more, the 

downward trend in the percentage 

of YBS loans in the System’s total 

loan portfolio is a byproduct of the 

System’s strong loan growth over 

the past three years. The number 

of loans made to small farmers in 

2008 was also affected by the sharp 

run-up in commodity prices, which 

pushed many farmers out of the 

small category even though they 

may have done nothing to change 

their operations. Finally, record farm 

income levels in recent years have 

enabled many farmers to use cash 

instead of debt to finance their operations. Thus, the number of farms 

reporting interest as an expense has 

decreased. 

Comparisons between the System’s 

YBS lending results and the results 

reported by other organizations are 

difficult to make. For example, comparisons cannot be made between 

FCS institutions and other lenders 

because other Federal regulators do 

not require reporting on young and 

beginning farmer loans. While large 

banks are required to report on small 

farm loans, small farm lending is 

defined in terms of loan size (a loan 

of less than $500,000 is considered a 

small farm loan) rather than in terms 

of the borrower’s annual sales. In 

addition, because of differences in 

data definitions and data collection 

methods, annual YBS data are not 

comparable with Census of Agriculture data, which are collected only 

once every five years. 

YBS PROGRAMS 

Because of its status as a Government-sponsored enterprise, the FCS 

is in a unique position to develop 

YBS programs; to coordinate these 

programs with other Government 

programs, which reduces risk; and 

to make a continuing commitment to 

lend to YBS borrowers. Institutions 

may use a variety of tools to fulfill 

their commitment to YBS lending. 

Associations may offer less stringent 

underwriting standards or reduced 

interest rates to make it easier for 

potential YBS borrowers to qualify 

for loans. The differential underwriting standards often include higher 

loan-to-value ratios or lower debt 

coverage requirements for YBS borrowers. One institution operates a 

starter-farmer program under investment authorities approved by the 

Agency. Almost all programs utilize 

Federal or State sources to obtain 

guarantees on loans to qualifying 

YBS borrowers. 
30

Farm Credit Administration 2008 Annual Report on the Farm Credit System

Figure 8A

Young Farmers and Ranchers

Figures 8A, 8B, and 8C

Loans Made to, and Loans Outstanding for, YBS Farmers and Ranchers, 2001–2008

As of December 31
31

Figure 8B

Beginning Farmers and Ranchers

Figure 8C

Small Farmers and Ranchers

Sources: Annual YBS reports submitted by System lenders through the FCS banks.
32

Farm Credit Administration 2008 Annual Report on the Farm Credit System

Most of the loan concessions made 

by System institutions to YBS borrowers favor the young and the 

beginning categories. Obviously 

these borrower groups face many 

challenges in raising enough capital 

to enter the industry and remain 

viable. During 2008, 37 associations 

offered interest rate concessions to 

their young borrowers. In addition, 

49 associations provided exceptions 

to their underwriting standards, 26 

associations charged lower loan fees, 

and 15 associations offered differential loan covenants. Altogether, 60 

out of the System’s 91 associations16

provided some form of loan concessions to young borrowers in 2008. 

In addition, 58 of the 91 institutions 

applied one or more of these four 

features to the beginning category, 

and 57 out of the 91 used one or 

more of these four features for small 

farmers.

Some YBS borrowers are assisted 

by the various State and Federal 

programs that provide interest rate 

reductions or guarantees to help 

commercial lenders and FCS institutions reduce credit risks for borrowers. Without such concessions 

and guarantees, credit would not 

be extended to some YBS borrowers 

because of excessive repayment or 

collateral risks. USDA’s Farm Service 

Agency is the primary provider of 

Government-guaranteed loans for 

farmers although a small portion of 

guaranteed loans is made through 

the Small Business Administration 

(SBA) and various State programs. In 

2008, 83 of the 91 FCS associations 

used FSA guarantees for YBS lending, while 17 associations used SBA 

guarantees and 16 associations used 

State and local programs.

FCS institutions actively use FSA’s 

guaranteed lending program for 

both conventional and YBS lending.17

Agency surveys indicate that about 

44 percent of the System’s overall 

volume of FSA-guaranteed loans 

outstanding was to young farmers; 

about 56 percent was to beginning 

farmers; and about 62 percent was to 

small farmers (numbers are not additive). However, the volume of YBS 

loans with FSA guarantees represents 

only 3 to 5 percent of the overall YBS 

program figures. This percentage is 

similar to that of 2007, when it was 

only 3 to 4 percent of the overall 

YBS program figures. At year-end 

2008, the guaranteed loan volume 

figures for young, beginning, and 

small farmer/rancher loans were $1.0 

billion, $1.2 billion, and $1.5 billion, 

respectively. 

An increasing number of associations offer a growing array of training programs and other services that 

benefit YBS farmers and ranchers. 

The most common training program 

focuses on providing insurance 

services; almost 80 percent of the 

associations offered this service in 

2008. The development of business 

and financial management skills is 

another important training objective, and in 2008, approximately 70 

percent of the associations provided 

training in this area. FCS associations 

also offer training opportunities in 

estate planning, recordkeeping, tax 

planning and preparation, and farm 

business consulting. In some cases, 

they discount or waive the cost of 

these programs for YBS borrowers. 

In addition to the training tools for 

YBS farmers at individual associations, System institutions are working together on System-wide training 

programs to be available online for 

YBS farmers. For example, an online 

business plan development training 

course is anticipated to be available 

in 2009.

Other outreach activities are offered 

in conjunction with such organizations as State or national young 

farmer groups, colleges of agriculture, State or national cooperative 

association leadership programs, 

and local chapters of 4-H and of the 

National FFA Organization. Many 

associations also provide financial 

support for college scholarships and 

for FFA, 4-H, and other agricultural 

organizations.

At year-end 2008, 39 associations 

reported that they had revised their 

YBS policies and/or procedures in 

the past year in response to guidance 

issued in an August 2007 FCA Bookletter.18 Additionally, 25 associations 

expect to revise their policies and 

procedures in 2009. FCA’s oversight 

activities are accomplishing the goal 

of helping institution management 

and boards stay focused on this 

important mission area.

16. By the end of 2008, the System had only 90 associations because two of them merged.

17. The FCS accounts for about 28 percent of the dollar volume of all FSA farm loan guarantees outstanding.

18. The Bookletter provides guidance to all FCS institutions on interpreting the phrase “sound and constructive credit” when applied to YBS farmers and 

ranchers and on extending credit to part-time YBS farmers who demonstrate a commitment to be full-time agricultural producers. The Bookletter 

further encourages System lenders to provide credit enhancements so that YBS farmers can qualify for financing, and it encourages System lenders 

to mitigate the risk of lending to YBS farmers by increasing coordination with other lending entities and sharing best practices. 
33

REGULATORY POLICY AND APPROVALS

FCA routinely issues regulations, 

policy statements, and other documents to ensure that the Farm Credit 

System complies with the law, operates in a safe and sound manner, 

and efficiently carries out its statutory mission. The regulatory philosophy of FCA is to establish a flexible 

regulatory environment that enables 

the System to safely and soundly 

offer high-quality, reasonably priced 

constructive credit and related services to farmers and ranchers and 

their cooperatives; rural residents; 

and other entities on which farming 

operations depend. 

The Agency makes every effort to 

develop balanced, well-reasoned, and 

flexible regulations whose benefits 

outweigh their costs. FCA’s objectives 

are (1) to enhance the System’s relevance in the marketplace and in rural 

America while remaining consistent 

with the law and safety and soundness principles, and (2) to promote 

participation by member-borrowers 

in the management, control, and 

ownership of their System institutions.

Regulatory Activity in 2008

The following paragraphs describe 

some of FCA’s regulatory efforts in 

2008, along with several projects that 

will remain active in 2009.

Financing for Processing or Marketing Operations—The FCA Board 

approved a final rule in April 2008 

that revised the eligibility and scopeof-lending regulations for processing 

and marketing operations to make 

them more responsive to changing 

ownership structures of such operations. 

Farmer Mac Risk-Based Capital 

Stress Test Revisions—The FCA 

Board approved a final rule in April 

2008 that revised FCA regulations 

governing the Risk-Based Capital 

Stress Test (RBCST) for the Federal 

Agricultural Mortgage Corporation 

(Farmer Mac). The RBCST calculates 

the minimum amount of regulatory 

capital that Farmer Mac is required 

to hold. The rule (1) adds a component to the RBCST to recognize 

the risk-reducing characteristics of 

structures such as off-balance-sheet 

AgVantage securities, a unique loan 

product that accounts for a significant percentage of Farmer Mac’s 

program volume; (2) adds a component to the RBCST to recognize 

counterparty risk on nonprogram 

investments; and (3) revises the estimated carrying costs of nonperforming loans.

Capital Adequacy—Basel Accord—

The Agency issued an advance notice 

of proposed rulemaking (ANPRM) in 

October 2007 that considers possible 

modifications to its risk-based capital 

rules for FCS institutions that are 

similar to the standardized approach 

delineated in the New Basel Capital 

Accord. In view of the mortgage 

crisis and the complexity of the 

questions asked in the ANPRM, FCA 

extended the comment period to 

December 31, 2008. 

Questions and Answers Regarding 

Flood Insurance—The FCA Board 

approved a notice with request for 

comment in March 2008 regarding 

loans in areas having special flood 

hazards. The notice contained an 

updated set of interagency questions 

and answers regarding flood insurance. The updated questions and 

answers will help Farm Credit System institutions better understand the 

flood insurance statutes, regulations, 

and Federal Emergency Management 

Agency guidance.

Regulatory Burden Notice—The FCA 

Board approved a regulatory burden 

notice of intent in June 2008 seeking public input on targeted parts of 

FCA’s regulations that may duplicate 

other requirements, are not effective 

in achieving stated objectives, are 

not based on law, or impose burdens 

that are greater than the benefits 

received. 

Disclosure and Accounting Requirements—The FCA Board approved 

a proposed rule in October 2008 to 

amend FCA regulations on disclosure 

to shareholders and accounting and 

reporting requirements. The proposed amendment will ensure that 

FCA regulations are consistent with 

System structural changes, and that 

they include changes in accounting, 

auditing, and reporting standards.

Inflation Adjustments to Civil 

Money Penalties—The FCA Board 

adopted a direct final rule in December 2008 that made the required cost-
34

Farm Credit Administration 2008 Annual Report on the Farm Credit System

of-living adjustments to FCA civil 

money penalties issued (1) under 

section 5.32 of the Farm Credit Act 

for violation of the act or regulations 

issued under the act to the maximum 

amount of $750 per day for each 

violation, and (2) under the National 

Flood Insurance Reform Act of 1994 

to not exceed $120,000 for the total 

civil money penalties that may be 

assessed against any single institution 

during any calendar year for violations of the Reform Act. 

Investments in Rural America—FCA 

continues to evaluate how System 

partnerships and investments could 

help increase the availability of funds 

to agriculture and rural America. 

FCA is reviewing investments made 

under pilot projects to determine 

if these investments assist institutions in fulfilling mission objectives. 

FCA considered projects emanating 

from this review as support for a 

proposed rule on Rural Community 

Investments. These projects may also 

be considered in future rulemakings. 

Rural Community Investments—The 

FCA Board approved a proposed 

rule in May 2008 that would authorize System banks, associations, and 

service corporations to invest in rural 

communities across America under 

certain conditions. 

Floor Nomination Procedures—FCA 

issued a Bookletter that provides 

guidance to System associations and 

banks on procedures they may use 

in accepting nominations of director 

candidates from the floor. 

Distribution of Director Candidate 

Information—FCA issued a Bookletter clarifying that campaign material 

does not include educational material, thus allowing System institutions 

to provide stockholders educational 

material on director candidates 

without violating the prohibition on 

distributing campaign material. 

Effect of FAS 158 on Regulatory 

Capital—FCA issued a Bookletter 

to System banks requiring them to 

adjust their net collateral ratio calculations to eliminate the effects, if any, 

of adopting Statement of Financial 

Accounting Standards No. 158. 

Collateral Evaluation Requirements 

and Frequently Asked Questions—

FCA issued an Informational Memorandum that provided guidance to 

System institutions to ensure that 

their collateral evaluation review 

programs are sufficient (1) to minimize risk to their assets from adverse 

trends in real property values and 

(2) to ensure compliance with FCA 

regulations. 

Asset Growth, Market Volatility, 

and the Best Practices for FastGrowing Institutions—FCA issued 

an Informational Memorandum to 

continue communication with the 

System regarding growth and emerging risks in agriculture, and to provide best practices FCA has observed 

for institutions experiencing rapid 

growth.

National Oversight and Examination Program for 2009—FCA issued 

an Informational Memorandum that 

provides a summary of the National 

Oversight and Examination Program 

for 2009, which focuses resources on 

the most significant risks to the FCS 

in accordance with FCA’s risk-based 

philosophy. The National Oversight 

and Examination Program is ongoing 

and dynamic. 

Capital Adequacy—Risk Weighting 

of Certain Off-Balance-Sheet Exposures—FCA issued an Informational 

Memorandum to provide guidance to 

System institutions for determining 

regulatory capital treatment of certain 

off-balance-sheet exposures, specifically commitments, letters of credit, 

direct credit substitutes, and recourse 

obligations.

Foreign Currency Transactions—

FCA issued an Informational Memorandum to provide guidance on the 

permissible scope of foreign currency 

transactions by System institutions.

Loan Syndications and Assignment 

Markets Study—FCA continued to 

study loan syndication and assignment markets to determine whether 

its regulations should be modified 

to reflect significant changes in the 

markets.
35

Corporate Activity in 2008 

In 2008, FCA analyzed and approved 

eight applications, compared with six 

applications processed in 2007. 

1. On December 31, 2008, a standalone FLCA merged into the 

FLCA subsidiary of an ACA in 

the U.S. AgBank, FCB, district. 

The resulting entity is an ACA 

with one FLCA subsidiary and 

one PCA subsidiary.

2. On December 31, 2008, two 

ACAs affiliated with AgFirst 

Farm Credit Bank merged their 

operations. The PCA and FLCA 

subsidiaries associated with the 

ACAs also merged.

3. On December 1, 2008, an ACA 

and its PCA and FLCA subsidiaries changed their headquarters location. The ACA and its 

subsidiaries are affiliated with 

AgriBank, FCB.

4. On October 16, 2008, a standalone FLCA received FCA 

approval to convert its charter to 

that of an ACA with PCA and 

FLCA subsidiaries. The FLCA is 

affiliated with the Farm Credit 

Bank of Texas. Following stockholder approval, the conversion 

to the new structure took effect 

January 1, 2009.

5. On October 1, 2008, an ACA 

affiliated with AgriBank, FCB, 

changed its name and the names 

of its PCA and FLCA subsidiaries. 

6. On October 1, 2008, two ACAs 

affiliated with the Farm Credit 

Bank of Texas merged their 

operations. The PCA and FLCA 

subsidiaries associated with the 

ACAs also merged.

7. On June 1, 2008, an ACA affiliated with AgFirst Farm Credit 

Bank changed its name and the 

names of its PCA and FLCA subsidiaries. 

8. On April 30, 2008, two ACAs 

affiliated with U.S. AgBank, 

FCB, merged their operations. 

The PCA and FLCA subsidiaries 

associated with the ACAs also 

merged. 

The total number of associations as 

of December 31, 2008, was 90. The 

number of banks remains at five. Figure 9 shows the chartered territory of 

each FCS bank. Details about specific 

corporate applications are available 

on FCA’s Web site at www.fca.gov. 

Funding Activity in 2008

While the System continued to have 

regular and flexible access to shortterm debt markets during 2008, its 

flexibility in issuing securities with 

maturities greater than one year was 

reduced, and the spreads over similar Treasury securities for such term 

issuances increased. Also, certain traditional buyers of the System’s longterm securities significantly reduced 

their purchases, with corresponding 

negative impact on the market and 

cost of these securities. The System 

has begun to adjust to these conditions with changes in issuance strategies and in the structure and pricing 

of loans to borrowers.

In addition, some of the Federal 

Government’s responses to the 

severe dislocation and volatility in 

the U.S. and global financial markets 

had, and may continue to have, the 

unintended consequences of increasing System institutions’ funding 

costs. The responses also impact the 

System’s ability to issue debt with 

preferred maturities and structures. 

Examples of the Federal Government’s responses include the Federal 

Deposit Insurance Corporation’s 

approval of a program that guarantees senior unsecured debt newly 

issued by commercial banks and others, the Federal Reserve’s purchase of 

debt obligations of the housing GSEs, 

and the U.S. Treasury’s creation of a 

line of credit for the housing GSEs. 

Finally, conditions in the markets 

substantially reduced, if not eliminated, the ability of individual System institutions to issue third-party 

capital (preferred stock and subordinated debt) at a cost acceptable to 

the issuing institution.
36

Farm Credit Administration 2008 Annual Report on the Farm Credit System

Figure 9

Chartered Territories of FCS Banks

As of April 30, 2009

Note: CoBank funds 5 associations in the indicated areas and serves cooperatives nationwide; U.S. AgBank, FCB, funds 27 associations; Farm Credit Bank 

of Texas funds 19 associations; AgriBank, FCB, funds 17 associations; and AgFirst Farm Credit Bank funds 22 associations. The FCS contains a total 

of 95 banks and associations.
37

The System funds its loans with a 

combination of consolidated Systemwide debt and capital. The Funding 

Corporation, the fiscal agent for the 

five System banks, sells debt securities such as discount notes, master 

notes, bonds, and designated bonds 

on behalf of the System.19 This 

process allows funds to flow from 

worldwide capital-market investors 

to agriculture and rural America, 

providing rural communities with 

efficient and expansive access to 

global resources. At year-end 2008, 

outstanding Systemwide debt was 

$178.4 billion, up from $154.4 billion 

a year earlier, representing a 15.5 

percent increase. The $23.9 billion 

increase in outstanding debt funded 

the $18.5 billion, or 13.0 percent, 

increase in gross loans outstanding, 

with the balance going primarily to 

fund investments for liquidity and 

other purposes.

FCA has various responsibilities 

pertaining to System funding activities. As required by the Farm Credit 

Act, the System must obtain FCA 

approval before distributing or selling debt issuances. FCA has systems and processes that enable it to 

respond to these requests quickly 

and efficiently. For example, FCA has 

a program that allows the System 

to issue discount notes at any time 

up to a certain amount as long as it 

provides FCA with periodic reports 

on this activity. As a result of the 

worldwide liquidity crisis, FCA 

raised that maximum in 2008 from 

$40 billion to $60 billion. In addition, FCA approves the majority of 

longer-term debt issuances through 

a monthly “shelf” approval program. 

For 2008, FCA approved $166 billion 

in longer-term debt issuance requests. 

To participate in the issuance of an 

FCS debt security, a System bank 

must maintain, free from any lien or 

other pledge, specified eligible assets 

(available collateral) that are at least 

equal in value to the total amount 

of its outstanding debt securities. 

Securities subject to the available collateral requirements include Systemwide debt securities for which the 

bank is primarily liable, investment 

bonds, and other debt securities that 

the bank may have issued individually. As a safe and sound practice, 

FCA regulations require the five 

System banks to maintain a net collateral ratio (primarily assets divided 

by liabilities) of not less than 103 

percent. All System banks have managed their operations to achieve net 

collateral ratios that are higher than 

the required minimum, with 104.6 

percent being the lowest ratio for any 

single bank as of December 31, 2008. 

As another safe and sound practice, 

FCA regulations require the banks 

to maintain a minimum of 90 days 

of liquidity to guard against a possible interruption in its access to the 

capital markets. In November 2008 

the FCA Board adopted a Market 

Emergency Standby Resolution that 

authorizes a waiver of the 90-day 

liquidity reserve requirement whenever a financial, economic, agricultural, or national defense emergency 

is deemed to exist. This resolution 

would go into effect only in the 

event of a serious market disruption, and it would temporarily allow 

banks (for no more than 14 days) to 

fund their assets with short-term liabilities even if doing so would cause 

the liquidity reserve of one or more 

banks to drop below the minimum 

requirement. 

The Funding Corporation and the 

System banks have also entered into 

voluntary agreements to provide for 

mutual protection in the support of 

joint and several liability on Systemwide debt obligations. The amended 

and restated Market Access Agreement20 establishes certain financial 

thresholds that provide the Funding 

Corporation with operational oversight and control over the System 

banks’ participation in Systemwide 

debt obligations. The amended 

and restated Contractual Interbank 

Performance Agreement establishes 

certain measures that monitor the 

financial condition and performance 

of the institutions in each System 

bank district. The System banks have 

also adopted a common liquidity 

standard to help ensure their collective ability to meet their obligations 

under these mutual agreements.21

Between 2002 and 2005, the volume 

of new issuances declined as System 

banks extended the maturity of debt 

to comply with the common liquidity standard and to capitalize on 

historically low interest rates. From 

19. The primary function of the Funding Corporation, whose headquarters are in Jersey City, New Jersey, is to issue, market, and handle debt securities 

on behalf of the System’s five banks. In addition, the Funding Corporation assists the banks with a variety of asset/liability management and specialized funding activities. The Funding Corporation is responsible for financial disclosure and the release of public information concerning the financial 

condition and performance of the System as a whole.

20. The amended and restated Market Access Agreement began in the late 1990s and is periodically amended (updated) pertaining to financial targets, 

economic incentives, etc.

21. The common liquidity standard requires each bank to maintain a minimum of 90 days of liquidity to guard against a possible interruption in its access 

to the capital markets.
38

Farm Credit Administration 2008 Annual Report on the Farm Credit System

2006 through 2008, debt issuances 

increased as a result of favorable economic conditions in agriculture and 

strong loan demand from System 

borrowers. For the 12 months ended 

December 31, 2008, the System issued 

$519 billion in debt securities, compared with $484 billion for 2007 and 

$387 billion for 2006.22

The System’s ability to extend its 

debt maturities in 2008 was challenged as investors preferred shorterterm debt instruments. The System’s 

weighted-average remaining maturity for all outstanding insured debt 

was 3.3 years as of December 31, 

2008, compared with 3.6 years as of 

December 31, 2007, and 2.9 years as 

of December 31, 2006. The weightedaverage interest rates for the insured 

debt decreased from 4.7 percent as of 

December 31, 2007, to 2.8 percent as 

of December 31, 2008.

Mission-Related 

Investments

FCA is committed to helping ensure 

a dependable and affordable flow 

of funds to agriculture and to rural 

areas so that farmers, ranchers, and 

rural communities can flourish. Agriculture and rural America face new 

and unique challenges that require 

innovative solutions. Investments in 

rural communities can help create 

infrastructure improvements that promote the economic vitality of these 

communities for current and future 

generations of American farmers and 

rural residents. Farming families will 

increasingly benefit from investment 

projects that promote rural development and off-farm income opportunities. Investments in rural communities also play an important role in 

attracting and retaining YBS farmers 

and other rural entrepreneurs who 

provide essential services for agricultural production. 

FCA’s current regulations allow 

System institutions to make certain 

mission-related investments. Examples include investments in farmers’ 

notes; certain debt obligations issued 

or guaranteed by Federal agencies or 

State or local municipalities for rural 

utilities and other economic development; and agricultural mortgagebacked securities (AMBS), which 

Farmer Mac issues or guarantees. As 

of December 31, 2008, the missionrelated investment securities held 

under these regulatory authorities 

totaled $2.9 billion, including 

$888.7 million in AMBS as heldto-maturity and $557.9 million as 

available-for-sale. In addition, in 

2005 FCA approved System institution holdings of investments in 

successor-in-interest contracts created 

as a result of the Tobacco Transition 

Payment Program.23 As of December 

31, 2008, investments in successorin-interest contracts totaled $763.6 

million (not including interest receivable). Also, at year-end, Farm Credit 

institutions held $589.0 million in 

asset-backed securities collateralized 

by the guaranteed portions of USDA 

loans and $58.4 million in securities 

backed by agricultural equipment 

loans. 

The Agency realizes, however, that 

these investment vehicles may no 

longer be sufficient to meet the 

growing and changing demands of 

agriculture and of rural communities 

for dependable, affordable, and flexible financing in the 21st century. In 

particular, FCA recognizes that rural 

areas have an essential and growing need for additional sources of 

capital to support economic growth 

and infrastructure improvements. In 

response, FCA issued guidance giving System institutions a provisional 

opportunity to make additional 

mission-related investments through 

pilot programs supporting investments in rural America (see FCA 

Informational Memorandum dated 

January 11, 2005, Investments in 

Rural America—Pilot Investment Programs, which is available on the FCA 

Web site at www.fca.gov). 

The pilot programs are intended to 

strengthen the System’s mission to 

provide for an adequate and flexible flow of funds, under specified 

conditions, to agriculture and to rural 

communities across the country. The 

investments made under the pilot 

programs are intended to provide 

FCS institutions an opportunity to 

support and supplement investments 

by government and community 

banks for worthwhile community 

projects. The pilot investment programs provide FCA with the opportunity to study these investments to 

determine how the System can use 

22. Payment of principal and interest on Systemwide debt securities is insured by the Farm Credit System Insurance Corporation’s Farm Credit 

Insurance Fund to the extent provided in the Farm Credit Act. Some FCS debt ($1.4 billion outstanding as of December 31, 2008) was issued by 

individual banks of the FCS. These individual banks are solely liable for the principal payments on this uninsured debt. 

23. On October 22, 2004, Congress enacted the Fair and Equitable Tobacco Reform Act of 2004 as part of the American Jobs Creation Act of 2004. 

The Tobacco Act repeals the Federal tobacco price support and quota programs, provides payments to tobacco quota owners and producers 

for the elimination of the quota, and includes a provision that allows the quota holders to assign to a financial institution the right to receive 

contract payments under a contract with the Secretary of Agriculture. FCA determined that FCS institutions meet the Tobacco Act’s financial 

institution criteria and are therefore eligible to participate in the Tobacco Transition Payment Program.
39

these investments to help it fulfill its 

mission and to increase the availability and efficiency of funding to rural 

areas. 

FCA has placed controls on these 

pilot investment programs to ensure 

their legal sufficiency, safety and 

soundness, and consistency with the 

FCS mission. These controls ensure 

a restricted authorizing environment 

that includes special examination and 

reporting for those institutions participating in the pilot programs. This 

pilot program structure also provides 

FCA with a unique opportunity to 

gain critical insight and understanding of rural financial markets. 

Since 2005, FCA has approved a 

number of pilot programs and 

specific investments involving the following investment areas and structures.

Rural Housing Mortgage Securities 

(RHMS)—During 2008, three Farm 

Credit banks were authorized to purchase and hold RHMS under a threeyear pilot program. RHMS must be 

fully guaranteed by a Government 

agency or another GSE. The rural 

housing loans backing the RHMS 

must be conforming, first-lien residential mortgage loans originated by 

non-System lenders in “rural areas” 

(as defined by the Farm Security 

and Rural Investment Act of 2002). 

These pilot programs are intended to 

provide additional liquidity for rural 

housing loans by providing economic 

incentives to lenders to create RHMS 

for sale in the secondary market. 

In turn, these programs will create 

more cost-effective credit for rural 

homeowners. As of December 31, 

2008, the investment securities of the 

Farm Credit banks participating in 

this program included $1.5 billion in 

RHMS classified as held to maturity.

Agriculture and Rural Community 

Bonds and Securities—During 2008, 

all FCS institutions were authorized 

to participate, under specific conditions, in pilot programs that provide 

funding for economic development, 

infrastructure, essential community 

facilities, and revitalization and stabilization projects that are necessary to 

maintain a vibrant American agriculture and strong rural communities. A 

key objective of these pilot programs 

is to stimulate FCS partnerships and 

alliances with other agricultural and 

rural lenders that will increase the 

availability of cost-effective funds to 

agriculture and to rural communities. Many of these projects included 

collaboration with U.S. Department 

of Agriculture (USDA) Rural Development programs, rural community 

banks, and regional and local economic development authorities. As of 

December 31, 2008, FCS institutions 

held $491.4 million of investments 

under these programs. 

Equity Investments—FCA has 

approved several mission-related 

equity investments, including an 

investment in a starter farmer program for beginning farmers and 

producers, as well as investments 

in regional venture capital funds 

focusing on rural areas. In addition, 

since the Farm Security and Rural 

Investment Act of 2002 authorized 

any FCS institution, under limited 

conditions,24 to invest in rural business investment companies (RBICs) 

to promote economic development 

and job opportunities in rural areas, 

several FCS institutions have made 

equity investments in RBICs. As of 

December 31, 2008, the amount of 

mission-related equity investments 

outstanding totaled $1.1 million for 

investments in the starter farmer 

program, $529,000 for investments in 

venture capital funds, and $1.3 million for investments in RBICs.

24. The Farm Security and Rural Investment Act of 2002 authorizes any FCS institution to establish and invest in RBICs, provided that such investments 

are not greater than 5 percent of the capital and surplus of the FCS institution. Further, if FCS institutions (alone or collectively) hold more than 15 

percent of the shares of an RBIC, the RBIC may not provide equity investments or financial assistance to entities that are not otherwise eligible to 

receive financing from the FCS under the Farm Credit Act.
40

Farm Credit Administration 2008 Annual Report on the Farm Credit System

MAINTAINING A DEPENDABLE SOURCE OF CREDIT 

FOR FARMERS AND RANCHERS

As federally chartered agricultural 

lending cooperatives, the institutions of the Farm Credit System are 

limited-purpose lenders exposed to 

risk in making loans and investments 

to benefit their borrower-stockholders 

and meet their public mission. 

For FCS institutions to keep providing a dependable source of credit 

and financially related services for 

rural America, they must operate 

with sufficient capital and appropriately manage and control risk. That 

is why FCA deploys examination 

and supervisory resources to monitor 

systemic risks in the FCS as a whole 

and specific risks in each institution. 

This risk-based examination and 

supervisory program requires examiners to determine how existing or 

emerging issues facing an institution 

or the agriculture industry may affect 

the nature and extent of risk in that 

institution. Examiners also evaluate 

whether each institution is meeting 

its public mission. They do so by 

determining whether each institution is operating in compliance with 

applicable laws and regulations and 

if it is responsive to the credit needs 

of all types of agricultural producers 

and cooperatives that are eligible for 

credit, including young, beginning, 

and small (YBS) farmers and ranchers. This risk-based approach helps 

to ensure that FCA provides the 

most effective and efficient regulatory 

oversight to the System. 

Conducting a Risk-Based 

Examination and Oversight

Program

FCA’s examination and oversight 

program is designed to monitor and 

address FCS risk as effectively and 

efficiently as possible. Therefore, FCA 

assigns highest priority to institutions at greatest risk. This approach 

also relies in part on the ability 

of FCS institutions to identify and 

manage both institution-specific and 

systemic risks. When institutions are 

either unable or unwilling to address 

unsafe and unsound practices or to 

comply with applicable laws and 

regulations, FCA takes appropriate 

supervisory action. 

Through its oversight practices, the 

Agency ensures that FCS institutions have the programs, policies, 

procedures, and controls to effectively identify and manage risks. 

The oversight programs also ensure 

compliance with laws and regulations. For example, FCA regulations 

require FCS institutions to have 

effective loan underwriting and loan 

administration processes. FCA also 

has specific regulations requiring 

FCS institutions to maintain strong 

asset-liability management capabilities. For approximately 20 years, FCA 

has used a comprehensive regulatory and supervisory framework for 

ensuring System safety and soundness. FCS institutions, on their own 

and in response to FCA efforts, have 

developed their own risk management systems. 

Meeting Statutory

Examination Requirements

The Farm Credit Act requires FCA to 

examine each FCS institution at least 

once every 18 months. In addition 

to meeting this minimum requirement, the Agency conducts ongoing 

monitoring and interim examination 

activities in each institution as risk 

and circumstances warrant. FCA then 

integrates identified systemic risks 

into its national oversight strategies 

to mitigate risks Systemwide. This 

approach provides differential riskdriven examination activities for all 

institutions. 

As of December 31, 2008, FCA was 

overseeing and examining the following:

• 90 FCS direct-lender associations 

• 4 Farm Credit Banks 

• 1 Agricultural Credit Bank 

• 5 service corporations and 

 1 special-purpose entity 

• Farmer Mac 

• The National Consumer Cooperative Bank (NCB), which is not an 

FCS institution25 

FCA’s examination approach emphasizes the importance of proactive 

communication with regulated 

institutions through a combination of 

communication methods.

The Small Business Administration 

(SBA) and the U.S. Department of 

Agriculture (USDA) continued to use 

FCA’s examiner expertise in 2008. 

25. The National Consumer Cooperative Bank Act of 1978, as amended, provides for FCA to examine and report on the condition of NCB. Since the 

passage of this law, FCA has conducted safety and soundness examinations of NCB and issued reports to the bank’s board.
41

SBA contracted with FCA to have 

the Agency conduct examinations of 

financial companies licensed by SBA 

to make guaranteed loans to small 

businesses. USDA contracted with 

FCA to have the Agency conduct 

examinations of financial companies 

authorized to make guaranteed loans 

under USDA’s Business and Industry 

Guaranteed Loan program and Community Facilities Guaranteed Loan 

program. FCA examiners also completed reviews of the Business and 

Industry Guaranteed Loan program 

operations at selected USDA State 

Rural Development offices. 

During 2008, as part of these contracted activities, the Agency issued 

18 Reports of Examination or other 

agreed-upon deliverables on SBAand USDA-guaranteed lenders. The 

Agency has found that enabling its 

examiners to assist SBA and USDA 

has broadened its examiners’ skills 

and experiences. However, the safety 

and soundness of the FCS remains 

FCA’s principal focus and responsibility. Therefore, because of the 

current riskier financial environment, 

FCA will reduce these contracting 

relationships in the coming year.

Identifying and Responding

to Potential Threats to

Safety and Soundness

Because of the dynamics and risks 

in the agricultural and financial 

industries, FCA must ensure that 

FCS institutions have the culture, 

governance, policies, procedures, and 

management controls to effectively 

identify and manage risks. To be 

fully effective in meeting this challenge, the Agency has various risk 

supervision processes for evaluating 

and responding to systemic risks that 

can affect an institution, a group of 

institutions, the System as a whole, 

agriculture, and the financial industry. These risk supervision processes 

emphasize taking a proactive, nationally focused approach to addressing 

material risks and emerging issues. 

While numerous important risks and 

emerging issues are being addressed, 

the following topics have been 

receiving particular emphasis:

Internal audit and credit review 

programs, with emphasis on Audit 

Committee operations and program 

reliability. 

Portfolio risk and stress analysis, with emphasis on techniques 

employed by institutions to proactively identify, quantify, and manage 

risks.

Shared assets initiative to assess 

System institutions’ processes for 

obtaining and analyzing information 

to assess large credits funded or participated by multiple FCS institutions 

and their processes for facilitating 

FCA’s identification of the System’s 

shared credit exposures. 

Capital management, with emphasis on capital trends, patronage and 

dividend programs, and strategies to 

determine appropriate capital management in FCS institutions.

Measuring the System’s

Safety and Soundness

The Financial Institution Rating 

System (FIRS) is a key risk-rating 

methodology used by FCA to indicate the safety and soundness threats 

in each institution. Similar to the systems used by other Federal financial 

regulators, it is a “CAMELS-based” 

system, with component ratings for 

capital, assets, management, earnings, 

liquidity, and sensitivity all factoring 

into an overall composite rating. The 

FIRS provides a general framework 

for evaluating and assimilating all 

significant financial, asset quality, 

and management factors. It assigns 

component and composite ratings to 

each institution on a scale of 1 to 5. 

A composite rating of 1 indicates an 

institution is sound in every respect. 

A rating of 3 means an institution 

displays a combination of financial, 

management, or compliance weaknesses ranging from moderately 

severe to unsatisfactory. A 5 rating 

represents an extremely high, immediate or near-term probability of 

failure.26

Through its ongoing monitoring and 

oversight programs, FCA examiners continually evaluate institutional 

risk and regularly review and update 

FIRS ratings to reflect current risks 

and conditions. The Agency maintains both quantitative and qualitative benchmarks as general examiner 

guidelines to facilitate consistent 

application of the FIRS process. The 

FIRS benchmarks were updated in 

26. See the Glossary for a complete description of the FIRS ratings.
42

Farm Credit Administration 2008 Annual Report on the Farm Credit System

2008. FCA discloses the FIRS composite and component ratings to 

the institution’s board to provide 

perspective on relative safety and 

soundness. Examination reports and 

other communications also provide 

the institution board with an assessment of management’s performance, 

the quality of assets, and the financial condition and performance of the 

institution. 

FIRS ratings for 2008 show that the 

financial condition and performance 

of the FCS remained relatively strong 

throughout the year; however, risk 

did increase from the extremely low 

risk levels of the last five years. As 

shown in figure 10, FIRS ratings 

declined in 2008 as stresses from the 

general economy, the credit crisis, 

and volatility in commodity prices 

surfaced and impacted some institutions. At December 31, 2008, 58 FCS 

institutions were rated 1, 32 were 

rated 2, 6 were rated 3, and 1 was 

rated 4. There were no institutions 

with a rating of 5. (FCA applies 

FIRS ratings only to the banks and 

associations of the FCS, not to the 

System’s service corporations. It also 

applies a FIRS rating to Farmer Mac, 

but Farmer Mac is not counted in 

figure 10.) Although there has been 

some decline, the ratings still reflect 

a financially safe and sound FCS. 

Stresses in the livestock and ethanol industries in the quarter ended 

December 31, 2008, largely drove 

the decline in the number of institutions with a rating of 1. The overall 

financial strength maintained by the 

System reduces the risk to investors 

in FCS debt, to the Farm Credit System Insurance Corporation (FCSIC), 

and to FCS institution stockholders. 

In addition to the FIRS process, FCA 

examiners use another tool to assess 

prospective risk. This tool considers 

six risk criteria: credit, interest rate, 

liquidity, operational, compliance, 

strategic, and reputation. It measures quantity of risk, quality of risk 

management, and direction of risk 

(that is, whether risk is increasing or 

declining). This tool is used, along 

with FIRS ratings and other information, to assist the Office of Examination in allocating resources to where 

the risks are highest. 

Providing Differential 

Supervision and

Enforcement

FCA uses a risk-based supervisory 

and enforcement program to differentially respond to the risks and particular oversight needs of FCS institutions. Risks are inherent in lending, 

and managing risks associated with 

a single sector of the economy, such 

as agriculture, presents an additional 

challenge for FCS lenders. If FCA 

discovers unacceptable risks, it takes 

action to ensure that the identified 

risks are appropriately mitigated. 

Corrective actions include reducing 

risk exposures; increasing capital, 

which improves an institution’s ability to bear risk; and strengthening 

risk management. 

The Agency uses a three-tiered 

supervision program: normal supervision, special supervision, and 

enforcement actions. Institutions 

under normal supervision are generally performing in a safe and sound 

manner and operating in compliance 

with applicable laws and regulations. 

These institutions are able to correct 

identified weaknesses in the normal 

course of business. 

For those institutions displaying 

more serious or protracted weaknesses, FCA shifts from normal to 

special supervision, and its examination oversight increases accordingly. 

Under special supervision, an institution is given clear and firm regulatory guidance to address identified 

weaknesses, and the institution is 

allowed time to correct the problems. 

If informal supervisory approaches 

have not been or are not likely to be 

successful, FCA will use its formal 

enforcement authorities to ensure 

that the operations of FCS institutions are safe and sound and are in 

compliance with laws and regulations. FCA may take an enforcement 

action for a number of reasons: 

• A situation threatens an institution’s financial stability. 

• An institution has a safety and 

soundness problem or has violated a law or regulation.

• An institution’s board is unable 

or unwilling to correct problems 

FCA has identified. 
43

Figure 10

Financial Institution Rating System (FIRS) 

Composite Ratings for the FCS, 2004–2008

As of December 31
44

Farm Credit Administration 2008 Annual Report on the Farm Credit System

FCA’s enforcement authorities 

include the following powers:

• To enter into formal agreements

• To issue orders to cease and 

desist

• To levy civil money penalties

• To suspend or remove officers, 

directors, and other persons 

If an enforcement action is taken, the 

FCS institution must operate under 

the Agency’s enforcement program 

and report back to FCA. FCA’s 

examiners oversee the institution’s 

performance to ensure compliance 

with the enforcement action. 

Working With Financially

Stressed Borrowers

Agriculture involves significant 

inherent risks and volatility because 

of many factors, including adverse 

weather, changes in Government 

programs, international trade issues, 

fluctuations in commodity prices, and 

crop and livestock diseases. The significant risks in agriculture can sometimes make it difficult for borrowers 

to repay loans. The System (under 

provisions of the Farm Credit Act) 

provides borrowers certain rights 

when they apply for loans and when 

they have difficulty repaying loans. 

For example, the Act requires FCS 

institutions to consider restructuring 

an agricultural loan before initiating 

foreclosure. It also provides borrowers an opportunity to seek review 

of certain credit and restructuring 

decisions. If a loan is foreclosed on, 

the Farm Credit Act also provides 

borrowers the opportunity to buy 

back their property at the fair market 

value. 

FCA enforces the borrower rights 

provisions of the Farm Credit Act 

and examines institutions to make 

sure that they are complying with 

these provisions. It also receives and 

reviews complaints from borrowers 

regarding their rights as borrowers. 

Through these efforts, FCA ensures 

compliance with the law and helps 

FCS institutions continue to provide 

sound and constructive credit and 

related services to eligible farmers and ranchers. As the economy 

has deteriorated and affected FCS 

borrowers, FCA has received an 

increase in the number of borrower 

complaints. Generally, borrowers 

who contact FCA with complaints 

are seeking clarification, additional 

information, and options to redress 

their concerns. To the extent there 

are potential violations of law and 

regulations, FCA requires corrective 

actions by the institutions.
45

CONDITION OF FARMER MAC

Farmer Mac is a stockholder-owned, 

federally chartered instrumentality of 

the United States. It was created in 

1988 to establish a secondary market 

for agricultural real estate and rural 

housing mortgage loans. Farmer 

Mac conducts its business primarily 

through three core programs: 

• Farmer Mac I, through which 

Farmer Mac purchases, or commits to purchase, qualified loans, 

or obligations backed by qualified loans, that are not guaranteed by any instrumentality or 

agency of the United States. 

• Farmer Mac II, through which 

Farmer Mac purchases and securitizes portions of certain loans 

guaranteed by the U.S. Department of Agriculture, including 

farm ownership and operating 

loans and rural business and 

community development loans. 

Farmer Mac also guarantees the 

timely payment of principal and 

interest on the securities created 

from these loans.

• AgVantage, through which 

Farmer Mac buys or guarantees 

securities issued by agricultural 

and rural utility lenders. 

In May 2008, the Food, Conservation, and Energy Act of 2008 (2008 

Farm Bill) expanded Farmer Mac’s 

program authorities by allowing it 

to purchase and guarantee securities 

backed by eligible rural utility loans 

made by cooperative lenders.

Farmer Mac is regulated by FCA 

through the Office of Secondary Market Oversight (OSMO), which was 

established by the Farm Credit System Financial Safety and Soundness 

Act of 1991. This office provides for 

the examination and general supervision of Farmer Mac’s safe and sound 

performance of its powers, functions, 

and duties. The statute requires that 

OSMO constitute a separate office 

that reports directly to the FCA 

Board and that its activities, to the 

extent practicable, be carried out by 

individuals not responsible for supervising the banks and associations of 

the FCS. 

Through this office, the Agency performs the following functions:

• Examines Farmer Mac at least 

annually for capital adequacy, 

asset quality, management performance, earnings, liquidity, and 

sensitivity

• Supervises Farmer Mac’s operations 

• Evaluates Farmer Mac’s safety 

and soundness and mission 

achievement 

OSMO reviews Farmer Mac’s compliance with FCA’s risk-based capital 

regulations and supervises its operations and condition throughout the 

year. Table 7 summarizes Farmer 

Mac’s balance sheets at the end of 

the year for 2003 to 2008. Please note 

that certain prior-year amounts will 

differ from amounts published in 

some of the earlier annual reports 

because in late 2006 Farmer Mac 

provided a financial restatement 

for several reporting periods. The 

restatement was required as a result 

of Farmer Mac’s determination that 

it was not appropriately applying 

hedge accounting in accordance 

with Statement of Financial Accounting Standard 133, Accounting for 

Derivative Instruments and Hedging 

Activities (SFAS 133). Farmer Mac 

completed the financial restatements 

during the fourth quarter of 2006 and 

eliminated the use of hedge accounting.

Capital 

By statute, secondary market GSEs 

like Farmer Mac are permitted to 

operate with lower statutory capital 

margins than are primary market 

lenders. Accordingly, monitoring 

the capital levels of Farmer Mac is a 

central component of FCA’s oversight 

programs. 

On December 31, 2008, Farmer Mac’s 

net worth (that is, equity capital 

determined using generally accepted 

accounting principles [GAAP]) was 

$15.3 million, compared with $223.6 

million a year earlier. Net worth 

was 0.3 percent of on-balance-sheet 

assets as of December 31, 2008, 

compared with 4.5 percent at the end 

of 2007. The reduction was primarily caused by impairment losses in 

its nonprogram investment portfolio 

and unrealized losses in its deriva-
46

Farm Credit Administration 2008 Annual Report on the Farm Credit System

Table 7	 	 	 	 	 	

Farmer Mac Condensed Balance Sheets, 2003–2008 

As of December 31	 	 	 	 	 	 	

Dollars in Millions

 Percentage 

 growth

2003 2004 2005 rate 

Restated Restated Restated 2006 2007 2008 2007–2008

Total assets 4,299.7 3,847.4 4,341.4 4,953.7 4,977.6 5,107.3 2.6

 

Total liabilities	 4,089.2	 3,612.2	 4,095.4	 4,705.2	 4,754.0	 4,947.7	 4.1

 

Net worth or 

	 equity capital	 210.5	 235.2	 246.0	 248.5	 223.6	 159.6*	 (28.6)

 

Sources: Farmer Mac’s Securities and Exchange Commission Form 10-Ks.

* Includes $144.3 million of preferred stock that is not included in GAAP equity.

tives portfolio. When Farmer Mac’s 

off-balance-sheet program assets 

(that is, its guarantee obligations) 

are added to total on-balance-sheet 

assets, capital coverage is 0.1 percent. In August 2004, Farmer Mac 

established a new common stock 

dividend policy, which continued 

through 2008. Beginning in 2006 

and continuing until first quarter 

2008, Farmer Mac also authorized a 

Class C common stock repurchase 

program. These policies affect outstanding common equity, and in 

March 2009 Farmer Mac reduced its 

common stock dividend in response 

to the losses experienced in 2008. 

While these losses reduced Farmer 

Mac’s capital significantly, Farmer 

Mac raised additional capital in the 

third and fourth quarters by issuing 

preferred stock to improve its capital position. Farmer Mac currently 

exceeds statutory and regulatory 

capital requirements, and it continues 

to build additional capital. 

At year-end 2008, Farmer Mac’s core 

capital (the sum of the par value 

of outstanding common stock, the 

par value of outstanding preferred 

stock, paid-in capital, and retained 

earnings) remained above the statutory minimum requirement, and its 

regulatory capital (core capital plus 

allowance for losses) exceeded the 

required amount as determined by 

the Risk-Based Capital Stress Test 

(RBC Model). Farmer Mac’s core 

capital as of December 31, 2008, 

totaled $207 million, exceeding the 

statutory minimum capital requirement27 of $193.5 million by $13.5 million. Farmer Mac’s regulatory capital 

totaled $223.4 million as of December 31, 2008, exceeding the regulatory risk-based capital requirement 

of $57.3 million by $166.1 million. 

Regulatory capital was 2.8 percent of 

total Farmer Mac I program volume 

(including both on- and off-balancesheet program volume). Table 8 

offers a historical perspective on 

capital and capital requirements for 

2004 to 2008. 

In 2008, FCA published a final rule 

revising the risk-based capital regulations that originally became effective 

in 2002. The revisions updated the 

RBC Model in response to changing 

financial markets, new business practices, and the evolution of the loan 

27. The statute requires minimum capital coverage of 2.75 percent for on-balance-sheet assets and 0.75 percent for off-balance-sheet obligations. 
47

Table 8	 	 	 	 	 	

Farmer Mac Capital Positions, 2004–2008

As of December 31	 	 	 	 	 	 	

Dollars in Millions

2004 2005

Restated Restated 2006 2007 2008

GAAP equity	 $235.2	 $246.0	 $248.5	 $223.6	 $15.3

Core capital $204.0 $230.8 $243.5 $226.4 $207.0

Regulatory capital	 NA	 $239.4	 $248.1	 $230.3	 $223.4	

Statutory requirement	 $128.9	 $142.5	 $174.5	 $186.0	 $193.5

Regulatory requirement	 NA	 $29.5	 $42.9	 $42.8	 $57.3

Excess over statutory or regulatory requirement*	 $75.0	 $88.3	 $69.0	 $40.4	 $13.5

Capital margin excess > minimum	 58.2%	 62.0%	 39.6%	 21.7%	 7.0%

Sources: Farmer Mac’s Securities and Exchange Commission Form 10-Ks.

 

NA = not available (because line items have not been restated for prior periods or because regulatory capital rulemaking had not yet been implemented)

> = greater than

* Farmer Mac is required to hold capital at the higher of the statutory minimum capital requirement or the amount required by FCA regulations as determined by the Risk-Based Capital Stress Test. 

 

portfolio at Farmer Mac, as well as 

continued development of best industry practices among leading financial 

institutions. During 2009, FCA plans 

to issue a proposed rule revising 

the risk-based capital regulations to 

address new program authorities for 

rural utility financing. 

In addition to supporting program 

assets, Farmer Mac’s capital supports nonprogram investment needs. 

Nonprogram investments provide 

liquidity in the event of a short-term 

disruption in the capital markets that 

prevents Farmer Mac from issuing 

new debt. Nonprogram investments 

are investment securities, cash, and 

cash equivalents. FCA regulations 

governing Farmer Mac’s nonprogram 

investments and liquidity became 

effective in the third quarter of 2005. 

Farmer Mac’s policy is to maintain 

nonprogram investments at levels 

that provide liquidity for a minimum 

of 60 days of maturing obligations, 

with a target of 90 days. Farmer Mac 

was in compliance with its liquidity 

policy throughout the year. However, 

because of the failure of Lehman 

Brothers and the conservatorship 

of the Federal National Mortgage 

Association (Fannie Mae), Farmer 

Mac was forced to take losses totaling $106 million in its investments 

in those two entities. These losses 

contributed to the significant overall 

net loss for the year.

Program Activity

Farmer Mac’s total program activity

increased significantly over the past 

year to $10.1 billion on December 

31, 2008, from $8.5 billion a year 

earlier (see figure 11). The increase 

was largely attributable to the shift 

of formerly nonprogram investments 

in rural utility cooperatives to the 

program portfolio,28 as well as continued growth in the off-balance-sheet 

AgVantage program. 

Off-balance-sheet AgVantage transactions are general obligations of 

the issuing financial institution that 

are, in turn, guaranteed by Farmer 

Mac. Farmer Mac’s exposure is col28. In May 2008, the Food, Conservation and Energy Act of 2008 (2008 Farm Bill) expanded Farmer Mac’s program authorities by allowing it to purchase 

and guarantee securities backed by eligible rural utility loans made by cooperative lenders.
48

Farm Credit Administration 2008 Annual Report on the Farm Credit System

lateralized by eligible agricultural 

mortgage loans owned by the issuing institution. Farmer Mac’s LongTerm Standby Purchase Commitment 

product has been another source of 

growth in program activity in the 

past. Under Farmer Mac Standbys, a 

financial institution pays an annual 

fee in return for Farmer Mac’s commitment to purchase loans in a specific pool under specified conditions 

at the option of the institution. The 

Standby product grew significantly 

between its introduction in 1999 and 

2006 although growth has moderated 

over 2007 and 2008. Lenders may 

elect to exchange Standby commitments for securities guaranteed by 

Farmer Mac. Standbys were up 14 

percent in 2008 to $2.2 billion. 

Figure 11

Farmer Mac Program Activity and Nonprogram

Investment Trends

As of December 31

Dollars in Billions

Sources: Farmer Mac’s Annual Reports on Securities and Exchange Commission Form 10-Ks.

Off-balance-sheet program activity 

consists of Standbys, certain AgVantage securities, and AMBS sold to 

investors. At the end of December 

2008, 68 percent of program activity 

consisted of off-balance-sheet obligations29 (see figure 12). 

Asset Quality

On December 31, 2008, the portion 

of the Farmer Mac I program portfolio that was nonperforming was 

$80.0 million, or 1.61 percent of the 

principal balance of all loans purchased, guaranteed, or committed 

to be purchased since enactment of 

the Farm Credit System Reform Act 

of 1996 (1996 Act).30 This compares 

with $31.9 million, or 0.63 percent, 

on December 31, 2007. Nonperforming assets consist of assets that are 

90 days or more past due, in foreclosure, or in bankruptcy, and real 

estate property acquired by Farmer 

Mac through foreclosure. Real estate 

owned as of December 31, 2008, was 

$606,000, up from $590,000 a year 

earlier. The total dollar amount and 

percentage of nonperforming assets 

moved up in 2008, reversing the 

trend toward unusually low levels 

in recent years. The shift in nonperforming loan volume was primarily 

the result of weakness in the ethanol 

portfolio. Farmer Mac reported no 

delinquencies or nonperforming loans 

in pools underlying its rural utility 

cooperative loan exposure.

29. Because of a small amount of on-balance-sheet AgVantage activity, this percentage does not correspond exactly to the total of percentages shown in figure 12 

for AMBS, Standbys, and AgVantage program activity. 

30. Farmer Mac assumes 100 percent of the credit risk on post-1996 Act loans, whereas pre-1996 Act loans are supported by mandatory 10 percent subordinated 

interests, which mitigate Farmer Mac’s exposure. For that reason, pre-1996 Act loans are excluded from analysis for comparison purposes. These amounts 

also exclude loans underlying AgVantage guaranteed securities, whose risk is significantly mitigated by the general obligation of the issuer.
49

Figure 12

Farmer Mac Total Program Activity

As of December 31

Source: Farmer Mac’s Annual Report on Securities and Exchange Commission Form 10-K.

AMBS = agricultural mortgage-backed securities

Total = $10.08 billion
50

Farm Credit Administration 2008 Annual Report on the Farm Credit System

On December 31, 2008, Farmer Mac’s 

allowance for losses totaled $16.4 

million, compared with $3.9 million 

on December 31, 2007. Farmer Mac 

attributed the increase in the allowance for losses primarily to a $17.8 

million provision for loan losses and 

charge-offs of $5.2 million recognized 

during the year, which were largely 

driven by defaults in the ethanol 

loan portfolio. Figure 13 shows the 

level of Farmer Mac’s allowance 

and nonperforming assets relative to 

outstanding post-1996 Act program 

volume.

Earnings

Farmer Mac sustained a net loss of 

$154.1 million (in accordance with 

GAAP) for the year ended December 

31, 2008, down significantly from 

$4.4 million in GAAP net income 

available to common stockholders reported at year-end 2007. This 

significant decrease in earnings is 

attributable primarily to losses on 

investments in Lehman Brothers 

and Fannie Mae and to significant 

unrealized losses resulting from the 

mark-to-market impact on derivatives and trading assets. Core earnings31 for 2008 were $24.7 million, a 

decrease of 17.4 percent from 2007. 

Net interest income, which excludes 

guarantee fee income, was $88.2 million in 2008, nearly double what it 

was in 2007. This increase resulted 

largely from an unusually favorable 

drop in funding costs during 2008. 

Guarantee fee income, at $28.4 million, was 12.5 percent higher in 2008 

than in 2007. This increase reflects 

the growth in the average balance 

31. Core earnings is a non-GAAP measure of financial results that excludes the effects of certain unrealized gains and losses and nonrecurring items. 

Farmer Mac began reporting core earnings to present an alternative measure of earnings performance. The components included in core earnings 

calculations are at Farmer Mac’s discretion. 

of outstanding guaranteed securities. 

Neither of these favorable developments was sufficient to offset the 

significant realized and unrealized 

losses sustained in 2008. Nonprogram 

investments accounted for an estimated 52.3 percent of interest income 

for 2008, down from 58.5 percent for 

2007. Table 9 shows a five-year trend 

for key income components. 
51

Figure 13

Allowance, Nonperforming Assets, and Delinquency Trends, 2003–2008

As of December 31

Dollars in Millions

Sources: Farmer Mac’s Annual Reports on Securities and Exchange Commission 10-Ks.

Table 9	 	 	 	 	 	 	

Farmer Mac Condensed Statements of Operations, 2003–2008

As of December 31	 	 	 	 	 	 	

Dollars in Millions	 	 	 	 	 	 	

 Growth 

2003 2004 2005 rate 

Restated Restated Restated 2006 2007 2008 2007–2008

 

Total revenues	 76.3	 77.3	 83.9	 67.8	 31.5	 (140.6)	 (547.0%)

Total expenses	 37.3	 38.3	 36.8	 38.0	 27.1	 13.5	 (50.2%)

Net income available

	 	 to shareholders	 39.0	 39.0	 47.0	 29.8	 4.4	 (154.1)	 (3602.3%)

Core earnings	 23.0	 27.4	 28.7	 25.9	 29.9	 24.7	 (17.4%)

Sources: Farmer Mac’s Annual Reports on Securities and Exchange Commission Form 10-Ks. 
52

Farm Credit Administration 2008 Annual Report on the Farm Credit System

CHALLENGES FACING AGRICULTURE AND THE FCS

The Farm Credit System attained 

another year of solid earnings and 

asset growth in 2008 despite unprecedented instability in global financial 

markets and a dramatic downturn in 

the general economy. The System’s 

resilient performance stems from its 

strong ties to a vibrant and welldiversified agricultural industry. For 

the fourth time in the last five years, 

net farm income set a new record in 

2008 as a combination of abundant 

supplies, record-high grain prices, 

and strong export sales more than 

offset a sharp rise in production 

costs. However, USDA projects that 

net farm income will be down in 

2009, due largely to the global economic slowdown. This outcome will 

likely erode the quality of the System’s loan portfolio and its financial 

results for the next year. 

Aside from the effect of the general 

economy and other factors on commodity prices, agriculture is inherently risky because its production 

processes are biological. Random 

weather events, crop and livestock 

diseases, and food safety concerns 

are ongoing risks that can suddenly 

transform into real-life catastrophes 

for individual producers or, worse 

yet, a large region of the country. 

Both producers and System institutions understand these risks and 

use a number of risk management 

techniques to mitigate their exposure. However, in any given year, 

individual producers can still suffer 

substantial losses and be unable to 

repay their loans. 

Several challenges, both domestic 

and foreign, could affect the System’s 

long-term ability to profitably finance 

the agricultural industry. In the following paragraphs, FCA identifies 

some of these challenges, including 

the macroeconomic outlook, key 

developments in the farm income 

picture, new public policy directions 

for agriculture and the economy, and 

important structural changes in the 

industry. Through its regulatory and 

examination activities, FCA will continue to closely monitor and address 

these challenges.

Prospects for the General 

Economy

The global financial meltdown and 

a free-falling economy in late 2008 

underscore the challenge of trying 

to predict future economic activity. 

A year ago, few foresaw the incredible events that would unfold during 

the year. The economy is now in a 

severe recession, and the only question now is its length and depth: 

will we see the end in 2009 or will 

it continue to slide well into 2010? 

Where is the bottom, and will the 

Government’s fiscal stimulus plans, 

Treasury’s financial rescue programs, 

and various Federal Reserve liquidity 

actions produce the desired effects 

of thawing out frozen credit markets and jump-starting consumer 

confidence and spending? While a 

few hopeful signs are emerging, the 

economy continues to be driven by 

fear as worries mount over the latest 

unemployment numbers and evaporating 401(k)s in the stock market. As 

a result, people are increasing their 

saving and cutting spending at the 

worst possible time for the economy.

The good news is that policymakers 

are responding with everything in 

their power to stop the downward 

spiral and establish a new foundation 

for future growth in the economy. 

Despite the unprecedented magnitude of these efforts, future risks 

abound.

As we look ahead, most of the 

risks appear to be abating. Many 

economists believe the economy will 

shrink between 2 and 3 percent in 

2009 before resuming growth rates 

closer to trend in 2010. However, a 

few forecasts paint a grim picture, 

with sharper gross domestic product 

declines and higher unemployment. 

The unemployment rate is expected 

to approach 9 percent near the end 

of the year and may exceed 10 percent before conditions stabilize. The 

Government’s expanded unemployment benefits in the fiscal stimulus 

program should help cushion these 

labor market dislocations. Inflation, after spiking in mid-2008 from 

soaring oil and commodity prices 

and then dropping to almost zero 

by year-end, will likely be low or 

negative in 2009 because of weak 

demand. While exports were a bright 

spot during most of 2008, they are 

expected to decrease significantly in 

2009 because of the stronger dollar 

and the drying up of foreign demand 

as a result of the global recession. A 
53

key assumption in these projections 

is that the American Recovery and 

Reinvestment Act (Recovery Act), 

along with additional Treasury and 

Federal Reserve actions, will have a 

positive effect on credit delivery and 

consumer confidence to help jumpstart economic activity in the near 

future. 

The economic outlook has several 

important implications for the FCS. 

One of the most significant implications concerns off-farm income 

because, on average, about 90 percent 

of farm household income is derived 

from off-farm employment, outside 

business interests, and other investments. Clearly, off-farm income is 

the lifeblood of small and part-time 

farms. But even large commercial 

farms (sales above $250,000) obtain 

about 25 percent of their household 

income from outside sources, giving many borrowers an important 

cushion for debt repayments. Thus, 

a deep economic recession likely 

would be detrimental to those farm 

families who rely on outside sources 

of income to repay their loans. In 

light of the prospects for 2009 farm 

income and off-farm employment, 

the System must remain vigilant 

about credit quality and the challenges of managing its portfolio in a 

troubled economy.

A second implication concerns the 

Federal Reserve’s dramatic easing of 

monetary policy, which has reduced 

interest rates to historic lows. Even 

with the increased difficulties the 

System has experienced in issuing longer-term debt securities (see 

discussion on pages 35 to 38) and 

the wider spreads between System 

securities and U.S. Treasuries for 

long-term maturities, the FCS has 

been able to keep its interest rates 

on farm loans relatively low. While 

external events could change the 

picture as the year unfolds, investors 

are expected to continue purchasing 

System securities in 2009 because of 

their safety and good returns. 

ECONOMIC SETTING FOR 

AGRICULTURE

A year ago, agriculture was riding 

a wave of record-high commodity 

prices, soaring exports, and strong 

asset values. As far as the eye could 

see, farm income prospects looked 

bright, driven in part by the boom 

in the ethanol industry and the 

positive outlook for renewable fuels. 

Although voices of caution were 

being raised about commodity price 

volatility, narrowing profit margins 

in livestock and ethanol production, 

and food price inflation, most people 

expected 2008 to be a banner year. 

And—for the most part—it was.

Net farm income was almost $90 

billion in 2008, which is a new 

record, up slightly from the previous 

record in 2007. In addition, agriculture has a strong balance sheet. The 

debt-to-asset ratio is now less than 

10 percent, one of the lowest figures 

in history and sharply below the 

crisis years of the 1980s when it was 

almost 20 percent. Yet the 40 to 50 

percent decline in most commodity 

prices since last summer, the excess 

capacity problem in the ethanol and 

livestock industries, and a return of 

the traditional price-cost squeeze in 

agriculture have diminished the optimism of 2008. 

Net farm income is expected to 

decline to around $70 billion in 2009, 

a 20 percent decrease, as smaller 

marketing receipts in both the crop 

and livestock sectors will more than 

offset an expected decline in production expenses. Although the new 

figure is still above the $65 billion 

average for the previous 10 years in 

inflation-adjusted constant dollars 

(2000), net farm income in nominal 

terms will be about 5 percent below 

the 10-year average. Thus, the income 

picture for the farm sector depends 

on which lens is used to examine it. 

In nominal terms, the picture looks 

reasonably good for 2009—despite 

notable shifts in likely winners and 

losers for the year. But the inflationadjusted number is more worrisome 

because it exposes agriculture’s 

weakening income situation. 

It seems clear that the crop sector 

will be less profitable than it was in 

2008. However, except for dairy producers, whose income will be down 

sharply, the livestock sector should 

fare better as profit margins improve 

from reductions in output and lower 

production expenses. The prospective 

decline in foreign demand from the 

global recession will be partly offset 
54

Farm Credit Administration 2008 Annual Report on the Farm Credit System

by continued expansion in ethanol 

production, especially if renewable 

fuel standards require higher ethanol blends. Any increase will tend 

to support the corn market, agriculture’s largest crop.

Moreover, the fiscal stimulus programs should benefit agriculture in 

2009 both directly and indirectly: 

directly, by providing tax credits 

and new spending on alternative 

fuels and infrastructure projects, and 

indirectly, by generating jobs and 

new off-farm income opportunities. 

However, financial outcomes likely 

will vary widely by region and by 

enterprise type and size as producers wrestle with volatile commodity 

prices, mounting labor and water 

supply issues, new Government policies, and a host of other variables. 

These conditions will complicate risk 

management strategies for farmers 

and increase the challenges for the 

FCS.

UNCERTAINTY OVER POLICY 

AND TRADE

Farm programs and trade agreements 

are two important policy forces that 

help shape the farm income picture. 

Both areas are important to the FCS 

because they can affect a borrower’s 

repayment capacity and, ultimately, 

the overall safety and soundness of 

the lender. The new directions in 

farm policy and trade may create a 

new set of loan underwriting challenges for the System to manage. 

Farm Policy Concerns

In May 2008, Congress enacted the 

Food, Conservation, and Energy 

Act of 2008, which made changes 

in the Federal safety net for agriculture. Although the new act 

leaves loan rates and target prices 

mostly unchanged, the safety net 

for the program crops is actually 

lower today because support prices 

were not adjusted to reflect recent 

increases in farm cost structures. In 

essence, the focus of farm policy is 

moving toward revenue protection 

and away from higher target prices. 

The 2008 act also shifts the spending 

priorities toward nutrition, renewable 

fuels, conservation, and rural development. 

According to USDA, direct Government payments to producers in 2009 

are projected to fall to $11.4 billion, 

their lowest level since 1997 and well 

below the $16 billion average under 

the 2002 farm act. Normally a payment drop alone is not worrisome 

if higher market prices or yields 

compensate producers for the loss. 

However, if market prices fall without any increase in Government payments, which may be the situation 

for most of the program crops this 

year (cotton is an exception), then 

borrower risks increase. Thus, lenders 

should closely monitor any declining 

trend in Government payments.

Producers face an important business 

decision under the 2008 act. They can 

choose to either operate under the 

old program’s terms, thereby receiving all of their direct payments and 

remaining eligible for counter-cyclical 

and loan deficiency payments, or 

they can sign up for the new Average Crop Revenue Election (ACRE) 

program.32 To participate in ACRE, 

producers must forfeit their countercyclical payments on the program 

crops and accept a 20 percent reduction in direct payments and a 30 

percent reduction in marketing 

assistance loan rates. Producers are 

unlikely to participate unless they 

believe ACRE will pay off over time. 

While some preliminary studies show 

that a poor year (low crop revenue) 

could potentially generate large 

ACRE payments, most producers 

will have difficulty making decisions 

about ACRE because the answers are 

not clear cut.

The ACRE payoffs are determined by 

a “double-trigger” mechanism that 

uses two revenue benchmarks—one 

for the State and one for the individual farm—to establish eligibility and 

the size of the payment. This requires 

producers to calculate the likelihood 

of two unknown outcomes. For the 

farmer to receive an ACRE payment, 

both the State and the farm must 

have a revenue shortfall. The risk, of 

course, is that the farm falls below its 

revenue benchmark while the State 

does not, in which case the producer 

receives nothing. Lenders should 

carefully consider the implications of 

potentially lower Government payments under ACRE as they counsel 

customers about the program. In particular, farmers need to understand 

32. Although ACRE is an optional program with annual enrollment opportunities, once a producer signs up for the program, the decision is irrevocable 

until 2012. USDA recently extended the sign-up deadline for 2009 to August, which will give producers more time to evaluate ACRE’s potential 

benefits for this year’s crops.
55

that ACRE is not intended to be a 

substitute for crop insurance since it 

provides very little protection against 

chronically low crop prices.

Government actions to shift spending 

priorities and introduce new farm 

program initiatives such as ACRE 

are aimed at accomplishing several 

objectives:

• To reduce the high cost of 

Government farm programs and 

redirect the benefits to a broader 

base of producers 

• To refocus the safety net so that 

it protects farm revenue—not 

just prices—thereby making it 

more likely that payments would 

be distributed only in truly bad 

years

• To encourage more participation 

in Federal crop insurance programs 

• To eliminate ad hoc disaster 

assistance programs by introducing permanent programs for 

adverse weather events.33

Concerns about the new priorities 

for farm programs are heightened 

by the prodigious deficits looming in 

the Federal budget. Proposals to cap 

payments to large farmers or highincome landlords or to cut subsidies 

for crop insurance premiums represent measures that may be employed 

at some point to save budget dollars. 

In all likelihood, the budget deficit 

issue will be front and center when 

the next farm bill is debated in the 

months leading up to 2013. A regime 

of rising production costs in agriculture remains a growing risk if money 

for the farm safety net fails to keep 

pace.

Foreign Trade Issues

Trade is governed by the World 

Trade Organization (WTO), which is 

a voluntary association of countries 

that periodically meets to set international trade rules and adjudicate disputes among its members. The Doha 

Round of multilateral negotiations 

was launched in 2001, but little progress has been made toward a new 

agreement. Despite efforts to keep 

the talks going, a new WTO agreement is unlikely this year. Because 

of the impasse, the United States 

continues to pursue both regional 

and bilateral trade agreements with 

its trading partners. It now has 17 

such agreements in place, the largest of which is the North American 

Free Trade Agreement (NAFTA) 

with Canada and Mexico. However, 

the big trade issue for 2009 is not 

the Doha Round but the recession’s 

effect on foreign demand. For the 

first time since World War II, world 

trade is expected to decline in the 

year ahead. 

Exports are a critical part of the 

farm income picture because our 

domestic markets cannot absorb all 

that is produced each year. Foreign 

sales often account for a fourth of all 

agricultural sales in a given year. In 

fiscal year 2008, farm exports were 

more than $115 billion, up $33 billion 

from fiscal 2007, easily making it a 

new record. It is also a phenomenal 

achievement when viewed from a 

historical perspective because, as 

recently as 2004–05, sales were running around $60 billion per year. 

Because of this expansion in foreign 

sales (more volume and sharply 

higher prices), the net surplus from 

agricultural trade, after shrinking 

over several years to almost zero, is 

once more solidly in the black.

Because of the weak global economy 

and a stronger dollar, U.S. farm 

exports are expected to decrease 

sharply to about $95 billion in fiscal 

year 2009, a $20 billion drop but still 

the second highest figure on record. 

The decline will likely be broadbased, affecting most commodities, 

livestock, and value-added products. 

Unfortunately, our export prospects 

could dim further as the global 

recession takes stronger root and 

potentially moves countries toward 

protectionist policies. Such a scenario 

would further depress farm prices 

and increase credit risk in the FCS. 

In addition, the fear of human- or 

animal-borne disease can suddenly 

reduce the demand for U.S. farm 

products, as we saw in spring 2009 

when fears about the spread of the 

H1N1 flu virus affected the export of 

pork. 

33. The 2008 farm bill established a new disaster assistance program called the Supplemental Revenue Assistance Trust Fund (SURE) to help producers 

cover the deductible portions of their crop insurance policies. To be eligible for SURE, producers must insure all crops and suffer a loss in a declared 

disaster area. 
56

Farm Credit Administration 2008 Annual Report on the Farm Credit System

Renewable Fuels

2008 was a challenging year for the 

ethanol industry. Rapidly rising corn 

and natural gas costs in the first 

half of 2008 squeezed profitability 

at ethanol plants. Some companies 

failed to hedge their inputs properly, 

while others experienced start-up 

problems and other mechanical or 

technical difficulties. Slowing gasoline consumption and lower fuel 

prices in the second half of 2008 and 

early 2009 compounded the problems 

and ultimately caused a number of 

bankruptcies and plant closures. As 

of the end of March 2009, 168 ethanol plants, with production capacity 

of 10.34 billion gallons, were active, 

while 37 plants, with 2.21 billion 

gallons of capacity (or 17.6 percent 

of the total), were idle. Another 15 

plants, with 1.46 billion gallons of 

capacity, were under construction. 

At the end of 2008, the System’s loan 

commitments to the biofuels industry 

totaled $4.4 billion, close to the figure 

a year earlier. Of the total commitments, System institutions had 

funded $3.0 billion at year-end, and 

that total had changed only slightly 

since mid-2008. Although total commitments at year-end represented 

16 percent of the System’s capital, 

biofuel loans outstanding were 

11 percent of capital and less than 

2 percent of total loan volume. These 

are both relatively small numbers 

when compared to the System’s 

exposure to other industries or commodities, but these risks are concentrated among a relatively small number of borrowers (fewer than 140), 

and risks facing the industry have 

risen. In addition to its loan holdings 

in the biofuels industry, the System 

also originated and participated out a 

significant amount of biofuel loans to 

non-System lenders.

The outlook for the ethanol industry continues to revolve around the 

excess capacity problem, which will 

weigh on producer returns until 

enough improvements occur in 

the economy to widen the spread 

between corn and ethanol prices. The 

ethanol industry has asked the EPA 

to increase the amount of ethanol 

that refiners must blend with gasoline from the current requirement of 

10 percent to 15 percent. If implemented, this increase would likely 

boost the demand for the renewable 

fuel additive by as much as 6 billion 

gallons a year and would generate 

numerous jobs. While preliminary 

studies suggest that a 20 percent 

blend is feasible, more testing will be 

done over the next year to make sure 

that higher ethanol blends do not 

harm gasoline engines. Meanwhile, 

the Administration’s new spending 

proposals for the development of 

alternative fuels should augur well 

for the ethanol industry, while offering new investment opportunities for 

the FCS.

A major risk for the FCS is that the 

biofuels industry still requires large 

tax incentives, import protection, and 

mandated blending requirements to 

remain viable. In addition, energy 

policies can suddenly change and 

new technological developments can 

render existing plants obsolete. For 

these reasons, FCA will be closely 

watching System institutions for loan 

underwriting practices that do not 

consider the full risks associated with 

ethanol production and marketing.

New Dimensions to

Portfolio Risk

Asset growth rates, new business 

lines, counterparty relationships, and 

a changing economic and political 

landscape are important variables 

affecting portfolio risk for a financial 

institution. The System’s loan portfolio has grown more than 15 percent a 

year since 2005, which has put downward pressure on key capital ratios. 

Although the System’s loan growth 

slowed to 2 percent during the fourth 

quarter of 2008 as economic conditions deteriorated, other issues—such 

as asset quality—are becoming more 

worrisome. For instance, the System 

recognized $408 million in provisions for loan losses in 2008, up from 

$81 million a year earlier, and other 

credit quality measures also weakened significantly. These changes 

were an outgrowth of the exceptional 

volatility that occurred in commodity 

prices last year.

Efforts to have farmers bear more of 

the costs of doing business by reducing the subsidies on crop insurance 

premiums or limiting the time periods for forward contracting of grain 
57

sales will magnify the risk profiles 

of many borrowers. However, other 

political and economic risks will 

require scrutiny, too:

Fiscal Stimulus Plan—The challenge 

for the System is to discover where 

the new plan offers potential opportunities for making new loans and 

investments in rural areas and then 

determine how to control exposure to 

these new risks. 

Funding Costs—New actions by 

the Government and the Federal 

Reserve to restart the credit function 

and improve bank liquidity could 

increase the System’s funding costs 

and borrower interest rates, thereby 

increasing credit and repayment risk. 

(See page 35)

Ethanol Blending Standards—Even 

with a possible increase in the blending standard, future profitability 

in the ethanol industry will still be 

heavily dependent on blending subsidies, new technologies, price spreads 

between ethanol and corn, and environmental requirements. Thus, the 

System must factor these risks into 

its management of portfolio exposure 

to the renewable fuels industry.

Farm Program Payments—Huge 

budget deficits and new interest 

group coalitions create mounting 

political pressure to revamp current 

farm programs to reduce payments 

and redistribute the amount going 

to large producers. Other prospective changes in farm program benefits could create new portfolio risk 

challenges for System institutions 

to manage, especially if commodity 

markets remain highly volatile.

The System’s Public Mission—

Due to the economic meltdown and 

efforts to stimulate the economy, the 

public may look to the System to 

“stand tall” in this difficult environment by assuming more lending risks 

to help jump-start rural economies. 

The System’s strong financial position 

makes it a candidate for these initiatives. However, new investments in 

unfamiliar business lines or loans to 

borrowers with weakened credit are 

inherently risky. Thus, System institutions must remain vigilant about 

safety and soundness in this environment.

Loan Participations and Syndication 

Activity—New business lines may 

help diversify an institution’s loan 

portfolio and mitigate risk. However, 

in 2009, the System is not expected to 

have a significant amount of syndication activity because of the decline 

in credit demand from other lenders. 

Instead, the System’s chief concern 

will be with some of its existing 

participations in large agribusiness 

loans. The key point is that lenders should periodically review their 

participation and syndication policies 

to ensure that they stay within their 

level of expertise, lending controls, 

and underwriting standards. 

The real test for managing credit risk 

in the System’s portfolio centers on 

the System’s primary business lines. 

Farm mortgage loans and production credit for crop and livestock 

enterprises account for two-thirds 

of the loan portfolio. Prospects for a 

weak economy in 2009–10 will likely 

translate into less total demand for 

farm products, especially from the 

foreign sector, and fewer off-farm 

employment opportunities. The 

projected decline in net farm income 

in 2009 may affect borrower repayment capacity as well as collateral 

values if farm real estate values drop 

significantly. More than 40 percent 

of the System’s loan portfolio is farm 

mortgages. 

All of these factors point to more 

portfolio risk and growing challenges 

for System institutions to manage. 

FCA will continue to focus resources 

on monitoring and evaluating the 

underlying sources of portfolio risk, 

the overall quality of the System’s 

assets, and management’s ability to 

manage the associated risks of operating in a more turbulent period for 

agriculture.
58

Farm Credit Administration 2008 Annual Report on the Farm Credit System

Other Challenges

On balance, the System’s loan portfolio quality and capital levels were 

still adequate at the end of 2008. 

However, a number of additional 

factors will continue to challenge the 

System’s ability to manage assets 

and ensure adequate capital levels to 

meet future borrower needs.

Commodity Price Volatility

Commodity markets experienced 

record volatility in 2008 as a record 

surge in prices in the first half of 

the year was followed by a precipitous decline in the second half. 

Principal factors for the run-up in 

prices included concerns over U.S. 

crop losses from major spring flooding in the Midwest; record increases 

in petroleum prices, which boosted 

the demand for grains, oilseeds, and 

sugar for biofuel production; strong 

export demand from the declining 

value of the dollar; sharp increases in 

speculative long positions in futures 

contracts; protectionist actions taken 

by a number of countries to ward off 

food price inflation; and generally 

low stocks of commodities worldwide, made worse by crop shortages 

in South America and other exporting countries. Most of these factors 

reversed direction in the second half 

of the year, sparked by the global 

financial crisis, the economic recession, and the increasing value of 

the dollar. In particular, the sharp 

decline in crude oil and gasoline 

prices had a pronounced effect on 

ethanol producers who saw their 

profit margins shrink as additional 

production capacity came online and 

consumers cut back on their driving 

and fuel consumption.

As we look ahead, commodity 

markets will likely remain subdued 

until a solid economic recovery takes 

hold, possibly in 2010. Meanwhile, a 

number of unfavorable events—such 

as a significant economic slowdown 

in China, India, and other developing 

countries, or a much stronger dollar—could result in a lasting downward movement in commodity prices 

that would affect the safety and 

soundness of the FCS and Farmer 

Mac.

Land Values

After climbing continuously for the 

21 years since the collapse of the 

land market in the mid-1980s, U.S. 

farmland values started to decline in 

the latter part of 2008 as the economy weakened. The Federal Reserve 

estimated that land values decreased 

from 2 to 4 percent in several regions 

of the Nation during the fourth quarter of 2008, and a recent Iowa survey 

showed that land values in that State 

decreased almost 8 percent in the last 

six months of the year. The shrinking 

farm income picture and the global 

economic recession point to further 

softening of farmland values in 2009. 

In addition, the decline in the housing market is affecting collateral 

values of part-time farms and agricultural land in densely populated 

rural areas. A sharp decline in land 

values could significantly reduce the 

System’s credit quality and financial 

performance.

Maintaining Market Flexibility

The most important strategic risk 

facing any financial institution is not 

being able to offer the products and 

services the market demands. Certainly, the System’s GSE status and 

its access to attractive funding mechanisms allow FCS institutions to be 

a reliable source of funds to agriculture and rural America in both good 

times and bad. However, for several 

decades, the FCS has attempted to 

respond to strong global banking 

trends and the evolving needs of 

rural America without major revisions to its statutory authorities. Periodically, most financial institutions 

require both legal and market-based 

adjustments to maintain their flexibility in the marketplace.

Borrower Characteristics

Dynamic forces are changing the 

structure of agriculture at a rapid 

pace, creating tremendous diversity 

in size, income and wealth, and 

operator characteristics. The magnitude of these changes continues to 

challenge the System’s creativity in 

meeting the financial needs of its 

rural customer base. For example, 

the growing significance of off-farm 

income to the welfare of farm families is causing the System to redesign 

the approaches it uses to satisfy the 

credit needs of its rural customer 

base. In addition, the mandate to 

serve the needs of YBS farmers and 

ranchers will continue to be a challenge for the System because this 

group is increasingly dependent on 

the off-farm economy to sustain its 

financial health and ability to live in 

rural areas.
59

FARM CREDIT ADMINISTRATION 

OFFICES

The 264 full- and part-time employees of FCA work together to ensure 

that the FCS remains a dependable 

source of credit for agriculture and 

rural America. The following paragraphs explain the functions of each 

of the Agency’s offices.

The FCA Board approves the 

policies, regulations, charters, and 

enforcement activities that ensure a 

strong FCS. The Board also provides 

for the examination and supervision 

of the FCS, including Farmer Mac, 

and oversees the activities of the FCS 

Building Association, which acquires, 

manages, and maintains FCA headquarters and field office facilities.

The Secretary to the Board ensures 

that the FCA Board complies with 

statutory, regulatory, and internal 

operation procedures and requirements. The Secretary to the FCA 

Board also serves as Secretary to 

the Farm Credit System Insurance 

Corporation Board. In addition, the 

Secretary serves as the Parliamentarian and the Sunshine Act Official for 

the FCA Board.

The Office of the Chief Executive

Officer enforces the rules, regulations, and orders of the FCA Board. 

The CEO directs the implementation 

of policies and regulations adopted 

by the FCA Board. The office plans, 

organizes, directs, coordinates, and 

controls FCA operations and leads 

the Agency’s efforts to achieve and 

manage a diverse workforce.

The Office of Congressional and 

Public Affairs (OCPA) serves as the 

Agency’s principal point of contact for Congress, the media, other 

Government agencies, FCS institutions, employees, System borrowers, and the public. OCPA develops 

and monitors legislation pertinent 

to FCA and the FCS, serves as the 

Agency’s congressional liaison, and 

prepares testimony for the Chairman 

and other staff members. The office 

also provides information to external 

audiences through news releases, 

informational brochures and fact 

sheets, the annual FCA Performance 

and Accountability Report, and other 

publications. It manages media relations regarding Agency activities and 

is responsible for the content of the 

FCA Web site.

OCPA also coordinates special meetings, briefings for international visitors, and field hearings.

The Office of Examination is responsible for examining and supervising 

each FCS institution in accordance 

with the Farm Credit Act and applicable regulations. The office develops 

oversight plans; conducts examinations; monitors the System’s condition, risks, and emerging risks; and 

develops supervisory strategies to 

ensure that the System operates in 

a safe and sound manner, complies 

with the law and regulations, and 

fulfills its public policy purpose. The 

FCA Board further defines the Office 

of Examination’s role in Policy Statement 53, available at www.fca.gov.

The Office of General Counsel 

(OGC) provides the FCA Board 

and staff with legal counsel as well 

as guidance on general corporate, 

personnel, ethics, and administrative matters. OGC supports the 

Agency’s development and promulgation of regulations, civil litigation, 

enforcement of applicable laws and 

regulations, and implementation of 

conservatorships and receiverships. 

The office serves as the liaison to the 

Federal Register, creates and maintains 

the Agency’s public rulemaking files, 

and handles the Agency’s submission 

of the Unified Agenda of Federal 

Regulatory and Deregulatory Actions. 

OGC also handles Freedom of Information Act requests and matters 

pertaining to the Privacy Act.

The Office of Inspector General 

provides independent and objective 

oversight of Agency programs and 

operations through audits, inspections, investigations, and the review 

of proposed legislation and regulations. The office promotes economy 

and efficiency within FCA and seeks 

to prevent and detect fraud, waste, 

abuse, and mismanagement in the 

Agency’s programs and operations.

The Office of Regulatory Policy 

(ORP) manages all policy and regulation development activities that 

ensure the safety and soundness of 

the FCS and support the System’s 

mission as a dependable source of 

credit and related services for agriculture and rural America. Policy 

and regulation development activities include the analysis of policy 

and strategic risks to the System on 

the basis of economic trends and 

other risk factors. ORP also evaluates all regulatory and statutory prior 

approvals for System institutions 

on behalf of the FCA Board, including chartering and other corporate 

approvals as well as funding approvals.

APPENDIX
60

Farm Credit Administration 2008 Annual Report on the Farm Credit System

The Office of Management Services (OMS) manages and delivers 

the Agency’s information technology, financial, human capital, and 

administrative services. The office 

coordinates planning efforts, including information resources management, security, human capital, and 

financial plans for the Agency. By 

centrally planning, managing, and 

delivering resource services, OMS 

enables the Agency’s program offices 

to fully focus their time and attention 

on their respective mission-related 

responsibilities.

The Office of Secondary Market 

Oversight (OSMO) provides for the 

examination, regulation, and supervision of the activities of Farmer Mac 

to ensure its safety and soundness 

and the accomplishment of its public 

policy purpose as authorized by 

Congress. OSMO also ensures that 

Farmer Mac complies with applicable 

laws and regulations, and it manages 

FCA’s enforcement activities with 

respect to Farmer Mac.

Figure 14

FCA Organizational Structure

As of December 31, 2008
61

AGENCY OFFICIALS 

Carl A. 

Clinefelter is the 

Inspector General 

of FCA. Before 

assuming this 

position in July 

2005, he concurrently served as 

Acting Director 

of the Office of 

Communications and Public Affairs 

and the Office of Congressional and 

Legislative Affairs. Prior to this, 

Mr. Clinefelter served as Director 

of the Office of the Ombudsman, 

Director of the Office of Secondary Market Oversight, Executive 

Assistant to FCA Board Member 

Doyle Cook, Assistant Director of 

the Office of Policy and Analysis, a 

regional supervisory officer in the 

Office of Supervision, and an Associate Regional Director in the Office 

of Examination and Supervision. 

Before joining FCA in 1980, he was 

employed by the Federal Intermediate Credit Bank of New Orleans as 

assistant vice president. 

S. Robert 

Coleman is Director of the Office 

of Secondary 

Market Oversight. 

Before assuming 

this position in 

September 2005, 

Mr. Coleman 

served as the 

Director of the Agency’s Regulation 

and Policy Division. Mr. Coleman 

joined FCA in 1986 as an examiner 

in the Office of Examination. He held 

various positions in that office, providing technical and analytical support to the FCA field offices and in 

the Policy Development and Planning 

Division. During this period, Mr. 

Coleman completed the commissioning program and became a commissioned examiner in 1990. In 1994, Mr. 

Coleman transferred to the Office of 

Policy Analysis, where he served as a 

policy analyst specializing in regulation development, and then as a 

senior policy analyst. He was named 

Director of the Regulation and Policy 

Division in June 2003. 

William J. 

Hoffman is Chief 

Operating Officer, responsible 

for planning, 

organizing, and 

directing a range 

of Agency functions. Before 

assuming this 

position in July 2008, Mr. Hoffman 

was Executive Assistant to Board 

Member and former Chairman and 

CEO Nancy C. Pellett. Prior to this, 

he served as the Associate Director 

for Examination and Supervision 

in the Office of Secondary Market 

Oversight, which oversees the Federal Agricultural Mortgage Corporation. He began his career as a credit 

representative in the Louisville Farm 

Credit District. Mr. Hoffman first 

joined FCA in 1976 as a credit and 

operations officer and went on to 

work in various divisions of the 

Office of Supervision. In 1980 he 

became director of the Eastern Division, Office of Supervision, where he 

served for four years before being 

named Associate Deputy Governor 

for the Office of Examination and 

Supervision. In 1986 he joined the St. 

Louis Farm Credit Bank as vice president of risk assets. He later was the 

CEO of PennWest Farm Credit, ACA, 

which served western Pennsylvania. 

Before rejoining FCA in 2004, he was 

involved in agricultural finance in 

the private sector and several international projects. 

Andrew D. Jacob,

CFA, is Director 

of the Office of 

Regulatory Policy. 

Before being 

named to this 

position in July 

2005, he served 

as the Director of 

the Office of Secondary Market Oversight, a position 

he assumed in 2004. Mr. Jacob joined 

the Agency in 1986 as a credit examiner in the Sacramento field office. In 

1988, he transferred to FCA’s headquarters in McLean, Virginia, where 

he served as a commissioned FCA 

examiner, as an information systems 

examiner, and as a capital markets 

specialist in the Office of Examination. In 1997, he transferred to the 

Office of Policy and Analysis, where 
62

Farm Credit Administration 2008 Annual Report on the Farm Credit System

he served as a senior policy analyst 

and a senior financial analyst before 

becoming the Assistant Director of 

the office in 1999. Mr. Jacob holds 

the Chartered Financial Analyst 

(CFA) designation, which the CFA 

Institute awarded him in 2000.

Mark McBeth

is the Executive Assistant 

to Leland A. 

Strom, Chairman and CEO of 

FCA. His duties 

include advising 

the Chairman on 

policy, administrative, and 

management issues affecting FCA, 

the FCS, and the Farm Credit System 

Insurance Corporation. Mr. McBeth 

began his career with the former 

Farm Credit Banks of Omaha where 

he was director of public relations 

from 1973 to 1980. In 1980 he joined 

FCA, and his experience includes 

serving as a commissioned examiner 

in the Enforcement Division. Other 

positions Mr. McBeth held within the 

Agency include Assistant Director of 

the Office of Congressional and Public Affairs and, more recently, Executive Assistant to FCA Board Member 

Douglas L. Flory. Mr. McBeth also 

served as Executive Assistant to 

Leland Strom prior to Mr. Strom’s 

appointment as Chairman and CEO.

Thomas G. 

McKenzie is Chief 

Examiner and 

Director of the 

Office of Examination. Before his 

current position, he 

served as Director of the Office of 

Secondary Market 

Oversight and as Director of the 

Office of Policy and Analysis; he 

has also held Regional and Division 

Director positions in the Office of 

Examination and the former Office of 

Supervision. As a Regional Director 

he oversaw field office operations in 

Albany, Atlanta, Dallas, Denver, and 

Sacramento. Before joining FCA in 

1979, he was a regional manager for 

a Federal Land Bank; a manager and 

CEO of a Federal Land Bank Association; and a financial analyst for 

a Bank for Cooperatives, where he 

began his career in agricultural credit 

in 1971.

Charles R. Rawls 

is the FCA General Counsel. 

Before joining FCA 

in March 2003, 

he was general 

counsel and vice 

president for legal, 

tax, and accounting at the National 

Council of Farmer Cooperatives. 

During the consideration of the 2002 

farm bill, he served as the General 

Counsel of the Senate Committee on 

Agriculture, Nutrition, and Forestry. 

From 1998 to 2001, he was General 

Counsel for the USDA, and from 

1993 to 1998 he was Chief of Staff to 

the Deputy Secretary of Agriculture. 

From 1988 to 1993, he was Legislative Director and then Administrative 

Assistant to Congressman Martin 

Lancaster. From 1985 to 1988, he 

was Associate General Counsel of 

the House Committee on Agriculture. He was Counsel to the House 

Agriculture Subcommittee on Forests, 

Family Farms, and Energy from 1983 

to 1985. 

Roland E. Smith

became Secretary to the FCA 

Board in January 

2006. He began 

his career with 

the FCS in 1974, 

when he became 

a loan officer for 

a System association in Greenville, North Carolina. He later served 

as a loan officer and credit reviewer 

for the Farm Credit Banks of Columbia, South Carolina. In 1979, Mr. 

Smith joined FCA as an examiner in 

the St. Louis field office. In 1984, he 

was promoted to Associate Regional 

Director. He later managed FCA’s 

Oklahoma City field office and then 

the Denver field office. In 1996, Mr. 

Smith was named Chief Examiner 

and Director of the Office of Examination. He served as the Agency’s 

Executive Director of Planning and 

Projects from August 2004 until January 2006.
63

Michael Stokke

is Director of the 

Office of Congressional and 

Public Affairs. 

Prior to joining 

FCA, Mr. Stokke 

was founder 

and president of 

Prairie Strategies, 

a consulting firm based in Illinois, 

where he advised corporations and 

nonprofit organizations. He served 

as Deputy Chief of Staff to former 

Speaker of the House Dennis Hastert 

from February 1998 to October 2007. 

Prior to this, Mr. Stokke served as 

Chief of Staff for the Office of the 

Speaker in the Illinois House of Representatives from 1995 to 1998. He 

served as Chief of Staff for Representative Thomas W. Ewing of Illinois 

from 1991 through 1994. From 1984 

to 1991, he was Assistant Director 

of Personnel for the Office of the 

Governor of Illinois. He also served 

as Assistant to the Secretary of the 

Illinois Department of Transportation 

from 1985 to 1987.

Stephen G. 

Smith is the 

Chief Financial Officer and 

Director of the 

Office of Management Services. 

Before accepting this position, he served 

as the Agency’s Inspector General. 

He joined FCA in 1981 as a technical specialist, became an examiner in 

1984, and later served as staff assistant for the Chief Examiner. In 1989, 

he was named Associate Regional 

Director for the Agency’s New York 

field office and then served as Senior 

Staff Director for the Chief Examiner 

before being named Director of the 

Technical and Operations Division. In 

1993, he assumed new responsibilities as Director of the Information 

Resources Division. He was named 

Chief Information Officer in 1996, 

directing all technology and information operations for FCA. Before 

joining the Agency, he worked at the 

North Central Jersey Farm Credit 

Associations. 
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Farm Credit Administration 2008 Annual Report on the Farm Credit System

GLOSSARY 

A

Agricultural Credit Association—An 

ACA results from the merger of a 

Federal Land Bank Association or an 

FLCA and a PCA and has the combined authority of the two institutions. An ACA borrows funds from 

an FCB or ACB to provide short-, 

intermediate-, and long-term credit 

to farmers, ranchers, and producers 

and harvesters of aquatic products. It 

also makes loans to these borrowers 

for certain processing and marketing activities, to rural residents for 

housing, and to certain farm-related 

businesses. 

Agricultural Credit Bank—An ACB 

results from the merger of a Farm 

Credit Bank and a Bank for Cooperatives and has the combined authorities of those two institutions. An 

ACB is also authorized to finance 

U.S. agricultural exports and provide 

international banking services for 

farmer-owned cooperatives. CoBank 

is the only ACB in the FCS. 

B 

Bank for Cooperatives—A BC provided lending and other financial services to farmer-owned cooperatives, 

rural utilities (electric and telephone), 

and rural sewer and water systems. 

It was also authorized to finance 

U.S. agricultural exports and provide 

international banking services for 

farmer-owned cooperatives. The last 

remaining BC in the FCS, the St. Paul 

Bank for Cooperatives, merged with 

CoBank on July 1, 1999. 

F 

Farm Credit Act—The Farm Credit 

Act of 1971, as amended, (12 U.S.C. 

§§ 2001–2279cc) is the statute under 

which the FCS operates. The Farm 

Credit Act recodified all previous 

acts governing the FCS. 

Farm Credit Bank—FCBs provide 

services and funds to local associations that, in turn, lend those funds 

to farmers, ranchers, producers and 

harvesters of aquatic products, rural 

residents for housing, and some agriculture-related businesses. On July 

6, 1988, the Federal Land Bank and 

the Federal Intermediate Credit Bank 

in 11 of the 12 then-existing Farm 

Credit districts merged to become 

FCBs. The mergers were required 

by the Agricultural Credit Act of 

1987. Currently there are four FCBs: 

AgFirst Farm Credit Bank; AgriBank, 

FCB; Farm Credit Bank of Texas; and 

U.S. AgBank, FCB. 

Farm Credit Leasing Services 

Corporation—The Leasing Corporation is a service entity owned by 

CoBank, ACB. It provides equipment leasing and related services to 

eligible borrowers, including agricultural producers, cooperatives, and 

rural utilities. 

Farm Credit System Insurance 

Corporation—FCSIC was established 

by the Agricultural Credit Act of 

1987 as an independent U.S. Government-controlled corporation. Its purpose is to ensure the timely payment 

of principal and interest on insured 

notes, bonds, and other obligations 

issued on behalf of FCS banks and to 

act as conservator or receiver of FCS 

institutions. The FCA Board serves ex 

officio as the Board of Directors for 

FCSIC. The chairman of the FCSIC 

board of directors must be an FCA 

Board member other than the current 

Chairman of the FCA Board. 

Federal Agricultural Mortgage 

Corporation—Farmer Mac was created with the enactment of the Agricultural Credit Act of 1987 to provide 

a secondary market for agricultural 

real estate and rural housing mortgage loans. 

Federal Farm Credit Banks Funding 

Corporation—The Funding Corporation, based in Jersey City, New Jersey, manages the sale of Systemwide 

debt securities to finance the loans 

made by FCS institutions. It uses a 

network of bond dealers to market 

its securities. 

Federal Intermediate Credit Bank—

The Agricultural Credits Act of 

1923 provided for the creation of 12 

FICBs to discount farmers’ shortand intermediate-term notes made 

by commercial banks, livestock loan 

companies, and thrift institutions. 

The Farm Credit Act of 1933 autho-
65

rized farmers to organize PCAs, 

which could discount notes with 

FICBs. As a result, PCAs became 

the primary entities for delivery of 

short- and intermediate-term credit to 

farmers and ranchers. The FICBs and 

the Federal Land Banks in all Farm 

Credit districts merged to become 

FCBs or the ACB. Thus, no FICBs 

remain within the FCS. 

Federal Land Bank—The Federal 

Farm Loan Act of 1916 provided for 

the establishment of 12 Federal Land 

Banks to provide long-term mortgage credit to farmers and ranchers, 

and later to rural home buyers. All 

Federal Land Banks and FICBs have 

merged to become FCBs or part of 

the ACB. Thus, no Federal Land 

Banks remain. 

Federal Land Bank Association—

These associations were lending 

agents for FCBs. Federal Land Bank 

Associations made and serviced 

long-term mortgage loans to farmers, ranchers, and rural residents for 

housing. The associations did not 

own loan assets but made loans only 

on behalf of the FCB with which 

they were affiliated. As of October 1, 

2000, there were no remaining Federal Land Bank Associations serving 

as lending agents for FCBs. 

Federal Land Credit Association—An FLCA is a Federal Land 

Bank Association that owns its loan 

assets. An FLCA borrows funds from 

an FCB to make and service longterm loans to farmers, ranchers, and 

producers and harvesters of aquatic 

products. It also makes and services 

housing loans for rural residents. 

Financial Institution Rating System—The FIRS is similar to the 

Uniform Financial Institutions Rating 

System used by other Federal banking regulators. However, unlike the 

Uniform Financial Institutions Rating 

System, the FIRS was designed to 

reflect the nondepository nature of 

FCS institutions. The FIRS provides 

a general framework for assimilating 

and evaluating all significant financial, asset quality, and management 

factors to assign a composite rating 

to each System institution. The ratings are described below.

• Rating 1—Institutions in this 

group are basically sound in 

every respect; any negative findings or comments are of a minor 

nature and are anticipated to be 

resolved in the normal course 

of business. Such institutions 

are well managed, resistant to 

external economic and financial 

disturbances, and more capable 

of withstanding the uncertainties of business conditions than 

institutions with lower ratings. 

Each institution in this category 

exhibits the best performance and 

risk management practices for its 

size, complexity, and risk profile. 

These institutions give no cause 

for regulatory concern. 

• Rating 2—Institutions in this 

group are fundamentally sound 

but may reflect modest weaknesses correctable in the normal 

course of business. Since the 

nature and severity of deficiencies are not material, such 

institutions are stable and able 

to withstand business fluctuations. Overall risk management 

practices are satisfactory for the 

size, complexity, and risk profile 

of each institution in this group. 

While areas of weakness could 

develop into conditions of greater 

concern, regulatory response is 

limited to the extent that minor 

adjustments are resolved in the 

normal course of business and 

operations continue in a satisfactory manner.

• Rating 3—Institutions in this 

category exhibit a combination 

of financial, management, operational, or compliance weaknesses 

ranging from moderately severe 

to unsatisfactory. When weaknesses relate to asset quality or 

financial condition, such institutions may be vulnerable to the 

onset of adverse business conditions and could easily deteriorate 

if concerted action is not effective in correcting the areas of 

weakness. Institutions that are in 

significant noncompliance with 

laws and regulations may also be 

accorded this rating. Risk management practices are less than 

satisfactory for the size, complexity, and risk profile of each 

institution in this group. Institutions in this category generally 

give cause for regulatory concern 

and require more than normal 
66

Farm Credit Administration 2008 Annual Report on the Farm Credit System

supervision to address deficiencies. Overall strength and financial capacity, however, still make 

failure only a remote possibility 

if corrective actions are implemented. 

• Rating 4—Institutions in this 

group have an immoderate 

number of serious financial or 

operating weaknesses. Serious 

problems or unsafe and unsound 

conditions exist that are not 

being satisfactorily addressed or 

resolved. Unless effective actions 

are taken to correct these conditions, they are likely to develop 

into a situation that will impair 

future viability or constitute a 

threat to the interests of investors, borrowers, and stockholders. 

Risk management practices are 

generally unacceptable for the 

size, complexity, and risk profile 

of each institution in this group. 

A potential for failure is present but is not yet imminent or 

pronounced. Institutions in this 

category require close regulatory 

attention, financial surveillance, 

and a definitive plan for corrective action. 

• Rating 5—This category is 

reserved for institutions with 

an extremely high, immediate, or near-term probability of 

failure. The number and severity of weaknesses or unsafe and 

unsound conditions are so critical 

as to require urgent external 

financial assistance. Risk management practices are inadequate 

for the size, complexity, and risk 

profile of each institution in this 

group. In the absence of decisive 

corrective measures, these institutions will likely require liquidation or some form of emergency 

assistance, merger, or acquisition. 

G

Government-sponsored enterprise—

A GSE is typically a federally chartered corporation that is privately 

owned, designed to provide a source 

of credit nationwide, and limited to 

servicing one economic sector. Each 

GSE has a public or social purpose.

GSEs are usually created because 

the private markets did not satisfy 

a purpose that Congress deems 

worthy—either to fill a credit gap or 

to enhance competitive behavior in 

the loan market. Each is given certain 

features or benefits (called GSE attributes) to allow it to overcome the 

barriers that prevented purely private 

markets from developing. In some 

cases, the GSE receives public assistance only to get started; in other 

cases, the assistance is ongoing. The 

FCS is the oldest financial GSE. 

P 

Participation—A loan participation is 

usually a large loan in which two or 

more lenders share in providing loan 

funds to a borrower to manage credit 

risk or overcome a legal lending limit 

for a single credit. One of the participating lenders originates, services, 

and documents the loan. Generally, 

the borrower deals with the institution originating the loan and is not 

aware of the other participating 

institutions. 

Production Credit Association—

PCAs are FCS entities that deliver 

only short- and intermediate-term 

loans to farmers and ranchers. A 

PCA borrows money from its FCB to 

lend to farmers. PCAs also own their 

loan assets. As of January 1, 2003, all 

PCAs were eliminated as independent, stand-alone, direct-lender associations. All PCAs are now subsidiaries of ACAs. 

S 

Syndication—A loan syndication 

(or “syndicated bank facility”) is a 

large loan in which a group of banks 

work together to provide funds for 

a borrower. Usually one bank takes 

the lead, acting as an agent for all 

syndicate members and serving as 

the focal point between them and the 

borrower. All syndicate members are 

known at the outset to the borrower 

and they each have a contractual 

interest in the loan. 
67

ACA—Agricultural Credit 

Association

ACB—Agricultural Credit Bank

AMBS—agricultural mortgagebacked securities 

CAMELS—capital, assets, 

management, earnings, liquidity, 

and sensitivity

CEO—chief executive officer 

Farm Credit Act, the Act—Farm 

Credit Act of 1971, as amended

Farmer Mac—Federal Agricultural 

Mortgage Corporation 

FCA—Farm Credit Administration

FCB—Farm Credit Bank

FCS—Farm Credit System

FCSIC—Farm Credit System 

Insurance Corporation

FIRS—Financial Institution Rating 

System

FLCA—Federal Land Credit 

Association

FSA—Farm Service Agency

GAAP—generally accepted 

accounting principles

GSE—Government-sponsored 

enterprise

OFIs—other financing institutions

PCA—Production Credit Association 

RBC—Risk-Based Capital (Model) 

RBIC—rural business investment 

company

SBA—Small Business Administration

USDA—U.S. Department of 

Agriculture

WTO—World Trade Organization

YBS—young, beginning, and small 

(farmers and ranchers)

ACRONYMS AND ABBREVIATIONS
68

Farm Credit Administration 2008 Annual Report on the Farm Credit System

The Farm Credit Administration 2008 Annual Report on the Farm Credit System is available on FCA’s Web site at 

www.fca.gov. For questions about this publication, contact 

Office of Congressional and Public Affairs 

Farm Credit Administration 

1501 Farm Credit Drive 

McLean, VA 22102-5090 

Telephone: 703-883-4056 

Fax: 703-790-3260 

E-mail: info-line@fca.gov 

The Federal Farm Credit Banks Funding Corporation prepares the financial press releases, the System’s Annual and 

Quarterly Information Statements, and the System’s combined financial statements contained therein, with the support of the System banks. These documents are available on the Funding Corporation’s Web site at www.farmcreditffcb.com. Copies can also be obtained from 

Federal Farm Credit Banks Funding Corporation 

10 Exchange Place, Suite 1401

Jersey City, NJ 07302

Telephone: 201-200-8000 

The Farm Credit System Insurance Corporation’s annual report is available on its Web site at www.fcsic.gov. Copies 

of this report can also be obtained from 

Farm Credit System Insurance Corporation 

1501 Farm Credit Drive 

McLean, VA 22102 

Telephone: 703-883-4380

ADDITIONAL INFORMATION