2009 Annual Report

on the Farm Credit System by the 

FARM CREDIT ADMINISTRATION

Regulator of the FCS
Statement of the Chairman and CEO 2 

 

Farm Credit Administration 4

Overview and 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	 17

	 Funding for Other Lenders	 20

	 Market Share of Debt	 21

	 Farmer Mac as a Secondary Market	 23

Serving Young, Beginning, and Small Farmers and Ranchers 25

	 YBS Lending Results	 25

	 Assessment of YBS Results for Individual Associations	 28

	 YBS Borrowing Trends, 2001–2009	 28

	 YBS Programs	 31

Regulatory Policy and Approvals 33

	 Regulatory Activity in 2009	 33

	 Corporate Activity in 2009	 35

	 Funding Activity in 2009	 37

	 Mission-Related Investments	 38

Maintaining a Dependable Source of Credit for Farmers and Ranchers 41

	 Conducting a Risk-Based Examination and Oversight Program	 41

	 Meeting Statutory Examination Requirements	 41

	 Identifying and Responding to Potential Threats to Safety and Soundness	 41

	 Measuring the System’s Safety and Soundness	 42

	 Providing Differential Supervision and Enforcement	 44

	 Working with Financially Stressed Borrowers	 45

CONTENTS
Farm Credit Administration 2009 Annual Report on the Farm Credit System 

Condition of Farmer Mac 46

Capital 46

	 Program Activity	 49

	 Asset Quality	 49

	 Earnings	 50

Challenges Facing the Agricultural Economy and the Farm Credit System 53

	 Prospects for the General Economy	 53

	 Economic Setting for Agriculture and Credit	 55

	 Growing Credit Risk in the System’s Portfolio	 58

Appendix 60

	 FCA Offices	 60

	 Agency Officials	 62
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 2009 Annual Report on the Farm Credit System 

STATEMENT OF THE CHAIRMAN AND CEO

May 2010

Dear Reader,

On behalf of the Board and the dedicated employees of the Farm Credit Administration, I present the 2009 Annual 

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

I am pleased to report that, despite a very challenging year for the credit markets, the System’s overall condition 

and performance remained sound in 2009. It is well positioned to withstand the continuing challenges posed by the 

general economy and by stress in some sectors of the agricultural economy. 

Access to Funding Improved, Loan Growth Declined in 2009

Early in 2009, the System faced increased funding costs, limited access to term funding, and extreme market turmoil. 

However, because of the strong condition of the System and its status as a Government-sponsored enterprise (GSE), 

it was able to continue to issue short-term debt securities. As the year progressed, market access for term financing 

steadily improved, and, despite relatively wider spreads to Treasury, interest rates were generally low. By the end of 

the year, the improved economic and financial market conditions afforded the System good access to funding across 

the yield curve, with narrower spreads than at the beginning of the year. System banks added high-quality liquid 

assets to their investment portfolios to ensure sufficient liquidity in the event of another market disruption. 

Also noteworthy in 2009, we saw several years of double-digit loan growth in the System come to an end. Growth 

was basically flat for the year. Not only was loan demand down, but System institutions further controlled and 

managed loan growth by focusing their lending activities in their local service areas and by adjusting loan structure, 

payment terms, and pricing to better reflect risk and market conditions. Despite the decline in its growth, the System 

had another year of solid earnings, with a combined net income of $2.85 billion. That was a significant accomplishment in a challenging environment and reflects the System’s effectiveness in managing some difficult credit situations, particularly in the dairy, hog, and ethanol segments of the loan portfolio. The System also maintained appropriate asset/liability management practices while continuing to strengthen its capital position. Its capital as a percentage of assets grew from 12.7 percent at December 31, 2008, to 13.9 percent at the end of 2009. 

FCA Increases Supervision and Enforcement Activities 

Because of the difficult economic environment, some of the System’s key performance measures have weakened. 

As a result, FCA has increased its supervisory activities and enforcement actions. As of December 31, 2009, we had 

10 associations under special supervision, whose assets totaled $3.6 billion, amounting to less than 2 percent of the 

System’s total assets. During the year, FCA also entered into formal written agreements with two associations, whose 

assets totaled $423 million at the end of 2009. 

During the past year, FCA conducted special studies on distressed agricultural industries to assess emerging risks 

that may impact the System. The studies identified concentrations within institutions, trends, and recent structural 

changes in these industries. The studies also provided an update on each industry’s economic conditions, credit situation, and outlook. 

With the more difficult economic environment, we also increased our communication to the System on safety and 

soundness issues during 2009. For example, we issued an Informational Memorandum on confronting the increased 

risk environment, and we provided other guidance addressing such issues as executive compensation, responding to 

local financial institution failures, and financing land in transition. 
3

YBS Lending Declines in Step with Overall System Lending 

The FCS is required to offer programs to provide credit and related services to young, beginning, and small (YBS) 

farmers and ranchers. Through these programs, FCS associations may offer lower interest rates and less stringent 

underwriting standards, such as high loan-to-value ratios or lower debt coverage requirements, to make it easier for 

potential YBS borrowers to qualify for loans. 

While loans outstanding at year end to farmers in the young and beginning categories continued to increase in both 

dollars and numbers, loans made (both dollars and numbers) in calendar year 2009 to young, beginning, and small 

farmers declined for the first time in several years. Loan volume outstanding to small farmers edged higher while 

loan numbers dipped at year end. The System’s decreased YBS lending activity (new loans plus loan renewals) during 2009 was in step with declines in its non-YBS lending activity. 

Since 2001, trends in the System’s YBS lending volume have nearly kept pace with the System’s strong loan growth. 

As a percentage of total loans outstanding, loans outstanding in each of the three categories have dipped just a few 

points or remained relatively flat. This trend has occurred in spite of the general decline in the number of YBS farm 

operators in the general farming population, suggesting that the System has continued to serve the needs of YBS 

farmers.

Borrower Complaints Increased as Economy Deteriorated

Under provisions of the Farm Credit Act, the FCS provides borrowers certain rights when they apply for loans and 

when they have difficulty repaying loans. FCA enforces borrower rights and examines institutions to make sure they 

are complying with these provisions. It also receives and reviews complaints from borrowers regarding their rights 

as borrowers. 

When the economy began deteriorating and affecting FCS borrowers, FCA began receiving more 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. 

FCA Remains Committed to Its Mission 

As the regulator of the FCS, FCA will continue working to ensure that the System remains safe and sound by providing appropriate guidance and maintaining strong examination and supervisory programs. We are continuing to 

focus the resources necessary for adequate oversight, to take proactive measures to safeguard institutions, and to 

identify emerging risks across institutions. FCA must ensure that FCS institutions have the governance, policies, procedures, and management controls to effectively identify and manage risks. 

As agriculture and rural America continue to contend with a challenging economic environment, 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 current and future generations of 

farmers and ranchers and the rural areas in which they live. 

Sincerely,

Leland A. Strom
4

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

FARM CREDIT ADMINISTRATION

OVERVIEW AND 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 

(12 U.S.C. 2001-2279cc). 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, operate 

safely and soundly and comply 

with applicable laws 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 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. FCA also approves 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, regulatory agenda, and 

supervisory and examination 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.
5

Leland A. Strom is Chairman of the 

Board and CEO of the Farm Credit 

Administration. Mr. Strom was 

appointed to a six-year term on 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.

Leland A. “Lee” Strom

Chairman and CEO

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 

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 the 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.

Mr. Strom studied agriculture business at Kishwaukee College and 

business administration at Northern 

Illinois University. 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.
6

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

Kenneth A. Spearman was appointed 

to the FCA Board by President 

Barack Obama on October 13, 2009. 

He was appointed for the balance of 

Dallas Tonsager’s term and reappointed for a full six-year term that 

expires on May 21, 2016. 

Mr. Spearman 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 Farm Credit System banks.

Mr. Spearman brings to his position on the FCA Board many years 

of experience in finance, agriculture, 

and agricultural cooperatives. He 

spent 28 years in the citrus industry. 

From 1980 to 1991, he was controller of Citrus Central, a $100 million 

cooperative in Orlando, Florida, 

where he was responsible for financial management and reporting and 

the supervision of staff accountants.

He later served as director of internal 

audit for Florida’s Natural Growers, 

where he designed and implemented 

the annual plan for reviewing and 

appraising the soundness, adequacy, 

and application of accounting, financial, and other operating internal 

controls.

 

From January 2006 until his appointment to the FCA Board, Mr. Spearman served as an appointed outside 

director on the AgFirst Farm Credit 

Bank board in Columbia, South Carolina. During his tenure, he served on 

the board compensation committee 

and the board governance committee. 

Before entering agriculture, Mr. 

Spearman was involved with development of a public accounting firm 

in Chicago, Illinois, and worked as 

an accountant for a major public 

accounting firm. He served as chairman of the board of trustees for the 

Lake Wales Medical Center. He is a 

member of the Institute of Internal 

Auditors, as well as the National 

Society of Accountants for Cooperatives, where he served at one time as 

president. 

He obtained his master’s degree in 

business administration from Governors State University in University 

Park, Illinois, and his B.S. in accounting from Indiana University.

Mr. Spearman and his wife Maria of 

Winter Haven, Florida, have three 

children—twin daughters, Michelle 

Springs and Rochelle Puccia, and a 

son, Dr. Kenneth Spearman. 

Kenneth A. Spearman

Board Member
7

Jill Long Thompson

Board Member

Jill Long Thompson was appointed to 

the FCA Board by President Barack 

Obama on March 27, 2010. Her recess 

appointment is effective through the 

end of the 2011 legislative session. 

She 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 

System banks.

Ms. Long Thompson brings to her 

position on the FCA Board many 

years of leadership experience. From 

1989 to 1995, she represented northeast Indiana as a Member of the U.S. 

House of Representatives, serving on 

the Agriculture Committee and the 

Committee on Veterans’ Affairs. As 

congresswoman, she introduced one 

of the nation’s first pieces of legislation banning members of Congress 

from accepting gifts; this legislation 

also expanded disclosure requirements for lobbying activities. 

From 1995 to 2001, she served as 

Under Secretary for Rural Development in the U.S. Department of 

Agriculture, where she oversaw an 

annual budget of $10 billion and 

a staff of 7,000 employees. In this 

position, she managed programs that 

provide services to the underserved 

areas of rural America.

In addition, Ms. Long Thompson 

served as chief executive officer and 

senior fellow at the National Center 

for Food and Agricultural Policy, a 

nonprofit research and policy organization in Washington, D.C.

The first and only woman to be 

nominated by a major party to run 

for Governor of Indiana, Ms. Long 

Thompson is also the first and only 

Hoosier woman to be nominated 

by a major party to run for the U.S. 

Senate. She was nominated by the 

President on October 15, 2009, for a 

term on the Farm Credit Administration Board ending May 21, 2014, 

and is awaiting confirmation by the 

United States Senate.

 

Ms. Long Thompson also has many 

years of experience as an educator, having taught at Indiana University, Valparaiso University, and 

Manchester College. She is also a 

former fellow at the Institute of 

Politics at Harvard University’s John 

F. Kennedy School of Government. 

She holds the M.B.A. and Ph.D. in 

Business from the Kelley School of 

Business at Indiana University and a 

B.S. in Business Administration from 

Valparaiso University. 

Ms. Long Thompson grew up on a 

family farm outside of Larwill, Indiana; today she lives with her husband Don Thompson on a farm near 

Argos, Indiana. 

Note: Ms. Long Thompson’s position on the FCA Board was previously held by Nancy C. Pellett, who was appointed to the FCA Board by President George 

W. Bush on November 26, 2002. From May 2004 to May 2008, Ms. Pellett served as Chairman and CEO of FCA. She continued as a member of the Board 

until Ms. Long Thompson’s appointment in March 2010.
8

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

FCS ROLE AND STRUCTURE

The Farm Credit System is a network of borrower-owned cooperative financial institutions and service 

organizations 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 Government-sponsored 

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; its Systemwide debt funding 

is subject to FCA approval. The U.S. 

Government does not guarantee the 

securities issued by the System.

As of December 31, 2009, the System 

was composed of 94 banks and associations. Loan funds were provided 

to 82 Agricultural Credit Association 

(ACA) parent organizations2 and 

Farm Credit System—An Overview of Events and Conditions

7 stand-alone Federal Land Credit 

Associations (FLCAs) by the following five banks:

• CoBank, ACB 

• AgriBank, FCB 

• U.S. AgBank, FCB

• AgFirst Farm Credit Bank

• Farm Credit Bank of Texas

An ACA can make short-, intermediate-, and long-term loans; an FLCA 

can make only long-term real estate 

loans. Under the Farm Credit Act of 

1971, the FLCA is exempt from State 

and Federal income taxes.

CoBank, 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 four affiliated ACAs, 

which serve New York, New Jersey, 

Connecticut, Rhode Island, Maine, 

Massachusetts, New Hampshire, Vermont, Alaska, Oregon, Washington, 

Montana, and Idaho.

Several structural changes occurred 

at the association level in early January 2010. A merger of two ACAs 

took effect on January 1, 2010, 

reducing the number of ACAs to 81. 

Most of the remaining changes were 

related to amendments to the Farm 

Credit Act contained in the 2008 

Farm Bill, which took effect January 

1, 2010. 

Section 7.7 of the Farm Credit Act 

now authorizes FCA to convert the 

charters of certain FLCAs to those of 

ACAs with subsidiaries, amend the 

charters of certain ACAs, and thus 

equalize the loan-making power of 

associations serving the states of Alabama, Mississippi, and most of Louisiana. FCA’s implementation of section 7.7 occurred on January 4, 2010, 

and, as a consequence, the number of 

ACAs increased to 85 while the number of FLCAs fell to 3. Overall, the 

number of banks and associations as 

of January 4, 2010, was 93.

Each ACA contains two subsidiaries, a Production Credit Association, 

which can make only short- and 

intermediate-term loans, and an 

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

wholly owned PCA and FLCA as 

subsidiaries, accounted for 92 percent 

of all associations as of December 31, 

2009, and 97 percent of all associations as of January 4, 2010. The ACA 

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.
9

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. For most regulatory and examination purposes, FCA treats the ACA 

and its subsidiaries as a single entity; 

however, the Agency has retained 

discretion to treat the parent and 

subsidiaries as separate entities if the 

Agency deems it to be appropriate. 

The ACA’s parent-subsidiary structure enables the ACA to preserve the 

tax-exempt status of the FLCA. Its 

structure offers several other benefits 

as well. 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. 

FCA 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 Farm 

Credit 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. AgVantis, Inc., which provides 

technology-related and other support services to the associations 

affiliated with U.S. AgBank, FCB. 

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), which provides 

a secondary market arrangement for 

agricultural real estate loans, Government-guaranteed portions of certain 

loans, rural housing mortgage loans, 

and eligible rural utility cooperative 

loans. These secondary market activities are intended to provide greater 

liquidity and lending capacity to 

agricultural lenders. Farmer Mac is 

established in the Farm Credit Act as 

a federally chartered instrumentality 

and an institution of the FCS. However, it 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 investorowned corporation, not a memberowned cooperative. Investors in 

voting stock may include commercial 

banks, insurance companies, other 

financial organizations, and FCS 

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.
10

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

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. For more information 

about Farmer Mac, see “Condition of 

Farmer Mac” on page 46.

When Congress established the FCS, 

its purpose was to provide a permanent, reliable source of constructive 

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 

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 to assist farmers who are 

unable to meet normal underwriting 

requirements.

FINANCIAL CONDITION 

OF THE FCS4

The overall condition and performance of the FCS remained safe and 

sound during 2009. Earnings, assets, 

and capital levels indicate that the 

System remains in a solid financial 

position despite continuing pressures in certain farm sectors and the 

general economy. See tables 1 and 2 

for a breakdown of major financial 

indicators of the FCS. While the overall FCS remained financially sound, 

some individual FCS institutions’ 

condition and performance declined. 

FCA addressed these declines by 

increasing its supervision of these 

institutions, which resulted in 

enforcement actions for some entities. 

More detailed information on the 

System’s performance and condition 

may be found in the 2009 Annual 

Information Statement of the Farm 

Credit System, located on the website 

of the Federal Farm Credit Banks 

Funding Corporation at 

www.farmcredit-ffcb.com. 

The economic environment for the 

System is expected to improve in 

2010 because of stronger global 

demand for agricultural commodities. 

Some industries experiencing severe 

stress in 2009—in particular swine, 

dairy, poultry, and ethanol—may 

see better profits in 2010. Nevertheless, after several quarters of losses, 

many of these producers will remain 

financially vulnerable, and some crop 

producers may face lower profit margins in 2010. In addition, sectors such 

as the forestry and nursery industries 

were particularly affected by the 

overall downturn in the general U.S. 

economy and the housing market. 

Although farmland prices have weakened somewhat, they have held up 

well despite the stress experienced in 

many sectors of the economy. However, they remain vulnerable to further decline depending on the pace 

of economic growth, agricultural net 

income, and future interest rates.

The unusual stress in the financial 

markets in late 2008 began to diminish in 2009, allowing certain segments of the capital markets to begin 

4. 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, 2009, 

and is presented on a combined basis reflecting eliminations of transactions between System entities.
11

Table 1	 	 	 	 	 	

Farm Credit System Major Financial Indicators, Annual Comparison 

As of December 31

Dollars in Thousands 

31-Dec-09 31-Dec-08 31-Dec-07 31-Dec-06 31-Dec-05

FCS Banks1

Gross loan volume	 152,412,187	 149,491,137	 131,191,826	 112,260,474	 94,865,873

Accruing restructured loans2 4,651	 5,125	 4,301	 5,378	 6,131

Accrual loans 90 days or more past due	 28,816	 21,594	 12,917	 5,439	 1,322

Nonaccrual loans	 759,134	 582,160	 46,069	 107,556	 152,223

Nonperforming loans/total loans3 0.52%	 0.41%	 0.05%	 0.11%	 0.17%

Cash and marketable investments	 39,305,172	 41,358,881	 34,408,807	 31,680,712	 27,788,225

Capital/assets4 5.59%	 4.89%	 5.43%	 5.65%	 6.20%

Unallocated retained earnings/assets	 2.80%	 2.50%	 2.69%	 2.95%	 3.28%

Net income	 1,442,328	 1,231,430	 981,688	 845,191	 740,785

Return on assets5 0.74%	 0.65%	 0.60%	 0.60%	 0.61%

Return on equity5 13.13%	 12.44%	 10.59%	 10.24%	 9.48%

Net interest margin	 1.17%	 0.97%	 0.83%	 0.80%	 0.84%

Operating expense rate6 0.33%	 0.31%	 0.30%	 0.33%	 0.33%

FCS Associations 

Gross loan volume	 118,575,715	 114,026,889	 105,620,488	 93,413,704	 83,253,781

Accruing restructured loans2 58,926	 30,381	 47,212	 51,384	 53,885

Accrual loans 90 days or more past due	 68,508	 68,856	 43,840	 19,504	 13,156

Nonaccrual loans	 2,631,604	 1,706,613	 465,414	 425,545	 371,703

Nonperforming loans/gross loans3 2.33%	 1.58%	 0.53%	 0.53%	 0.53%

Capital/assets7 15.82%	 15.46%	 15.57%	 16.27%	 17.19%

Unallocated retained earnings/assets	 14.56%	 13.51%	 13.58%	 13.89%	 14.79%

Net income	 1,589,151	 1,805,929	 1,934,968	 1,662,255	 1,613,346

Return on assets5 1.30%	 1.56%	 1.74%	 1.75%	 1.85%

Return on equity5 8.14%	 9.83%	 10.82%	 10.44%	 10.55%

Net interest margin	 2.64%	 2.50%	 2.57%	 2.64%	 2.71%

Operating expense rate6 1.46%	 1.45%	 1.49%	 1.58%	 1.53%

Total Farm Credit System8

Gross loan volume	 164,830,000	 161,423,000	 142,906,000	 123,436,000	 106,272,000

Nonperforming loans	 3,535,000	 2,416,000	 621,000	 615,000	 600,000

Nonaccrual loans	 3,369,000	 2,282,000	 512,000	 533,000	 524,000

Nonperforming loans/gross loans3 2.14%	 1.50%	 0.43%	 0.50%	 0.56%

Bonds and notes	 178,358,000	 179,769,000	 155,295,000	 134,466,000	 113,576,000

Capital/assets9 13.90%	 12.70%	 14.20%	 15.00%	 16.30%

Surplus/assets	 11.57%	 10.80%	 11.52%	 12.25%	 13.30%

Net income	 2,850,000	 2,916,000	 2,703,000	 2,379,000	 2,096,000

Return on assets5 1.33%	 1.44%	 1.56%	 1.59%	 1.61%

Return on equity5 9.92%	 10.63%	 10.44%	 10.06%	 9.43%

Net interest margin	 2.65%	 2.41%	 2.43%	 2.48%	 2.58% 

Sources: Farm Credit System Call Report as of December 31, 2009, and the Farm Credit System Annual Information Statement provided by the Federal 

Farm Credit Banks Funding Corporation. 

Note: Changes to previous periods occasionally occur for accounting reasons.

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

2. Excludes loans 90 days or more past due. 

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

4. Capital excludes mandatorily redeemable preferred stock. 

5. Income ratios are annualized. 

6. Operating expenses divided by average gross loans, annualized. 

7. Capital excludes protected borrower capital. 

8. Cannot be derived through summation of above categories because of intradistrict and intra-System eliminations used in reports to investors.

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

borrower capital. 
12

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

Table 2	 	 	 	 	 	 	 	 	 	

Farm Credit System Major Financial Indicators, by Districta 

As of December 31, 2009		 	 	 	 	 	 	 	 	

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	 30,867,544 21,327,319 217,307 32,292 9,184,625 838,707 864,827 1,580,330

AgriBank	 66,143,331 55,659,788 111,729 23,412 9,659,133 1,702,257 1,723,910 3,266,635

CoBank	 58,160,702 44,174,365 307,630 369,817 12,761,000 2,220,054 1,871,986 4,057,629

Texas	 13,776,721 11,033,114 111,915 31,602 2,640,111 437,361 373,060 821,292

U.S. AgBank	 25,549,449 20,217,601 10,553 5,077 5,060,303 849,053 618,516 1,141,252

Total	 194,497,747 152,412,187 759,134 462,200 39,305,172 6,047,432 5,452,299 10,867,138

 

Associations 

AgFirst	 18,324,961 	 16,795,927 	 552,345 162,840 627,078 187,434 2,690,574 2,856,090

AgriBank	 57,998,957 52,688,530 1,038,583 358,352 2,342,625 220,478 8,925,066 9,145,655

CoBank	 13,467,932 12,805,021 330,008 150,627 102,916 26,238 2,075,618 2,049,571

Texas	 13,802,889 13,214,598 426,368 114,761 169,403 63,980 1,935,556 2,007,975

U.S. AgBank	 24,699,168 23,071,639 284,300 107,165 555,440 506,826 3,731,220 4,242,029

Total	 128,293,907 118,575,715 2,631,604 893,745 3,797,462 1,004,956 19,358,034 20,301,320

Total FCS 215,457,000 164,830,000 3,369,000 1,359,000 42,221,000 1,504,000 24,765,000 29,959,000 

 

Sources: Farm Credit System Call Report as of December 31, 2009, and the Farm Credit System Annual Information Statement provided by the Federal 

Farm Credit Banks Funding Corporation.

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

2. Includes accrued interest receivable on marketable investments.

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

4. Includes allocated and unallocated surplus.

5. Includes capital stock, participation certificates, perpetual preferred stock, surplus, and accumulated other comprehensive income. For the total Farm 

Credit System amount, total capital also includes $3.289 billion of restricted capital, which is the amount in the Farm Credit Insurance Fund. Excludes 

mandatorily redeemable preferred stock and protected borrower capital.
13

functioning more normally. Generally, the System continued to have 

ready access to short-term funds. 

Early in 2009, market demand for 

medium-term securities remained 

low, particularly for maturities over 

five years. However, as the year 

progressed, access to term securities 

improved markedly, and the System 

was able to enhance earnings performance and to maintain its debt maturity profile by calling and re-issuing 

term debt at lower rates. For 2010, 

System access to the debt markets 

may again be challenged based on 

legislative action related to regulatory 

financial and GSE reform. Similarly, 

the interest rate environment may 

not provide the same opportunity to 

lower the cost of debt by calling and 

re-issuing term securities.

These conditions are expected to 

cause continued challenges for the 

System in 2010. For a discussion 

of how these stresses and others 

are likely to affect the agricultural 

economy and the System in 2010 and 

beyond, see “Challenges Facing the 

Agricultural Economy and the Farm 

Credit System” on pages 53 to 59. 

Earnings

The FCS earned $2.85 billion in 

2009 compared with $2.92 billion in 

2008 (See figure 1). This 2.4 percent 

decline in net income was largely 

driven by higher provisions for loan 

losses. The FCS established a provision for loan losses of $925 million 

in 2009 compared with $408 million 

in 2008. The significant increase in 

the 2009 provision resulted primarily from credit deterioration caused 

by continued volatility in commodity 

prices, which adversely affected the 

swine, dairy, poultry, and ethanol 

sectors. Another factor causing the 

increase in the provision for loan 

losses was the weakness in the overall economy and uncertainty regarding the likely path of the recovery.

Net interest income increased by 

$690 million and was attributable 

to the more favorable net interest spread, which increased by 44 

basis points from year-end 2008 to 

2.43 percent at year-end 2009. The 

System’s return on average assets 

declined to 1.33 percent in 2009 

from 1.44 percent the prior year. 

The return on average capital also 

declined, dropping to 9.92 percent in 

2009 from 10.63 percent in 2008.

As cooperative institutions, the FCS 

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

borrower-owners as patronage distributions. During 2009, System institutions declared a total of $749 million 

in patronage distributions. Of that 

amount, $469 million was paid in 

cash, $215 million was issued in the 

form of allocated retained earnings, 

and $65 million was issued as stock. 

The System also distributed $70 million in cash from patronage allocations of earlier years. Many System 

institutions decided to pay out a 

smaller percentage of net income 

in 2009 (26 percent) compared with 

2008 (33 percent) to conserve their 

capital after experiencing high provisions for loan losses and increased 

credit risk. 

Asset Growth

The System faced a challenging 

operating environment in 2009. A 

global recession sapped demand 

for many agricultural products, 

unemployment reached high levels 

in the United States, and there was 

overcapacity in the swine and dairy 

sectors. The result was severe stress 

and record losses for many swine 

and dairy farmers. Ethanol margins 

were also under considerable pressure during much of 2009 because of 

excess capacity in the industry and 

uncertainties associated with pending government actions. Grain prices 

declined considerably in 2009 from 

the extremely high levels reached 

in mid-2008. Crop sector input 

prices also declined as grain prices 

dropped, but not to the same extent 

as grain prices, leading to reduced 

profit margins for many grain farmers. The riskier conditions in agriculture led to lower loan demand as 

well as more stringent underwriting 

practices at many FCS institutions.

System growth slowed considerably 

in 2009 as a result of reduced borrower demand and tighter underwriting practices. FCS assets grew 

to $215.5 billion, up only $1.1 billion from 2008. Total System assets 

increased just 0.5 percent in 2009 
14

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

Figure 1

FCS Net Income, 2002–2009

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.

compared with 15 percent in 2008. 

Loan growth also declined sharply in 

2009; total loans increased by just 2.1 

percent after four years of doubledigit growth (see figure 2). 

Asset Quality

The quality of the System’s loan 

portfolio declined in 2009 from 

2008 because of the conditions discussed above. Nonperforming loans 

increased to 2.14 percent of gross 

loans by year-end 2009 from 1.50 

percent at the end of 2008 (see 

figure 3). Nonaccrual loans increased 

from $2.3 billion, or 1.41 percent of 

gross loan volume, at year-end 2008 

to $3.4 billion, or 2.04 percent of 

gross loan volume, at year-end 2009. 

Loan delinquencies (that is, total 

accruing loans that are 30 days or 

more past due) remained the same 

from year-end 2008 to year-end 2009 

at 0.53 percent of all accruing loans. 

Despite the improvement in the 

general economy, credit quality may 

deteriorate further in 2010 because 

this indicator tends to lag behind the 

general economy. Nevertheless, the 

overall level of nonperforming loans 

was within the System’s risk-bearing 

capacity.

The allowance for loan losses 

increased to $1.4 billion, or 0.82 

percent of loans outstanding in 2009, 

from $936 million, or 0.58 percent of 

loans outstanding the year before. 

The System recognized a provision 

for loan losses of $925 million in 

2009 compared with $408 million in 

2008. The 2009 provision for loan 

losses was primarily related to the 

deterioration in the swine, dairy, 

and ethanol sectors. Net charge-offs 

increased in 2009 to $518 million 

from $99 million in 2008. Although 

the System’s overall asset quality 

remains strong, the current riskier 
15

Figure 2

Annual Growth Rate of FCS Loans Outstanding, 2000 to 2009

Source: Federal Farm Credit Banks Funding Corporation, Annual Information Statements. 

 

lending environment may lead to 

further deterioration in coming years.

Funding 

In 2009, the System’s funding composition changed slightly. Short-term 

debt securities made up 36.8 percent 

of total Systemwide debt securities at 

December 31, 2008, and 34.8 percent 

at December 31, 2009. The debt securities due within a year decreased by 

6.0 percent in 2009, and those due 

after one year increased by 2.6 percent. Although the System continues 

to have regular and flexible access to 

the short-term debt markets, issuance 

of securities with maturities greater 

than five years was more challenging 

in early 2009, and the cost of such 

term issuances increased as a result. 

However, the access to term securities improved throughout the year. 

(See section titled “Funding Activity 

in 2009” on page 37 for further discussion of how the System’s funding 

environment has changed.)

Liquidity

The System’s days of liquidity position was 178 days at year-end 2009, 

up slightly from 177 days at year-end 

2008. This level is significantly higher 

than the regulatory minimum.5 The 

System banks also improved the 

quality of their liquidity through 

purchases of U.S. Treasury securities 

and corporate securities with explicit 

U.S. Government guarantees. This 

liquidity provides each bank with a 

cushion against significant negative 

events in the U.S. and global markets and also creates financial flexibility to operate more effectively in 

a challenging funding environment. 

Investments available for sale (based 

on fair value) remained relatively 

steady at $34.9 billion in 2009, with a 

weighted average yield of 1.9 per5. 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.
16

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

Figure 3

FCS Nonperforming Loans, 2004–2009

As of December 31

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

 

cent. Investments held to maturity 

also remained steady at $3.7 billion, 

with a weighted average yield of 4.5 

percent. The yields on investments 

declined in 2009 because of the lower 

interest rate environment.

The quality of some System investments continues to be adversely 

affected by the historic declines 

in the Nation’s financial markets. 

By regulation, System banks may 

acquire certain investments only if 

they have a triple-A rating from at 

least one major rating agency. If such 

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. The FCS 

had 135 ineligible securities because 

of a ratings downgrade (3.6 percent 

of total FCS investments). FCA has 

approved, or is in the process of 

approving, divestiture plans to hold 

these investments longer than six 

months. The FCS recognized otherthan-temporary impairment of $217 

million on securities (recognized 

through earnings in 2008 and 2009). 

These impairments represent 0.6 

percent of the $35 billion availablefor-sale investment portfolio. 

Capital

Capital levels were strong and 

increased during 2009, going from 

$27.1 billion at year-end 2008 to $29.9 

billion at year-end 2009. A number of 

factors contributed to the increase in 

System capital, including the accumulation of net income earned and 

retained, growth in restricted capital (i.e., the Farm Credit Insurance 

Fund), additional paid-in capital, and 

a reduction in accumulated other 

comprehensive loss. 
17

Figure 4

FCS Capital, 2002–2009

As of December 31

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

As figure 4 shows, surplus accounts 

for the overwhelming majority of 

capital. Overall, the System’s capitalto-assets ratio rose from 12.7 percent 

at year-end 2008 to 13.9 percent at 

year-end 2009, caused principally 

by a sharp reduction in the growth 

of System assets. In addition, accumulated other comprehensive losses 

decreased to $1.6 billion, which 

consisted primarily of net unrealized losses and other-than-temporary 

impairment on investments 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 requirement 

is 7.0 percent, and, as of December 

31, 2009, the permanent capital ratios 

ranged between 15.3 percent and 18.4 

percent for the System’s banks and 

between 9.1 percent and 27.6 percent 

for the associations. In addition, at 

December 31, 2009, the FCS had 

$3.3 billion of restricted capital in the 

Farm Credit Insurance Fund, which 

exceeded the 2 percent secure base 

amount. 

The System has augmented regulatory capital through third-party capital, including $2.01 billion in various 

forms of preferred stock and $1.55 

billion in subordinated debt. See 

Funding Activity in 2009 for additional information on System 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 
18

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

lending authorities have evolved to 

include the following: 

• 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 authority6

Nationwide, the System had $164.8 

billion in gross loans outstanding as 

of December 31, 2009, (see table 3). 

Agricultural producers represented 

by far the largest borrower group, 

with $115.0 billion, or 69.7 percent, 

of the total dollar amount of loans 

outstanding.7 As required by law, 

borrowers own stock or participation 

certificates in System institutions. The 

FCS had more than 850,000 loans 

and approximately 481,000 stockholders in 2009. Approximately 84.5 percent of the stockholders were farmers 

or cooperatives with voting stock. 

The remaining 15.5 percent were 

nonvoting stockholders, including 

rural homeowners and other financing institutions that borrow from the 

System. Over the past five years, the 

number of System stockholders has 

increased gradually, rising more than 

4.5 percent since year-end 2004. 

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

grew by $3.4 billion, or 2.1 percent, 

during the year ended December 31, 

2009. Both the dollar volume and 

the percentage growth in 2009 were 

significantly less than the gain in the 

previous year. In 2008, gross loans 

grew 13.0 percent, which followed 

growth of 15.8 percent in 2007 and 

16.2 percent in 2006. Since year-end 

2005, total System loans outstanding 

increased by $58.6 billion, or 55.1 

percent. 

As of December 31, 2009, 45.7 percent of the dollar volume of the 

System’s loans outstanding was in 

long-term real estate loans, 24.0 percent in short- and intermediate-term 

loans to agricultural producers, and 

14.3 percent in agribusiness loans. 

Agribusiness loans are broken down 

further into 6.4 percent for loans to 

cooperatives, 6.7 percent for processing and marketing enterprises, and 

1.3 percent for farm-related businesses. Loans to finance rural utilities represented 8.8 percent of the 

System’s loan volume, while rural 

residential real estate loans made 

up 3.0 percent of the System’s total 

loans. International loans (export 

financing) represented 2.4 percent of 

the System’s loan portfolio, and lease 

receivables accounted for 1.3 percent 

of the overall portfolio. Finally, loans 

outstanding to OFIs represented a 

small but important segment of the 

System’s portfolio. 

The System’s increase in loan volume 

in 2009 stemmed primarily from its 

core customer base, the farmers and 

ranchers of America. Long-term real 

estate loans increased $3.5 billion, or 

4.8 percent, in 2009, while short- and 

intermediate-term loans increased 

$2.1 billion, or 5.7 percent. Agribusiness loans were down sharply 

in 2009, decreasing $3.3 billion, or 

12.2 percent, because of lower loan 

demand as prices for commodities 

and farm inputs declined. However, 

rural utility loans (energy, water, 

waste disposal, and communication 

loans) increased $631 million, or 

4.5 percent, and rural residential real 

estate loans increased $366 million, 

or 7.9 percent. The other categories 

posted modest changes for the year, 

either up or down, including a 

3.0 percent drop for international 

loans.8

Several factors caused the slow 

growth in System lending during 

2009. Two factors slowing demand 

were declining farm income and 

increased risk in several agricultural 

sectors (see “Challenges Facing the 

Agricultural Economy and the Farm 

Credit System” in this report). On 

6. 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). 

7. This amount includes real estate mortgage loans and production and intermediate-term loans but excludes leases and loans to “rural homeowners” 

(as defined in 613.3030 of the FCA regulations).

8. A majority of the System’s international loan portfolio is guaranteed by the Commodity Credit Corporation (CCC) through USDA’s GSM-102 and 

GSM-103 export credit programs. Overall, 92 percent of the System’s international loans in 2009 carried a CCC guarantee. 
19

Table 3

FCS Gross Loans Outstanding, 2005–2009

As of December 31

Dollars in Millions

 Percent 

 change 

2005 2006 2007 2008 2009 from 2005

Production agriculture

	 Long-term real estate

	 	 mortgage loans	 51,690	 56,489	 63,458	 71,892	 75,352	 45.8

Short- and intermediate-

	 	 term loans	 24,935	 28,731	 32,267	 37,468	 39,610	 58.9

Agribusiness loans*	 14,673 	 21,141 	 28,091	 26,901	 23,626	 61.0

Rural utility loans	 8,063	 9,569	 10,846	 13,931	 14,562	 80.6

Rural residential loans	 2,950	 3,408	 3,965	 4,611	 4,977	 68.7

International loans	 2,277	 2,183	 2,135	 4,077	 3,956	 73.7

Lease receivables	 1,290	 1,489	 1,708 	 1,952	 2,160	 67.4

Loans to other financing

	 institutions	 394	 426	 436	 591	 587	 50.0

Total 106,272 123,436 142,906 161,423 164,830	 55.1

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

* At December 31, 2009, agribusiness loans consisted of loans to cooperatives of $10.5 billion, processing and marketing loans of $11.0 

billion, and farm-related business loans of $2.1 billion.
20

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

the supply side, growth slowed 

because most lenders took prudent 

steps to adjust for rising risks by 

tightening their credit underwriting practices and increasing interest 

spreads. As a result of these factors, 

loan growth is expected to remain 

low in 2010. 

Although net cash farm income experienced a sharp decline in 2009, the 

final figure of $70.8 billion was down 

only $2.1 billion from its 10-year 

average of $72.9 billion. Thus, the 

core segments of the System’s portfolio—farm real estate mortgages and 

production and intermediate-term 

loans—continued to grow as farmers 

demanded more credit to purchase 

land and other inputs needed to 

maintain production and to manage 

through operating losses in stressed 

agricultural sectors. Nonetheless, the 

System’s growth rates in 2009 were 

well below the levels of earlier years. 

The growth in rural utility loans 

last year was driven, in part, by a 

reduction in available credit in the 

broader debt capital markets, as well 

as ongoing marketing efforts by the 

System to attract new customers. 

Despite considerable turmoil in the 

capital and credit markets last year, 

the FCS was able to meet its mission 

as a reliable source of constructive 

and reasonably priced credit 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 

certain non-System lending institutions described as “other financing 

institutions” (OFIs). OFIs include 

commercial banks, savings institutions, credit unions, trust companies, 

agricultural credit corporations, and 

other specified agricultural lenders that are significantly involved in 

lending to agricultural and aquatic 

producers and harvesters. System 

banks can fund and discount shortand intermediate-term loans for 

OFIs that demonstrate a need for 

additional funding to meet the credit 

needs of borrowers who are eligible 

to receive loans from the FCS. 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. 

As of December 31, 2009, the System 

served 28 OFIs, up from 27 the year 

before. Outstanding loan volume to 

OFIs was $587 million at year-end, 

down $4 million from 2008. OFI loan 

volume continues to be less than one 

percent of the System’s loan portfolio. More than three-fourths of the 

System’s OFI loan volume is in the 

Midwest.

Decline in Loan Participations and 

Syndications with Non-FCS Lenders

In addition to the authority to provide funding and discounting services to OFIs, the Farm Credit Act 

gives System banks and associations 

the authority to partner with financial institutions outside the System, 

including commercial banks, in making loans to agriculture and rural 

America. Generally, System institutions partner 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 to fund a loan that 

exceeds a lender’s 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, 

each of which has a contractual 

interest in the loan.

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

loan in which a group of financial institutions work 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 a liaison 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 comply 

with lending limits, but they also 

use them to manage and optimize 

capital, earnings, and liquidity. For 
21

example, a financial institution with 

a high concentration of production 

loans for a single commodity could 

use participations or syndications 

to diversify its loan portfolio, or it 

could use them to sell loans that are 

beyond its credit limit. As figure 5 

shows, activity from loan participations and syndications with nonSystem lenders has generally grown 

over the past six years. However, this 

activity declined in 2009 because of 

uncertainty in the capital markets, 

mounting credit quality concerns in 

agriculture, and lower demand for 

large loans.

The first group of bars shows gross 

loan syndication activity by FCS 

banks and associations.9 Gross loan 

syndications by the System with nonSystem lenders totaled $11.3 billion 

at year-end 2009, down about $500 

million from the 2008 figure but still 

well above the totals of earlier years. 

Although syndication volume as a 

percentage of the System’s loan portfolio decreased from 7.3 percent at 

year-end 2008 to 6.9 percent at yearend 2009, the overall level of activity 

was still the second highest in the 

history of the FCS despite the general market conditions noted above. 

This use of syndications reflects the 

growing complexity of commercial credits in agriculture. For large 

loans, lenders are shifting from being 

single-lender originators who sell 

loan participations to other institutions to being members of syndicates 

in which groups of lenders originate 

loans. This arrangement allows multiple lenders to have direct contractual 

agreements with customers as a way 

to manage risk while satisfying the 

credit needs of their customers. 

The other bars in figure 5 show net 

loan participation activity involving 

non-System lenders for two lending 

categories for the past six years. 

• The middle group shows net 

loan participations with institutions that are originating loans 

with customers who are also 

eligible to borrow from the FCS. 

The net total of these participations was $7.5 billion, down 

slightly from 2008. 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 of the loans 

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 5). A similar-entity 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 the borrower’s 

loans (the participation interest 

must be less than 50 percent). At 

the end of 2009, the net amount 

of similar-entity participations in 

the System amounted to $8.6 billion, a decrease of $1.3 billion, or 

15 percent, from 2008.

The net total of all loan participations 

was $16.1 billion at year-end 2009, 

compared with $17.5 billion the year 

before. Again, the unsettled credit 

market situation contributed to the 

decrease in the System’s loan participation activity in 2009. While the 

results for 2010 may be sluggish, the 

partnering between System and nonSystem lenders remains an important 

component of System lending, and it 

will continue to expand the availability of credit to rural America.

MARKET SHARE OF DEBT

According to USDA preliminary 

data, total farm business debt for the 

year ended December 31, 2009, was a 

record $249.5 billion (nominal dollar 

basis), up 4.4 percent from year-end 

2008.10 (After accounting for inflation, 

farm debt is still well below the peak 

level of 1980.) Farm debt increased 

more than 10 percent in 2008, reflecting record-high farm income, strong 

farm real estate prices, and higher 

input costs. The lower demand for 

debt in 2009 was caused by two factors: the sharp drop in farm income 

and the recession. On the supply 

side, lenders had adequate funds to 

lend, but credit underwriting practices were tightened. 

USDA expects farm debt to decrease 

to $232.5 billion in 2010, down 

almost 7 percent from year-end 2009, 

9. Typically, some of the syndication volume is sold and may be reported by FCS institutions 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.

10. In 2009, USDA made several revisions in its data series. As a result, adjustments were made to farm debt estimates for prior years.
22

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

Figure 5

Syndications and Net Loan Participations Involving Non-System Lenders, 2004–2009

As of December 31

Dollars in Billions

Sources: Farm Credit System Call Reports. 

* The 2008 FCA Annual Report on the Farm Credit System reported $9.0 billion in net loan participations involving eligible borrowers in 2008. 

Subsequently, that figure was revised to $7.6 billion. 

Note: A similar-entity 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

because of an increasing softness 

in the farm real estate market and 

tighter profit margins in several key 

enterprises. Farm debt will also be 

affected by the future direction of 

the economy and by off-farm income 

opportunities. 

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

2008.11 The information for 2009 will 

not be available until USDA issues 

its planned update in August 2010. 

USDA’s estimated debt by lenders 

shows that commercial banks held 

44.3 percent of the $238.9 billion in 

total farm business debt at the end 

of 2008. The System’s share was 39.0 

percent. The System was the only 

lender group to increase its market 

share in 2008, posting a gain of 2.4 

percentage points. Commercial banks 

lost about a half point of market 

share in 2008, and the other lenders, 

such as life insurance companies, the 

Farm Service Agency, and merchants 

and dealers, also had small market 

share losses. Commercial banks and 

the FCS now represent more than 

80 percent of the total farm business 

debt market, as compared with about 

74 percent in 2000. (Figure 6 shows 

market share shifts for the major 

lenders since 1989.)

Except for the unusual period of the 

1980s and a brief time in the 1990s, 

the FCS has typically had the largest market share of farm real estate 

mortgages. Commercial banks have 

always dominated non-real estate 

lending. The System’s share of debt 

secured by farm real estate increased 

to 43.1 percent at year-end 2008, continuing the steady upward trend of 

the past 10 years. The System’s share 

of non-real estate farm debt was 34.2 

percent at year-end 2008, again continuing a solid upward trend since 

the late 1990s when it was slightly 

less than 20 percent. At year-end 

2008, commercial banks held 37.5 

percent of the farm real estate mortgage debt, up slightly from 2007, and 

52.5 percent of the non-real estate 

debt, which was down almost one 

percentage point from 2007.

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 

timely 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 expanded Farmer 

Mac’s program authorities by allowing it to purchase and guarantee 

securities backed by eligible rural 

utility loans made by cooperative 

lenders.

11. 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 2009 Annual Report on the Farm Credit System 

Figure 6

Market Shares of U.S. Farm Business Debt, 1989–2008

Sources: USDA, Economic Research Service.

Note: Year-end 2008 figure is a preliminary estimate.
25

Programs to provide financially 

sound and constructive credit and 

related services to young, beginning, 

and small (YBS) farmers and ranchers are a statutory mandate and a 

high priority for the System. Loans 

to YBS borrowers help provide a 

smooth transition of agribusiness to 

the next generation and maintain a 

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 becomes more 

important in helping young and 

beginning farmers finance the purchase of agricultural assets sold by 

those who are exiting the business. 

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 2007.12 The 2007 results 

show that almost a third of all farm 

operators are not principal operators. 

Moreover, 13.4 percent of the members in this group are young. Therefore, when all are included (principal 

Serving Young, Beginning, and Small Farmers and Ranchers

operators and other farm operators), 

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, as well as 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 lending volume, operations, and achievements 

in its YBS program. (See the YBS 

Programs section on page 31.)

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 2009, the volume 

of YBS loans outstanding increased 

for each of the three borrower categories, as it has for the past nine 

years. However, loans made in 2009 

(including new loans and renewals) 

for each of the three YBS categories 

decreased in both number and dollar 

volume from 2008 levels, reversing 

the steady increases of earlier years.13

These results closely follow declines 

in the System’s overall number of 

loans made in 2009 (down 2.4 percent from 2008) and the dollar 

volume of all System loans made 

(down 15.2 percent from 2008). These 

declines were driven by both supply and demand factors. The supply 

of credit declined because System 

lenders tightened their underwriting 

standards to protect themselves from 

credit risks, and the demand for 

credit was down because of the deep 

recession in the general economy and 

the drop in net farm income. 

However, the more instructive 

longer-term perspective shows that 

overall loans in 2009 were actually 

up by about 10 percent for both 

loan numbers and volume over the 

prior five-year average. Likewise, 

loan numbers and dollar volume for 

two of the three YBS categories were 

12. The System’s definition of a young farmer differs slightly from USDA’s definition. See the note below table 4B. 

13. 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.
26

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

higher in 2009 than the prior fiveyear average.

In the section on YBS borrowing 

trends (page 28), FCA provides information on the progress in YBS lending activity since 2001, which was 

the first year institutions reported 

their results using the current definitions for young, beginning, and 

small farmers and ranchers. Table 4A 

contains information on loans outstanding in each category at the end 

of 2009; table 4B provides information on loans made during the year. 

Loans to YBS farmers include real 

estate loans and short- and intermediate-term loans.

Young—The System’s extension of 

credit to young farmers, those aged 

35 or younger, consisted of 157,708 

loans totaling $20.4 billion at the end 

of 2009 as compared with $19.5 billion at the end of 2008. During 2009, 

50,689 loans totaling $6.6 billion 

were made to young borrowers. The 

2008 total was $7.7 billion. The loans 

made to young borrowers in 2009 

represented 16.4 percent of all loans 

the System made for the year, which 

totaled 308,279, and 11.3 percent of 

the dollar volume of loans made, 

which totaled $58.5 billion. The average size of loans made to young 

farmers in 2009 was $130,915. The 

number and volume of loans made 

during the year is a good indicator 

of current service to YBS borrowers. 

The number of loans made to young 

farmers during 2009 was 4.1 percent 

lower than in 2008, and the volume 

of loans made was 13.7 percent 

lower. However, if you compare 

2009 numbers to the prior five-year 

average, the number of loans made 

to young farmers was actually up 

9.3 percent, and the dollar volume of 

loans made to young borrowers in 

2009 was up by 15 percent.

Beginning—Beginning farmers, 

defined as those with 10 or fewer 

years of farming experience, constituted 223,311 of the System’s YBS 

loans, totaling $34.1 billion at yearend 2009 as compared with $33.0 billion at the end of 2008. During 2009, 

61,387 loans totaling $9.5 billion were 

made to beginning borrowers. The 

2008 total was $12.0 billion. Loans 

made to beginning farmers in 2009 

represented 19.9 percent of all loans 

made in 2009 and 16.2 percent of the 

dollar volume of loans made. The 

average size of loans made in 2009 

was $154,169. The number of loans 

made during 2009 was 7.8 percent 

lower than in 2008, and the volume 

of loans made was 20.9 percent lower 

than in the previous year. Compared 

to the prior five-year average, however, the number of loans made was 

up in 2009 by 4.7 percent, and the 

volume was up by 1.5 percent.

Small—FCS institutions had 474,762 

outstanding loans, totaling $42.8 billion, to small farmers (those with 

gross annual sales of less than 

$250,000) at the end of 2009. The 

loan volume was up fractionally from 

year-end 2008. During 2009, 145,618 

loans were made to small borrowers for a total of $11.9 billion as 

compared with $14.2 billion in 2008. 

Loans made in 2009 to small farmers 

represented 47.2 percent of all loans 

made in 2009 and 20.3 percent of 

the dollar volume of loans made in 

2009. The average size of loans made 

in 2009 was $81,713. Compared with 

2008 year-end numbers, the number 

of loans made during 2009 was 

3.4 percent lower and the volume of 

loans made was 16.4 percent lower. 

However, compared with the prior 

five-year average, 2009 numbers were 

just slightly lower, by 3.9 percent for 

number of loans and by 0.1 percent 

for volume of loans. Over time, 

many producers graduate from the 

small farm category by expanding 

their farm operations or increasing 

farm revenue through other means, 

which shrinks the potential number 

of small customers for YBS programs. 

Nevertheless, during 2009, almost 

half of the loans by number were 

to small farm producers, which is a 

testament to the importance of small 

farm lending for the System. 

The YBS information is reported 

separately for each of the three YBS 

borrower categories because the YBS 

mission is focused on each borrower 

group separately. Also, loans cannot 

be added across categories because 

some loans belong to more than one 

category. If, for example, a borrower 

is less than 35 years old, if he sells 

less than $250,000 in agricultural or 

aquatic products per year, and if he 

has farmed for less than 10 years, 

his loan would be included in each 
27

Table 4A

YBS Loans Outstanding

As of December 31, 2009

 Dollar 

Number Percentage volume Percentage Average

of of total of loans of total loan

loans number in millions* volume size

Young farmers/ranchers 157,708 18.4 $20,424 11.7 $129,507

Beginning farmers/ranchers 223,311 26.0 $34,109 19.5 $152,743

Small farmers/ranchers 474,762 55.3 42,756 24.4 $90,057

 

Table 4B

YBS Loans Made During 2009

As of December 31

 Dollar 

Number Percentage volume Percentage Average

of of total of loans of total loan

loans number in millions* volume size

Young farmers/ranchers 50,689 16.4 $6,636 11.3 $130,915

Beginning farmers/ranchers 61,387 19.9 $9,464 16.2 $154,169

Small farmers/ranchers 145,618 47.2 $11,899 20.3 $81,713

 

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.

* The volume figures for loans made and loans outstanding include both advances and commitments.
28

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

category. Therefore, adding the 

categories together would produce a 

misleading measurement of the System’s YBS lending involvement. 

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 lending activity in each 

category in 2009. 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 under Consolidated Reporting System Reports.

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 whose average production values were 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—also affect individual 

association results.

In addition, the number of small 

farms in an association’s territory can 

affect its YBS lending results. The 

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

small, using the same definition for a 

small farm that the System uses in its 

YBS reporting. However, less than a 

third of all small farms show interest paid as a farm business expense, 

which means that more than twothirds of all small farms have no 

farm debt at all. Indeed, according to 

the census, more than half of all U.S. 

farms had annual sales of $10,000 or 

less in 2007. Instead of being potential YBS borrowers, most of these 

operators probably rely on off-farm 

income sources for almost all of their 

family income and are not likely to 

be customers for agricultural credit. 

However, even within this group 

some farmers are seeking credit for 

their farming enterprises and will be 

able to meet the criteria to qualify for 

a YBS loan. 

YBS BORROWING TRENDS, 

2001–2009

FCA now has nine 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 

7A, 7B, and 7C shows fairly strong 

upward trends in dollars of loans 

outstanding for each of the three categories from 2001 to 2009. With the 

exception of 2009, the same conclusion is valid for the dollars of loans 

made. (Also, until 2009, the number 

of loans made in each category has 

generally increased.)

As a percentage of total loans outstanding in the System, the YBS 

statistics for all three categories 

have either dipped a few points or 

remained relatively flat since 2001. 

Thus, System YBS lending has nearly 

kept pace with the System’s strong 

loan growth since 2001 in spite of 

the general decline in the number of 

young, beginning, and small farm 

operators. 

Comparisons between the System’s 

YBS lending results and the results 

reported by other organizations 

are difficult to make. For example, 

comparisons are not feasible between 

FCS institutions and other lenders 

because other Federal regulators do 

not require reporting on young and 
29

Figure 7A

Young Farmers and Ranchers

Figures 7A, 7B, and 7C

Loans Made to, and Loans Outstanding for, YBS Farmers and Ranchers, 2001–2009

As of December 31
30

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

Figure 7B

Beginning Farmers and Ranchers

Figure 7C

Small Farmers and Ranchers

Sources: Annual YBS reports submitted by System lenders through the FCS banks.
31

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 

directly comparable with Census of 

Agriculture data, which are collected 

only once every five years.

YBS PROGRAMS

Delivering Credit Services

Because of its status as a Government-sponsored enterprise with a 

statutory YBS mandate, the FCS is in 

a unique position to assist the next 

generation of American farmers, and 

System institutions have developed 

YBS programs to provide this assistance. 

Through these programs, FCS associations may offer lower interest rates 

and less stringent underwriting standards, such as higher loan-to-value 

ratios or lower debt coverage requirements, to make it easier for potential 

YBS borrowers to qualify for loans. 

During 2009, System institutions used 

four types of loan concessions for 

YBS borrowers. 

• Interest rate concessions—offered 

by 38 associations 

• Exceptions to underwriting 

standards—offered by 46 associations 

• Lower loan fees—offered by 27 

associations

• Loan covenants designed specifically for YBS borrowers—offered 

by 12 associations 

Most of the loan concessions made 

by System institutions to YBS borrowers are for the young and the 

beginning categories. Altogether, 

54 of the System’s 89 associations 

provided some form of loan concessions to young borrowers in 2009; 55 

of the 89 associations applied one or 

more of these four concessions to the 

beginning category; and 51 out of the 

89 used one or more of these concessions for small farmers. 

As required by the Farm Credit Act, 

System institutions coordinate their 

YBS programs with other Government programs whenever possible. 

Several State and Federal programs 

provide interest rate reductions or 

guarantees for YBS borrowers. By 

partnering with these Government 

programs, FCS institutions help 

reduce their risk exposure, enabling 

them to continue to provide credit to 

YBS borrowers. Without such concessions and guarantees, credit would 

not be extended to some YBS borrowers because of excessive repayment or collateral risks. 

Almost all YBS programs make 

some use of Federal or State sources 

to obtain guarantees on loans to 

qualifying YBS borrowers. 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 2009, 84 of the 89 FCS 

associations used FSA guarantees 

for some of their YBS lending, while 

17 associations used SBA guarantees and 13 associations used State 

and local programs. In addition, 26 

associations used Farmer Mac as a 

vehicle to either guarantee a segment 

of eligible loans in their portfolios or 

otherwise shift credit risk to thirdparty investors.

FCS institutions use FSA’s guaranteed lending program for both 

conventional and YBS lending. 

Agency surveys indicate that about 

36 percent of the System’s overall 

volume of FSA-guaranteed loans 

outstanding went to young farmers; 

about 41 percent went to beginning 

farmers; and about 47 percent went 

to small farmers (numbers are not 

additive because categories overlap). 

At year-end 2009, the guaranteed 

loan volume figures for young, 

beginning, and small farmer/rancher 

loans outstanding were $1.0 billion, 

$1.1 billion, and $1.3 billion, respectively. 

Delivering Insurance, Training, and 

Other Services

In addition to offering credit, FCS 

institutions also serve YBS producers by offering insurance services. 

Almost 80 percent of the associations 

offered insurance services to YBS 

farmers in 2009. 
32

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

The FCS also offers training programs for its borrowers. Strengthening the business and financial management skills of its borrowers is one 

of the System’s key training objectives. In 2009, 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 provided 

at association locations, System institutions are developing System-wide 

online training programs for YBS 

farmers. In 2009, the System implemented a mentored online business 

plan development training course; 

recently 30 young and beginning 

farmers from North Carolina completed business plans through the 

program. Other System institutions 

provide an online mentored course 

to promote sound business practices 

and sustainable farm operations.

Some outreach activities are offered 

in partnership 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. Several 

System associations are active supporters of Annie’s Project, a farm 

financial skills training program for 

farm women. They donate to the 

program, grant tuition reimbursement for participants, and provide 

meeting space for Annie’s Project 

local chapters in the 23 States that 

now have the program. In some 

cases, System employees provide 

training through Annie’s Project. 

One System association spearheaded 

the effort to bring Annie’s Project to 

Kansas.

The System has developed financial 

skills training seminars for young 

and beginning farmers in conjunction 

with agricultural trade groups. The 

System created and delivered “Financial Skills for Ag Organization Leaders” and “Leading Off the Farm” to 

young and beginning producers at 

Farm Bureau, National Milk Producer 

Federation, and National Cattlemen’s 

Beef Association meetings.

Many FCS associations also provide 

financial support for college scholarships and for FFA, 4-H, and other 

agricultural organizations. One association invested capital to help establish a local farmer’s market. Also, in 

recognition of the growing diversity 

of farm borrowers in some institution 

territories, a few associations are now 

providing foreign language training. 

Crafting Policies and Procedures to 

Support YBS Producers

Farm Credit institutions have been 

responsive to FCA’s encouragement 

to develop YBS policies and procedures and to enhance their service 

to YBS producers in their territories. At year-end 2009, 40 associations reported that they had revised 

their YBS policies or procedures in 

response to guidance issued in an 

August 2007 FCA Bookletter. As a 

result of these revisions, 13 associations reported that they had made 

loans to YBS farmers on the same 

terms as those offered to lower-risk, 

full-time farmers. Also, 22 associations reported that they had made 

loans to YBS farmers who had minimal agricultural income or performance history but who possessed the 

knowledge and ability to farm. 

In 2009, the boards of directors of 

23 associations indicated that they 

had received input from advisory 

committees that helped shape their 

operations, including, in most cases, 

the associations’ YBS policies. In 

2010, 18 associations plan to revise 

their policies and procedures for 

their YBS borrowers. FCA’s oversight 

activities are helping institution management and boards stay focused on 

this important mission area.
33

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, agricultural cooperatives, rural residents, 

and other entities on which farming 

operations depend. 

The Agency strives 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 2009 

The following paragraphs describe 

some of FCA’s regulatory efforts in 

2009, along with several projects that 

will remain active in 2010. 

Effective Interest Rate Disclosure—

The FCA Board approved a proposed 

rule in May 2009 and a final rule in 

December 2009 that amended the 

borrower rights regulations governRegulatory Policy and Approvals

ing what initial and subsequent 

disclosures a qualified lender must 

make to a borrower when the borrower’s interest rate is directly tied to 

a widely publicized external index. 

Director Elections—The FCA Board 

approved a proposed rule in March 

2009 that would amend FCA regulations to consolidate Farm Credit bank 

and association director election and 

voting rules and enhance election 

reporting and disclosure rules. 

Registration of Mortgage Loan 

Originator—The FCA Board 

approved a proposed rule to implement the Secure and Fair Enforcement for Mortgage Licensing Act of 

2008 (S.A.F.E. Act). The rule requires 

System institution employees who act 

as residential mortgage loan originators to register with the Nationwide 

Mortgage Licensing System and 

Registry.

Announcement of Meetings—The 

FCA Board approved a direct final 

rule in August 2009 that amended 

the regulations to provide the Board 

greater flexibility in scheduling meetings. 

Farmer Mac Risk-Based Capital 

Stress Test Revisions—The FCA 

Board approved a proposed rule in 

December 2009 that would modify 

the Federal Agricultural Mortgage 

Corporation’s Risk-Based Capital 

Stress Test. The proposed version 

of the test would include a component to characterize credit losses on 

rural utility loan volume and would 

modify the risk-reducing characteristics of structures such as off-balancesheet AgVantage.

Questions and Answers Regarding 

Flood Insurance—The FCA Board 

approved a notice with request for 

comment in April 2009 regarding 

loans in areas having special flood 

hazards. The notice provides an 

updated set of interagency questions 

and answers regarding flood insurance that were proposed in March 

2008. The updated questions and 

answers will help FCS institutions 

better understand the flood insurance 

statutes, regulations, and Federal 

Emergency Management Agency 

guidance. The notice also solicits 

comments on new proposed questions and answers that address insurable value and force placement. 

Regulatory Burden Notice—The FCA 

Board in October 2009 approved a 

notice for publication in the Federal Register to respond publicly to 

comments FCA received in response 

to the June 2008 Regulatory Burden 

Solicitation. 

Disclosure and Accounting Requirements—The FCA Board approved 

a final rule in June 2009 to amend 

FCA regulations on disclosure to 

shareholders and accounting and 

reporting requirements. The final 

rule will ensure that FCA regulations 

are consistent with System structural 

changes and are updated to include 

changes in accounting, auditing, and 

reporting standards. 
34

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

Frequently Asked Questions on Borrower Rights—FCA issued frequently 

asked questions on borrower rights 

to provide clear guidance to both 

System management and borrowers 

on the application of borrower rights.

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. These 

projects may be considered in future 

rulemakings. 

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. 

Rural Housing Mortgage-Backed 

Securities—FCA issued a Bookletter 

in November 2009 allowing System 

banks to hold rural housing mortgaged-backed securities as missionrelated investments for the purpose 

of addressing liquidity needs in the 

rural housing mortgage market. 

Compensation Committees—FCA 

issued a Bookletter in July 2009 that 

provides guidance to System institutions’ boards of directors and their 

compensation committees on prudent 

committee operations and practices. 

Eligibility and Scope of Financing 

for Limited Liability Companies—

FCA issued a Bookletter in July 2009 

to provide guidance and answers 

to frequently asked questions about 

eligibility and scope of financing for 

limited liability companies. 

Financing Agricultural Land in 

Transition—FCA issued a Bookletter in May 2009 to provide guidance 

on how System institutions should 

ensure compliance with the eligibility and scope of financing regulations 

when loan funds will be used to purchase, or refinance debt on, land that 

is in the path of development. 

Use of State-Chartered Business 

Entities to Hold Acquired Property—FCA issued a Bookletter in 

April 2009 to provide guidance to 

System institutions on the use of 

limited liability companies or other 

State-chartered business entities for 

limited purposes related to holding 

acquired property. 

Financial Institution Rating System—FCA issued an Informational 

Memorandum in March 2009 describing changes to the FCA Financial 

Institution Rating System (FIRS). The 

FIRS is the rating system used by 

FCA examiners for evaluating and 

categorizing the safety and soundness of System institutions on an 

ongoing, uniform, and comprehensive basis.

Revised Guidelines on Submission 

of Proposals to Merge or Consolidate Associations—FCA issued 

an Informational Memorandum 

(updated in January 2010) that provided revised guidelines for mergers and consolidations that reflect 

changes in regulations, Board policy, 

and generally accepted accounting 

principles. 

Maximum Bank Director Compensation for 2009—FCA issued an Informational Memorandum in March 

2010 that communicated the annual 

adjustment in the maximum annual 

compensation payable to FCS bank 

directors to reflect the change in the 

Consumer Price Index. 

National Oversight and Examination Program for 2010—FCA issued 

an Informational Memorandum in 

December 2009 that provided a summary of the National Oversight Plan 

for 2010, which details strategies 

for addressing critical risks or other 

areas of focus in the System. 

FACT Act Regulations and 

Resources—FCA issued an Informational Memorandum regarding 

recently issued regulations and 

resources relating to the Fair and 

Accurate Credit Transactions Act 

of 2003 (FACT Act). The rules will 

promote the accuracy and integrity 

of information furnished to credit 

reporting agencies.

Allowance for Loan Losses (ALL)—

FCA issued an Informational Memorandum that introduced FCA’s 

recently revised Examination Manual 
35

section for evaluation of the ALL. 

FCA’s revised examination guidance 

reinforced the need for FCS management to use prudent judgment 

supported by a thorough and welldocumented analysis of risks facing 

institutions when determining the 

appropriate level of the ALL. 

Correspondence from the Chairman 

and Chief Executive Officer—The 

FCA Chairman and Chief Executive 

Officer issued several Informational 

Memorandums to System institutions 

that communicated his thoughts and 

concerns on issues such as executive 

compensation and benefits programs, 

confronting the increased risk environment, responding to local financial institution failures, and association mergers in economically challenging times.

CORPORATE ACTIVITY IN 2009 

In 2009 and early 2010, FCA analyzed and approved nine corporate 

applications, compared with eight 

applications processed in 2008. 

• On January 4, 2010, four standalone FLCAs affiliated with 

the Farm Credit Bank of Texas 

received FCA final approval to 

convert their charters to those 

of ACAs, each with PCA and 

FLCA subsidiaries. The stockholders of each FLCA approved 

the conversion to an ACA. By 

converting from FLCAs to ACAs, 

these associations, which already 

had mortgage lending authority, 

acquired the additional authority to provide production lending in their respective territories. 

Amendments to the Farm Credit 

Act that were contained in the 

2008 Farm Bill granted FCA the 

authority to convert these charters. The provisions of section 7.7 

of the Farm Credit Act, which 

took effect January 1, 2010, equalized the loan-making powers 

among the associations serving 

the states of Alabama, Mississippi, and most of Louisiana.

• On January 4, 2010, FCA 

amended the charters of an 

ACA affiliated with the Farm 

Credit Bank of Texas and an 

ACA affiliated with AgFirst Farm 

Credit Bank. The Texas-affiliated 

ACA was authorized to provide 

short- and intermediate-term 

lending throughout its territory; 

the AgFirst-affiliated ACA was 

authorized to provide long-term 

lending throughout its territory. 

By amending their charters, FCA 

extended new lending authorities to these ACAs in accordance 

with section 7.7 of the Farm 

Credit Act.

• On January 1, 2010, two ACAs 

affiliated with CoBank, ACB, 

merged their operations following stockholder approval of the 

merger. The PCA and FLCA 

subsidiaries associated with the 

ACAs also merged. The continuing ACA and its subsidiaries also 

changed their names effective on 

the same date.

• On December 1, 2009, two ACAs 

affiliated with U.S. AgBank, FCB, 

merged their operations following stockholder approval of the 

merger. The PCA and FLCA 

subsidiaries associated with the 

ACAs also merged.

• On January 1, 2009, a stand-alone 

FLCA received FCA approval 

to convert its charter to that of 

an ACA with PCA and FLCA 

subsidiaries. The new ACA and 

its subsidiaries are affiliated with 

the Farm Credit Bank of Texas. 

The voting stockholders of the 

stand-alone FLCA approved the 

conversion. 

The total number of associations as 

of December 31, 2009, was 89. Following the early 2010 activity, the 

total number of associations as of 

January 1, 2010, was 88. Although 

FCA’s actions to fully implement 

section 7.7 of the Farm Credit Act 

on January 4, 2010, did not reduce 

the number of associations below 88, 

they did alter the makeup of associations in the FCS. As of January 4, 

85 ACAs and 3 FLCAs make up the 

System’s structure of associations. 

The number of banks remains at five. 

Figure 8 shows the chartered territory of each FCS bank. Details about 

specific corporate applications are 

available on FCA’s Web site at 

www.fca.gov. 
36

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

Figure 8

Chartered Territories of FCS Banks

As of January 4, 2010

Note: CoBank funds 4 associations in the indicated areas and serves cooperatives nationwide; U.S. AgBank, FCB, 

funds 26 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 93 banks and associations.
37

FUNDING ACTIVITY IN 2009

During 2009, the System continued 

to have regular and flexible access 

to debt markets, though demand 

for longer-term securities remained 

moderate. Dissipation of the severe 

financial market stresses of 2008 

allowed key capital market sectors to 

function more normally. Corporate 

debt issuance improved, and borrowing rates for shorter-term issuances 

trended lower as a result of strong 

investor demand. While investor 

demand for the System’s longer-term 

maturities, especially over five years, 

remained moderate, System access 

to term securities improved throughout the year, resulting in significant 

opportunities to call debt, lower term 

funding costs, and improved net 

interest spreads. 

The System’s status as a Government-sponsored enterprise (GSE) 

enabled it to have continual access to 

debt capital markets. However, with 

two housing-related GSEs14 now in 

conservatorship, investor perceptions 

of all GSEs have adversely affected 

the System’s ability to issue debt at 

favorable rates, on favorable terms, 

and with the flexibility it has historically enjoyed as a GSE.

The System has enhanced its marketing programs, strengthened internal 

liquidity reserve requirements, and 

analyzed and implemented methods 

to improve loan pricing and financial projection models. These efforts 

should provide additional stability 

for funding programs and market 

access in 2010 as the System continues to respond to stresses in the 

capital debt markets.

The System continues to issue 

third-party capital (preferred stock 

and subordinated debt). However, 

activity—especially for preferred 

stock—has been curtailed by the 

higher costs of these transactions 

compared to conventional funding 

costs. The amount of mandatorily 

redeemable preferred stock outstanding at year-end 2009 was $225 million, unchanged from December 31, 

2008. The System also had perpetual 

preferred stock that totaled $1.78 billion at December 31, 2009, up only 

slightly from year-end 2008. Outstanding subordinated debt totaled 

$1.55 billion at December 31, 2009, 

up from $1.05 billion at December 31, 

2008.

The System funds its loans with a 

combination of consolidated Systemwide debt and capital. The Federal 

Farm Credit Banks Funding Corporation, the fiscal agent for the five 

System banks, sells debt securities 

such as discount notes, bonds, and 

designated bonds on behalf of the 

System.15 This process facilitates the 

flow of funds from worldwide capital-market investors to agriculture 

and rural America, providing rural 

communities with efficient access to 

global resources. At year-end 2009, 

outstanding Systemwide debt was 

$177.3 billion, down from $178.4 billion a year earlier, representing a 0.6 

percent decline.16

The decline of $1.1 billion in Systemwide debt was caused by several factors. Although gross loans 

increased $3.4 billion in 2009, which 

typically increases the debt, the System’s combined investments, Federal 

funds, and cash balances decreased 

$2.2 billion in 2009 and reduced the 

amount of debt needed. In addition, 

the increase in subordinated debt 

and significant net income in 2009 

contributed to the decrease in Systemwide debt.

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 requests quickly and 

efficiently. For example, FCA has a 

program that allows the System to 

issue discount notes at any time, up 

to a maximum of $60 billion, as long 

as it provides FCA with periodic 

reports on this activity. In addition, FCA approves the majority of 

longer-term debt issuances through 

a monthly “shelf” approval program. 

For 2009, FCA approved $179 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 

14. The GSEs are the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

15. 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 preparing the financial disclosures to investors and for making information concerning 

the financial condition and performance of the System as a whole publicly available.

16. 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 ($1.1 billion outstanding as of December 31, 2009) was issued by individual banks 

of the FCS. These individual banks are solely liable for the principal payments on this uninsured debt.
38

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

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, less 

the amount of affiliated associations’ 

investments in the bank that are 

counted in the regulatory capital of 

the associations, divided by liabilities) of not less than 103 percent. In 

connection with preferred stock and 

subordinated debt offerings, certain 

System banks are required by FCA 

to maintain a minimum net collateral ratio of 104 percent. All System 

banks have managed their operations 

to achieve net collateral ratios that 

are higher than the required minimum, with 104.56 percent being the 

lowest ratio for any individual bank 

as of December 31, 2009. 

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 2008, 

FCA adopted a Market Emergency 

Standby Resolution that authorizes a 

waiver of the 90-day liquidity reserve 

requirement whenever FCA deems 

that a financial, economic, agricultural, or national defense emergency 

has occurred. 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 90-day 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. First, 

the System banks have adopted a 

common liquidity standard to help 

ensure their collective ability to meet 

their obligations under these mutual 

agreements. Second, the amended 

and restated Market Access Agreement (MAA) establishes certain 

financial thresholds that provide the 

Funding Corporation with operational oversight and control over 

the System banks’ participation in 

Systemwide debt obligations.17 Third, 

the amended and restated Contractual Interbank Performance Agreement (CIPA) is tied to the MAA 

and establishes certain measures 

that monitor the financial condition 

and performance of the institutions 

in each System bank district. For 

the third quarter of 2009, one Farm 

Credit bank’s CIPA score fell below a 

defined MAA threshold, but, effective 

February 27, 2010, the bank’s score 

returned to compliance and exceeded 

the MAA financial performance 

threshold.

Between 2002 and 2005, the volume 

of new debt issuances declined as 

System banks extended maturities to 

comply with the common liquidity 

standard and to take advantage of 

historically low interest rates. From 

2006 through 2008, debt issuances 

increased as a result of favorable economic conditions in agriculture and 

strong loan demand from System 

borrowers. In 2009, debt issuances 

increased as the System called debt 

and reissued it at lower rates. For the 

12 months ended December 31, 2009, 

the System issued $523 billion in 

debt securities, compared with $519 

billion for 2008, $484 billion for 2007, 

and $387 billion for 2006.

Investor preference for shorter-term 

debt instruments made it more difficult for the System to extend its 

debt maturities in 2009. The System’s 

weighted-average remaining maturity for all outstanding insured debt 

was 3.1 years as of December 31, 

2009, compared with 3.3 years as of 

December 31, 2008, and 3.6 years as 

of December 31, 2007. The weightedaverage interest rates for the insured 

debt decreased from 2.8 percent as of 

December 31, 2008, to 1.8 percent as 

of December 31, 2009. The decrease 

is attributable to the low interest rate 

environment created by U.S. monetary and fiscal policy.

MISSION-RELATED 

INVESTMENTS

FCA is committed to helping ensure 

a dependable and affordable flow 

of funds to agriculture and to rural 

17. The System banks and the Funding Corporation first entered into the MAA in 1994, and the agreement is periodically amended (updated) and restated 

to revise financial targets, economic incentives, and other matters.
39

areas so that farmers, ranchers, and 

rural communities can flourish. Agriculture and rural America face new 

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. FCA believes that farming 

families 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 regulations allow System 

institutions to make certain missionrelated 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, 2009, the missionrelated investment securities held 

under these regulatory authorities 

totaled $2.56 billion, including $774.7 

million in AMBS as held-to-maturity 

and $277.9 million as available-forsale, $799.1 million in securities 

backed by guaranteed portions of 

USDA loans and agricultural equipment loans, and $12.6 million in 

farmer’s notes. In addition, in 2005 

FCA approved System institution 

investments in successor-in-interest 

contracts created as a result of the 

Tobacco Transition Payment Program.18 As of December 31, 2009, 

investments in successor-in-interest 

contracts totaled $695.5 million. 

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 has 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 expected to support 

and supplement investments by 

Government and community banks 

for worthwhile community projects. 

The pilot programs provide FCA 

with the opportunity to study these 

investments to determine how the 

System can use them 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. The restricted authorizing environment includes special 

examination and reporting for those 

institutions participating in the pilot 

programs. The pilot program structure also enables FCA 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 2009, three Farm 

Credit banks continued to be authorized to purchase and hold RHMS 

under a 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). 

18. 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 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.
40

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

These pilot programs are expected 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 should create 

more cost-effective credit for rural 

homeowners. As of December 31, 

2009, only one of the Farm Credit 

banks was participating in this program; it had $1.24 billion in RHMS 

classified as held to maturity. 

Agriculture and Rural Community 

Bonds and Securities—During 2009, 

all FCS institutions continued to 

be 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 Rural 

Development programs, rural community banks, and regional and local 

economic development authorities. 

As of December 31, 2009, FCS institutions held $635.2 million of investments in 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,19 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, 2009, the amount of 

mission-related equity investments 

outstanding totaled $4.7 million for 

investments in the starter farmer 

program, venture capital funds, and 

RBICs. 

19. 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.
41

As federally chartered agricultural 

lending cooperatives, the banks 

and associations of the Farm Credit 

System are limited-purpose lenders 

exposed to risk in making loans and 

investments to benefit their borrowerstockholders 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. 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. 

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 assetliability 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, continue 

to build the capabilities of their 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. In addition, FCA takes systemic risks into 

consideration when it develops its 

annual National Oversight Plan. This 

approach provides differential riskdriven examination activities for all 

institutions.

As of January 1, 2010, FCA was overseeing and examining the following 

FCS institutions:20

• 88 FCS direct-lender associations 

• 4 Farm Credit Banks 

• 1 Agricultural Credit Bank

• 5 service corporations and 

 1 special-purpose entity

• Farmer Mac

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 

Maintaining a Dependable Source of Credit for Farmers and Ranchers

 20. On a reimbursable basis, FCA performs examinations of certain entities that are not part of the Farm Credit System. As mandated by 12 U.S.C. 3025, 

FCA examines the National Consumer Cooperative Bank, which specializes in non-agriculture cooperative loans. In 2009, FCA also performed contract 

work for the U.S. Department of Agriculture (USDA). However, the safety and soundness of the FCS remains FCA’s principal focus and responsibility.
42

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

supervision processes for evaluating 

systemic risks emerging in agriculture and the financial services 

industry that can affect an institution, a group of institutions, and the 

System as a whole, and we respond 

to ensure that these risks are safely 

and soundly managed by the System. These risk supervision processes 

emphasize taking a proactive, nationally focused approach to addressing 

material risks and emerging issues. 

Also, as part of its examination 

approach, FCA uses a combination of 

methods to communicate with regulated institutions.

FCA is addressing numerous risks 

and emerging issues, and it is placing particular emphasis on the following:

• Loan Portfolio Management.

Our examiners review systems 

and processes used by the board 

of directors and management to 

plan, direct, control, and monitor 

the institution’s lending operations. 

• Large, Complex, and Shared 

Assets. We provide guidance to 

institutions in evaluating portfolio risks; enhancing processes, 

risk management systems, and 

controls; and establishing audit 

and review plans to address 

risks. 

• Collateral Risk Management.

We will evaluate how collateral 

risk is being routinely monitored 

and assessed and if operational 

adjustments are made to manage 

increased collateral risk.

• Compensation Programs and 

Corporate Governance. We have 

increased our scrutiny of the 

quality of board operations and 

directorates—especially in a risky 

lending environment.

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.21

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. FCA 

discloses the FIRS composite and 

component ratings to the institution’s 

board and CEO to provide perspective on relative safety and soundness. These ratings are also disclosed 

to the institution’s funding bank to 

ensure that it takes any actions necessary to safely and soundly oversee 

its direct loan with the institution. 

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 2009 show that the 

financial condition and performance 

of the FCS remained relatively strong 

throughout the year; however, risk 

did increase from the low risk levels 

of previous years. As shown in 

figure 9, FIRS ratings continued to 

decline in 2009 as stresses from the 

general economy, the credit crisis, 

and volatility in commodity prices 

surfaced and impacted some institutions. At December 31, 2009, 26 FCS 

institutions were rated 1 (28 percent), 50 were rated 2 (54 percent), 

14 were rated 3 (15 percent), and 3 

 21. See the Glossary for a complete description of the FIRS ratings.
43

Figure 9

Financial Institution Rating System (FIRS) 

Composite Ratings for the FCS, 2005–2009

Source: FCA’s FIRS Ratings Database.

Note: Figure 9 reflects ratings for only the System’s banks and direct-lending associations; 

it does not include ratings for the System’s service corporations, Farmer Mac, or the Federal 

Farm Credit Banks Funding Corporation. Also, the numbers shown on the bars reflect the 

total number of institutions with a given rating; please refer to the y-axis to determine the 

percentage of institutions receiving a given rating.
44

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

were rated 4 (3 percent). 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 9.) Although there 

has been some decline, the ratings 

still reflect a financially safe and 

sound FCS. Stresses in the swine, 

dairy, nursery, timber, and ethanol 

industries 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 and 

enhancing earnings, 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. 

As of December 31, 2009, FCA had 

10 associations under special supervision whose assets totaled $3.6 billion, 

amounting to less than 2 percent of 

the System’s total assets.

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. 

FCA’s enforcement authorities 

include the following powers:

• To enter into formal agreements

• To issue cease and desist orders

• 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 
45

with the enforcement action. During 

2009, FCA entered into formal written agreements with two associations 

whose assets totaled $423 million 

at December 31, 2009. The written 

agreements require the associations 

to take corrective actions with respect 

to certain areas of their operations, 

including financial condition and 

performance, portfolio management, 

and asset quality.

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 Farm 

Credit act provides System 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.
46

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

Farmer Mac is a stockholder-owned, 

federally chartered instrumentality 

of the United States and an institution of the System. It was created in 

1988 to establish a secondary market 

for a variety of loans to borrowers in 

rural areas. This secondary market is 

designed to increase the availability 

of long-term credit at stable interest 

rates to America’s rural communities 

and to provide those borrowers with 

the benefits of capital markets pricing 

and product innovation. 

Farmer Mac conducts activities 

through three programs, Farmer 

Mac I, Farmer Mac II, and its Rural 

Utilities program. Loans eligible for 

the Farmer Mac secondary market 

include the following:

• Farmer Mac I: mortgage loans 

secured by first liens on agricultural real estate and rural housing

• Farmer Mac II: certain agricultural and rural loans guaranteed 

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

rural business and community 

development loans

• Rural Utilities program: loans to 

finance electrification and telecommunications systems in rural 

areas

Farmer Mac’s secondary market 

activities include purchasing eligible 

loans directly from lenders; providing advances against eligible loans 

by purchasing obligations secured by 

those loans; securitizing assets and 

guaranteeing the resulting securities 

that represent interests in, or obligations secured by, pools of eligible 

loans; and issuing long-term standby 

purchase commitments (LTSPCs) for 

eligible loans. Securities guaranteed 

by Farmer Mac may be retained 

by the originator of the underlying 

assets, retained by Farmer Mac, or 

sold to third-party investors. 

In May 2008, the Food, Conservation, 

and Energy Act of 2008 expanded 

Farmer Mac’s program authorities by 

allowing it to purchase, and to 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 Food, Agriculture, 

Conservation, and Trade Act Amendments 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 

interest rate 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 5 summarizes Farmer 

Mac’s condensed balance sheets 

at the end of each year from 2004 

to 2009. 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 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, Farmer Mac is 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. 

Condition of Farmer Mac
47

Table 5	 	 	 	 	 	

Farmer Mac Condensed Balance Sheets, 2004–2009

As of December 31	 	 	 	 	 	 	

Dollars in Millions

 Percentage 

 growth

2004 2005 rate

Restated Restated 2006 2007 2008 2009 2008–2009

Total assets	 3,847.4	 4,341.4	 4,953.7	 4,977.6	 5,107.3	 6,138.8	 20.2

 

Total liabilities	 3,612.2	 4,095.4	 4,705.2	 4,754.0	 4,947.7	 5,798.4	 17.2

 

Net worth or 

	 equity capital	 235.2	 246.0	 248.5	 223.6	 15.3	 196.2	 1,182.3

 

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

On December 31, 2009, Farmer Mac’s 

net worth (that is, equity capital 

determined using generally accepted 

accounting principles [GAAP]) was 

$196.2 million, compared with $15.3 

million a year earlier. Net worth was 

3.2 percent of on-balance-sheet assets 

as of December 31, 2009, compared 

with 0.3 percent at the end of 2008. 

The increase resulted primarily from 

$80.3 million of retained earnings, 

$50.7 million of other comprehensive income from unrealized gains 

on investment securities and Farmer 

Mac Guaranteed Securities classified 

as available-for-sale, and the issuance of $48.4 million of Farmer Mac’s 

Series C Preferred Stock during 2009. 

When Farmer Mac’s off-balance-sheet 

program assets (that is, its guarantee 

obligations) are added to total onbalance-sheet assets, capital coverage 

is 1.5 percent. In March 2009, Farmer 

Mac reduced its common stock 

dividend in response to investment 

losses experienced in 2008, which 

also added to its capital position. 

As of December 31, 2009, Farmer 

Mac continued to be in compliance 

with all statutory and regulatory 

minimum capital requirements. In 

addition, in the first quarter of 2010, 

Farmer Mac issued $250 million of 

Farm Asset Linked Credit Notes 

(FALConS). This hybrid equity was 

issued by Farmer Mac II, LLC, a 

newly created subsidiary of Farmer 

Mac that now houses all Farmer Mac 

II program business. Farmer Mac 

used part of the proceeds from the 

sale of the FALConS to repurchase 

and retire all $150 million of the outstanding Series B Preferred Stock.

At year-end 2009, 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).22 Farmer Mac’s core 

capital as of December 31, 2009, 

totaled $337.2 million, exceeding the 

statutory minimum capital requirement23 of $217 million by $120.2 million. Farmer Mac’s regulatory capital 

totaled $351.3 million as of December 31, 2009, exceeding the regulatory risk-based capital requirement 

of $35.9 million by $315.4 million. 

Regulatory capital was 4.8 percent of 

total Farmer Mac I program volume 

(including both on- and off-balancesheet program volume). Table 6 

offers a historical perspective on 

capital and capital requirements for 

2005 through 2009.

22. See the FCA Web site at www.fca.gov for more information about the RBC Model.

23. The statute requires minimum capital coverage of 2.75 percent for on-balance-sheet assets and 0.75 percent for off-balance-sheet obligations.
48

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

Table 6	 	 	 	 	 	

Farmer Mac Capital Positions, 2005–2009

As of December 31	 	 	 	 	 	 	

Dollars in Millions

2005

Restated 2006 2007 2008 2009

GAAP equity	 $246.0	 $248.5	 $223.6	 $15.3	 $196.2

Core capital	 $230.8	 $243.5	 $226.4	 $207.0	 $337.2

Regulatory capital	 $239.4	 $248.1	 $230.3	 $223.4	 $351.3	

Statutory requirement	 $142.5	 $174.5	 $186.0	 $193.5	 $217.0

Regulatory requirement	 $29.5	 $42.9	 $42.8	 $57.3	 $35.9

Excess over statutory or regulatory requirement*	 $88.3	 $69.0	 $40.4	 $13.5	 $120.2

Capital margin excess > minimum	 62.0%	 39.6%	 21.7%	 7.0%	 55.4%

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

* 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. 

 

Figure 10

Farmer Mac Program Activity and Nonprogram

Investment Trends

As of December 31

Sources: Farmer Mac’s Annual Reports on Securities and Exchange Commission Form 10-Ks.
49

In 2009, FCA published a final rule 

revising the risk-based capital regulations. The revisions updated the 

RBC Model in response to changing 

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

portfolio at Farmer Mac, as well as 

continued development of best industry practices in financial modeling. 

During 2009, FCA issued 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 investments. 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 

consist of 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. During 2010, FCA issued an 

advance notice of proposed rulemaking to solicit public comments on 

potential amendments to the current 

nonprogram investment and liquidity 

regulations. 

PROGRAM ACTIVITY

Farmer Mac’s total program activity 

increased to $10.7 billion on December 31, 2009, from $10.1 billion a 

year earlier (see figure 10). The net 

increase was largely attributable 

to new on-balance-sheet rural utility cooperative business completed 

through the Farmer Mac AgVantage 

program. AgVantage transactions are 

general obligations of the issuing 

financial institution that are guaranteed by Farmer Mac. In addition to 

the general obligation of the financial 

institution, each AgVantage security 

is secured by eligible loans under 

one of Farmer Mac’s programs in an 

amount at least equal to the outstanding principal amount of the 

security. 

Farmer Mac’s Long-Term Standby 

Purchase Commitment (LTSPC, 

Standby) product also generates 

program activity. 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. Lenders may also elect to 

exchange Standby commitments for 

securities guaranteed by Farmer Mac. 

Farmer Mac recently announced an 

agreement with an investment banking partner to market Farmer Mac 

investment products—primarily the 

LTSPC—to commercial banking clients that hold agricultural mortgage 

loans in their portfolios.

Off-balance-sheet program activity 

consists of Standbys, certain AgVantage securities, and agricultural mortgage-backed securities (AMBS) sold 

to investors. At the end of December 

2009, 62 percent of program activity 

consisted of off-balance-sheet obligations24 (see figure 11).

ASSET QUALITY

On December 31, 2009, the portion 

of the Farmer Mac I program portfolio that was nonperforming was 

$62.0 million, or 1.41 percent of the 

principal balance of all loans purchased, guaranteed, or committed to 

be purchased.25 This compares with 

$80.0 million, or 1.61 percent, on 

December 31, 2008. Assets are considered to be nonperforming when 

they are 90 days or more past due, 

24. Because of on-balance-sheet AgVantage activity, this percentage does not correspond to the total of percentages shown in figure 11 for AMBS, Standbys, 

and AgVantage program activity. 

25. Farmer Mac assumes 100 percent of the credit risk on loans made after enactment of the Farm Credit System Reform Act of 1996, whereas loans made 

prior to enactment of the act are supported by mandatory 10 percent subordinated interests, which mitigate Farmer Mac’s exposure. For that reason, 

loans made before enactment of the 1996 act 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.
50

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

in foreclosure, or in bankruptcy; real 

estate properties acquired by Farmer 

Mac through foreclosure are also 

reported as nonperforming assets. As 

of December 31, 2009, Farmer Mac’s 

90-day delinquencies were $49.5 

million, or 1.13 percent, compared 

with $67.1 million, or 1.35 percent, 

as of December 31, 2008. Real estate 

owned as of December 31, 2009, 

was $739,000, up from $606,000 a 

year earlier. Thirty-nine percent of 

the 90-day delinquencies in Farmer 

Mac’s loan portfolio were on ethanol 

loans. Delinquencies on non-ethanol 

loans remain low and reflect the 

strength of the rest of the agricultural 

economy. Farmer Mac reported no 

delinquencies or nonperforming loans 

in its pools of rural utility cooperative loans. 

On December 31, 2009, Farmer Mac’s 

allowance for losses totaled $14.2 

million, compared with $16.4 million 

on December 31, 2008. Farmer Mac 

attributed the change in the allowance for losses primarily to a $5.2 

million provision for loan losses; 

charge-offs of $8.5 million recognized during the year, which were 

largely driven by defaults in the 

ethanol loan portfolio; and $1 million 

in recoveries. Figure 12 shows the 

levels of Farmer Mac’s nonperforming assets and its 90-day delinquencies relative to outstanding program 

volume, excluding volume prior to 

passage of the Farm Credit System 

Reform Act of 1996. 

EARNINGS

Farmer Mac reported net income 

available to common stockholders 

of $82.3 million (in accordance with 

GAAP) for the year ended December 

31, 2009, up significantly from the 

$154.1 million loss reported at yearend 2008. The significant loss in 2008 

was 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 earnings for 

2009 were $16.1 million, compared 

with a loss of $81.5 million on a core 

earnings basis in 2008.26 Net interest 

income, which excludes guarantee fee 

income, was $85.9 million in 2009, 

down slightly from what it was in 

2008. Guarantee fee income, at $31.8 

million, was 12.1 percent higher 

in 2009 than in 2008. Nonprogram 

investments accounted for an estimated 16 percent of interest income 

for 2009, down from 44.5 percent for 

2008.27 Table 7 shows a six-year trend 

for the basic components of income.

26. 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. In the 2008 FCA Annual Report, 2008 core earnings were reported as a positive $24.7 million. That figure 

excludes impairment losses on investments, but a more meaningful amount to report includes such losses, which were $106.2 million. 

27. Because of a transposition error, nonprogram investments were incorrectly reported in the 2008 annual report as 52.3 percent of interest income.
51

Figure 11

Farmer Mac Total Program Activity

As of December 31, 2009

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

AMBS = agricultural mortgage-backed securities

Total = $10.72 billion
52

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

Figure 12

Allowance, Nonperforming Asset, and Delinquency Trends, 2004–2009

As of December 31

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

Table 7	 	 	 	 	 	 	

Farmer Mac Condensed Statements of Operations, 2004–2009

As of December 31	 	 	 	 	 	 	

Dollars in Millions	 	 	 	 	 	 	

 

2004 2005

Restated Restated 2006 2007 2008 2009

 

Total revenues	 $77.3	 $83.9	 $67.8	 $31.5	 ($140.6)	 $181.8	

Total expenses	 $38.3	 $36.8	 $38.0	 $27.1	 $13.5	 $99.5	

Net income available

	 	 to shareholders	 $39.0	 $47.0	 $29.8	 $4.4	 ($154.1)	 $82.3	

Core earnings	 $27.4	 $28.7	 $25.9	 $29.9	 ($81.5)	 $16.1	

Sources: Farmer Mac’s Annual Reports on Securities and Exchange Commission Form 10-Ks.
53

During 2009, the Farm Credit System operated in an environment of 

economic uncertainty and financial 

volatility. The United States and most 

of the world were mired in one of 

the worst economic downturns since 

the Great Depression. The situation 

was characterized by plummeting 

residential real estate values, tightening credit markets, sharp cutbacks 

in consumer purchases, and doubledigit unemployment rates in many 

countries. Consequently, both domestic and foreign demand for agricultural products declined sharply 

last year, particularly for higher-end 

items like meats and dairy products, 

and resulted in reduced prices and 

incomes for farmers and a number 

of agribusiness bankruptcies. Dairy, 

cattle, and hog producers had a particularly challenging year as prices 

for their products fell faster than the 

drop in feed costs, resulting in low 

to negative returns. They responded, 

though somewhat slowly, by cutting 

back herd sizes. As a result, by the 

end of 2009 and early 2010, producer 

prices had seen some improvement. 

Record crops, both at home and 

abroad, further weakened crop prices 

and returns in 2009. The economic 

downturn and oversupply also 

affected the ethanol industry, which 

struggled throughout 2009 with low 

to negative margins. Sectors tied 

to the housing sector also suffered 

financially, including timber, nursery, 

and sod. 

Economic conditions in the United 

States and throughout the world are 

expected to improve in 2010 and 

2011, with economic growth expected 

to be slower in industrialized countries than in developing countries. 

Consumers are returning to the 

marketplace, exports are beginning to 

grow again, and business spending is 

finally picking up after a long period 

of decline. The USDA forecasts an 

improvement in net farm income for 

2010, with almost all of the gains 

occurring in the livestock sector. 

Although crop sales may decrease in 

2010, a likely drop in fertilizer costs 

and other production expenses will 

help support net income for crop 

producers. A moderate level of direct 

Government payments for program 

crops will also aid many producers 

in 2010.

The FCS experienced a relatively 

good year in 2009, achieving relatively low loan growth and another 

round of solid earnings despite the 

difficult environment. However, the 

System’s financial performance was 

negatively affected by the global 

recession: credit quality declined and 

the number of nonperforming loans 

rose. Increases in nonaccrual loans 

were especially evident in the dairy, 

hog, and ethanol segments of the 

System’s loan portfolio. Furthermore, 

the collapse of the housing market 

had an adverse effect on the System’s 

forestry and nursery products portfolio as well. 

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 uncertain conditions in 

the macro-economy, margin pressures for producers, financial stress 

in the System’s loan portfolio, and 

other longer-term challenges that will 

influence the financial performance of 

agriculture and the FCS in the coming years. Through its regulatory and 

examination activities, FCA will continue to closely monitor and address 

these challenges.

Prospects for the General 

Economy

Key economic indicators released in 

April 2010 offer hope for a speedier 

recovery of the U.S. economy yet 

the continued economic and sovereign debt stress in Europe creates 

uncertainty. Buoyed by an uptick in 

consumer confidence and durable 

goods orders, payroll employment 

registered a gain of 162,000 jobs in 

March, the largest increase in more 

than two years, following a year that 

saw a loss of 4.1 million jobs. While 

the jobs market turned a corner in 

March, hiring remained sluggish 

compared with hiring in previous 

recoveries, and the unemployment 

rate remained stuck at 9.7 percent 

for the third month in a row. In all 

likelihood, the unemployment rate 

will stay above 9.0 percent this year 

and will continue to be high until 

Challenges Facing the Agricultural Economy 

and the Farm Credit System
54

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

the economy sees more strength from 

consumer and business spending. 

While many of the problems that 

precipitated the recession have now 

been addressed, a few still remain 

and will likely slow the pace of the 

recovery.

One of those problems is the housing 

sector. In a typical recovery, housing 

often spurs economic activity at an 

early stage as confident buyers begin 

to purchase homes, new furniture, 

and other home improvements. This 

time, however, housing may be slow 

to contribute to the turnaround, 

acting as a drag on overall GDP 

growth. While the housing market 

began to show some improvement 

early in 2010, with existing home 

sales up slightly from a year ago, 

new home sales remained stagnant. 

Many regional housing markets 

continue to be depressed by a lack 

of jobs, as well as prospects for more 

home foreclosures in 2010. 

On balance, the economic outlook for 

2010 suggests that consumer demand 

will be sufficient to promote a continuation of the recovery that began 

in the second half of last year. Most 

forecasters expect to see moderate 

GDP growth of about 3.2 percent this 

year, up considerably from the 2.4 

percent contraction in the economy 

in 2009. Consumer spending will be 

a key factor in the economy’s performance. A gradual improvement in 

employment earnings, some recovery 

in household wealth, and more credit 

availability will promote consumer 

spending. The export sector is also 

expanding with the improving economy, but so too are imports. These 

offsetting developments will leave 

the net trade balance in a negative 

position for 2010, although the trade 

balance for agriculture will remain 

positive. As noted earlier, while the 

employment picture for 2010 may see 

some gradual improvement as the 

year progresses, meaningful reductions in the unemployment rate will 

face stubborn resistance. 

An issue raising concerns among 

policymakers is the size of the Federal budget deficit and its potential 

effect on inflation. The projected 

deficit for this fiscal year is on track 

to nearly match the $1.4 trillion gap 

recorded in fiscal year 2009. Ongoing deficits of this magnitude could 

lead to structural imbalances in the 

capital and credit markets that would 

threaten the confidence of market 

participants—both domestic and 

foreign—and spark inflationary fears 

and a rise in interest rates. While the 

current deficits have been necessary 

to address the economic recession, 

focus is now shifting to greater fiscal 

discipline. For example, in February 

2010 President Obama established 

the National Commission on Fiscal Responsibility and Reform. As a 

result of this shift in focus, policymakers will likely move to set the 

budget on a path toward fiscal balance. Such a move would help calm 

investor fears, yield lower long-term 

interest rates, and enhance consumer 

and business confidence. 

With respect to inflation, most of 

the current data point to a modest 

rate of increase in consumer prices 

despite a sharp jump in energy 

prices. Core inflation, which excludes 

food and energy, was less than 1 percent (annual rate) in the first quarter. 

Most observers believe it will remain 

in check for the rest of this year 

and 2011, reflecting household and 

business uncertainty, sluggish labor 

markets, slack manufacturing capacity, and a slow increase of credit 

availability. The longer-term picture 

for inflation also appears relatively 

stable, with most forecasts pointing 

to only modest gains in consumer 

prices over the next decade. 

Other factors affecting the outlook 

for the FCS are funding costs and the 

future direction of borrower interest 

rates. As noted on page XX, the System maintained regular and flexible 

access to the debt markets in 2009, 

although demand for longer-term 

securities remained moderate and 

pricing was volatile, as spreads over 

Treasury securities show. Because 

of the Federal Reserve’s low interest 

rate policies, rates paid by System 

borrowers have been near historic 

lows. The outlook for Treasuries 

is for an increase of about 25 basis 

points in both short- and long-term 

rates by the end of 2010. Over the 

longer term, larger rate increases 

seem possible, though future interest 

rate movements are highly unpredictable and events could occur that 

prolong the current low rate environment in the United States. How-
55

ever, because of the safety of System 

securities, investors are expected to 

continue purchasing them in 2010 at 

favorable spreads over U.S. Treasury securities. Higher volatility in 

the financial markets could lead to 

new marketing challenges in issuing System securities in the period 

ahead. Another factor that could 

affect the System’s funding costs 

and its ability to meet its funding 

needs is Government policy change. 

For example, actions associated with 

financial regulatory reform or policy 

actions affecting the role of the housing GSEs could have an impact on 

the System.

Economic Setting for

Agriculture and Credit

From a big-picture perspective, the 

agricultural sector appears to be 

relatively healthy. Net farm income is 

expected to be on the mend in 2010. 

And while land values are projected 

to dip again this year, the sector’s 

aggregate balance sheet continues 

to be strong. However, behind what 

are relatively favorable sector-wide 

measures, the financial condition of 

commercial farmers has diverged 

greatly over the past several years. In 

general, producers of the major field 

crops have enjoyed record incomes 

and substantial gains in accumulated 

wealth. Meanwhile, those producers 

with incomes dependent on the sale 

of livestock and livestock products 

have had extremely poor earnings 

(particularly if they had to rely on 

purchased feed grain items), and 

many have had their equity positions 

severely eroded. Similarly, producers 

of housing-related products, such as 

nursery plants and timber, have had 

depressed earnings. Naturally, considerable regional differences exist, 

reflecting enterprise mixes and local 

economic conditions. 

USDA has forecast that net farm 

income will increase nearly 12 percent to $63 billion in 2010 (forecast 

of February 11, 2010). If achieved, 

this level would be the fifth largest on record and slightly below the 

prior 10-year average, an average 

made higher by four record years. 

Net farm income topped $87 billion 

in 2008, nearly matching the 2004 

record high, and it was over $70 

billion in both 2005 and 2007. Still, 

in constant dollars, 2010 net income 

would be off about 13 percent from 

the prior 10-year average. Also, given 

a higher cost structure, the potential rebuilding of grain stocks, much 

uncertainty over the demand prospects for livestock products, and the 

link to ethanol policy and volatile oil 

prices, this year’s net income forecast 

is by no means certain. Included in 

net farm income are direct Government payments, which are projected 

to dip $0.5 billion to $12.4 billion in 

2010, or about 19.7 percent of net 

farm income, a level lower than the 

average of the past 10 years.

Farm programs and foreign trade 

agreements are two important policy 

forces that help shape farm income 

results and thus their effect on borrower repayment risk. The flow of 

Government payments serves as a 

safety net offering protection to producers against ruinous price declines, 

yield disasters, or other market 

disruptions. Over the years, these 

programs have generally supported 

farm income, mostly for crop producers, and helped stabilize prices, but 

sometimes at a heavy cost to taxpayers. Government farm program payments under the five-year 2002 farm 

act averaged $16 billion per year.

A key concern for many agricultural 

lenders has been the potential for 

significant change to the Government 

payment mechanism. In the 2008 

farm bill, vigorous debates occurred 

over reducing, or at least redistributing, direct payments to producers, 

but in the end the 2008 act retained 

many of the basic features of earlier 

laws with respect to acreage bases, 

yield histories, loan rates, and target 

prices for program crops. Still, Congress successfully shifted the overall 

spending priorities toward nutrition, 

renewable fuels, conservation, and 

rural development in an effort to 

benefit a broader base of participants. 

Congress also emphasized revenue 

protection under redesigned crop 

insurance programs to provide financial assistance in low-income years, 

with the aim of eliminating the need 

for costly ad hoc disaster assistance 

programs. 

Short of a significant market disruption in agriculture, most policymakers likely will remain focused on 
56

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

employment issues and the future 

direction of the economy until the 

current farm bill legislation expires 

and a new farm bill is introduced 

(scheduled in 2012). As that date 

draws near, worries will once again 

surface that Congress will try to 

reduce Government payments to 

farmers in its continuing efforts to 

reduce deficits in the Federal budget. 

Agricultural lenders cannot assume 

that the Federal safety net for agriculture will automatically keep pace 

with structural changes in the industry and the rise in production costs. 

In fact, the safety net is likely to play 

a lesser role in off-setting farmer 

repayment risk in the future.

Exports are a critical part of the farm 

income picture because our domestic markets cannot absorb all that is 

produced each year. About a fourth 

of all farm production is shipped 

abroad, resulting in a substantial 

net trade surplus for the farm sector. 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, which was launched in 2001, 

has faced strong headwinds from 

the outset, resulting in very little 

progress toward a new agreement on 

tariffs and trade. The world recession and other economic priorities 

continue to distract the negotiations, 

and it seems unlikely that anything 

meaningful will be accomplished 

by the WTO this year. Fortunately, 

bilateral agreements with various 

countries and a return to growth 

for the world’s economies should 

lead to farm export growth. In fact, 

USDA’s February forecast for 2010 

shows agricultural exports increasing 

$3.4 billion above the previous year’s 

level to $100 billion, which would be 

the second highest on record.

As previously noted, agriculture’s 

balance sheet remains strong. According to USDA, the sector’s debt-toasset ratio was down to about 10 

percent at year-end 2007 and is projected to be 12.4 percent at the end 

of 2010. This ratio is still among the 

lowest in history and sharply below 

the crisis years of the 1980s when 

it topped 20 percent. However, for 

individual farm lenders, this oftenquoted national average leverage 

ratio is not particularly relevant, in 

part because it includes the roughly 

two-thirds of farms that have no 

debt. Portfolio risk is determined by 

the distribution of widely varying 

debt-to-asset ratios for individual 

farm loans across the portfolio. 

With about 85 percent of the farm 

sector balance sheet made up of 

farmland assets, land value trends 

are tracked closely by System lenders. According to USDA projections, 

by December 2010 land values will 

have declined by 10 percent in the 

past three years. This decline has for 

the most part been driven by nonagricultural influences on farmland and, 

to a lesser degree, by poor returns to 

livestock producers. Quarterly surveys conducted by Federal Reserve 

district banks reported mixed results 

for changes in cropland and ranch 

values in 2009. Pasture and ranchland values generally decreased in 

most regions, and all land classes 

have been affected by the general 

economic recession and high unemployment rates. The lack of economic 

opportunity in some regions has 

hurt farm households that rely on 

off-farm sources of income to sustain 

their farming operations, leading to 

a weaker farm real estate market. 

Note that agricultural land values for 

prime land have stayed about flat in 

the major field crop States, even as 

crop earnings prospects have weakened. One factor currently supporting land values, especially for prime 

farmland, is the limited amount of 

land being placed on the market.

In 2009, net farm income dropped 

much more sharply than previously 

projected to an estimated $56.4 billion as a result of relatively weak 

export and domestic demand. Early 

farm income prospects were worrisome for both the crop and livestock 

sectors. For livestock and dairy, 

product prices declined faster than 

feed costs, which squeezed profit 

margins. Crop producers were concerned about the ethanol industry 

and a weaker outlook for renewable 

fuels, plus planting delays and rising 

input prices. As the year progressed, 

however, concerns on the crop side 

lessened as inputs became readily available at lower prices and as 
57

favorable growing conditions led to 

high yields in many areas. However, 

concerns on the livestock side materialized, especially among milk and 

pork producers, where losses either 

wiped out or greatly reduced the 

equity accumulations from earlier 

years. 

Through herd downsizing and 

some increase in expected demand, 

the excess capacity problem in the 

livestock industry is expected to ease 

as 2010 progresses. Adjustments in 

agricultural production capacity are 

expected to firm up market prices 

and improve the margins of livestock 

producers—broiler producers mostly 

self-corrected in 2009. In fact, USDA 

expects the average net cash income 

for commercial and intermediatesized farms in each of the major livestock enterprises to improve in 2010. 

One caveat is the dairy industry. 

Even as late as April 2010, the imbalance of supply and demand in the 

dairy industry was still a problem 

because milk production had not 

decreased as expected. On the other 

hand, pork margins were doing better than anticipated by spring 2010; 

thus the average earnings for commercial hog operations may come in 

higher than projected. These developments show how difficult estimating 

farm income can be. 

In contrast to the livestock outlook, 

USDA projects that receipts and net 

cash earnings for commercial and 

intermediate-sized operations in each 

of the major crop enterprises will be 

down in 2010. However, the earnings 

estimates are only marginally lower 

than those of a year ago, and they 

follow a string of years with record 

earnings. Also, some of the declines 

in cash receipts from crops will be 

offset by further reductions in input 

costs. Fertilizer expenses are forecast 

to decline by almost 8 percent in 

2010, after a 26 percent decline in 

2009. 

There are some concerns that 

demand for crops will falter, causing 

crop prices to collapse and placing 

many producers in a greater cost 

squeeze. However, demand will be 

less likely to weaken for the crop 

sector if the Environmental Protection Agency decides to increase the 

ethanol blend mix above 10 percent. 

Of course, this may not be good 

news for livestock producers because 

it may increase their input costs. The 

fact that such a policy decision can 

be a boon for one agricultural sector and a disadvantage for another 

reflects the diversity of the agricultural industry.

The massive fiscal stimulus programs 

of 2009 should benefit agriculture in 

2010, 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 

will vary widely by region and by 

enterprise type and size as producers continue to wrestle with volatile 

output and input prices and with 

labor and water shortages. New 

Government policies may also affect 

outcomes. There is considerable support for new regulations aimed at 

reducing green house gas emissions 

in the production of energy. These 

may raise costs and narrow margins, 

especially for the livestock sector.

Another factor affecting farmers, 

ranchers, and their lenders is the rise 

in credit risk. Driving this increase 

in risk is the increase in price volatility, which affects not only the prices 

farmers receive for their products 

but also the prices they pay for their 

inputs. Farmers have always had 

years of profit and years of loss, but 

the swings have been wider in recent 

years. Also, to reduce their own 

risks, traditional agricultural intermediaries, such as grain elevators, are 

having to push risk down the production chain to the producer. Government programs, which have traditionally helped farmers—especially 

crop producers—to manage risk, may 

not provide enough protection in this 

increased risk environment. 

Concerned that large price swings 

may be characteristic of the future, 

many lenders, including System institutions, are becoming more cautious 

and looking more closely at the risk 

management practices of credit applicants. More and more lenders are 

likely to expect potential borrowers 

to use risk management tools such as 

forward contracting, futures, options, 
58

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

USDA revenue insurance, and the 

new USDA ACRE program. In addition, lenders are better aligning their 

pricing structures to charge for risk, 

which results in higher rates for borrowers who have the greatest risk.

Not only does high volatility in 

profits or margins increase the need 

for risk management, it also increases 

the need for working capital and 

increases the risk of leverage (use of 

debt relative to capital). As a result, 

many lenders today expect potential 

borrowers to have more collateral 

and greater cash flow relative to 

debt. Furthermore, the low cost of 

agricultural credit, which has been a 

big benefit for System borrowers,28 is 

expected to rise, along with the cost 

of credit in the non-farm economy. 

Growing Credit Risk in the

System’s Portfolio

Declines in 2009 commodity prices 

and farm income, coupled with 

decreases in farm real estate values 

on marginal or transitional land, 

increased the stress on agricultural 

credit last year, especially in the 

dairy, hog, and biofuels sectors. 

In some cases losses were greater 

because producers did not have 

sufficient risk management experience to adjust for the greater volatility in both output and input prices. 

Furthermore, stress in the forestry 

sector rose as demand for housing 

declined and the general economy 

weakened. In total, nonaccrual loans 

to these four sectors accounted for 

$1.8 billion, or 53 percent, of the $3.4 

billion in total nonaccrual loans in 

the System at the end of 2009. Also, 

$267 million in loan charge-offs, representing about half of the System’s 

total charge-offs, was associated with 

loans to these four agricultural sectors. In comparison, these four sectors represented about $31 billion, or 

19 percent, of the System’s total loan 

portfolio. The individual sectors are 

discussed more fully in the following 

paragraphs.

Dairy

The System’s loans outstanding to 

the dairy sector totaled $13.4 billion at the end of 2009, up about 

14 percent from year-end 2008. The 

increase, which resulted from a 

combination of rising feed costs and 

declining milk prices, reflects the 

distressed conditions in the industry. The sharp decline in milk prices 

stemmed from an oversupply of milk 

caused by the reduced demand for 

exports and other dairy products. 

As a result, producers borrowed 

more money to finance their operating loans and to refinance operating 

losses using equity in their real estate 

or other assets where possible. While 

most producers reported profits during 2008, substantial losses during 

2009 wiped out the financial progress 

many producers had made over the 

past few years. System dairy loans 

not accruing interest rose to $640 

million at year-end 2009 as compared 

with a negligible amount at the end 

of 2008. Charge-offs amounted to $73 

million. Loans to this sector were 

about 8 percent of the System’s total 

loan portfolio and 45 percent of its 

capital at the end of the year.

28. The average rate charged by FCS institutions for farm real estate and production loans was only 5 percent in 2009.
59

Hogs

The System’s loans outstanding to 

the hog industry totaled almost $4.7 

billion at year-end 2009, an increase 

of $0.2 billion from a year earlier. 

Like dairy producers, hog producers borrowed money to finance their 

operating loans and to refinance 

operating losses using equity in their 

real estate where possible. Reduced 

export demand and insufficient 

herd downsizing decisions led to an 

oversupply of pork and significantly 

lower hog prices, causing many 

producers to suffer losses during 

most of the last two years. System 

loans not accruing interest were $398 

million at year end compared with a 

negligible amount at the end of 2008. 

Charge-offs totaled $15 million in 

2009. Loans to this sector represented 

about 3 percent of the System’s total 

loan portfolio and 16 percent of its 

capital.

Biofuels

At the end of 2009, the System’s loan 

commitments to the biofuel industry (primarily ethanol) totaled $3.6 

billion, down about 20 percent from 

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

funded $2.5 billion at year end. The 

decline in loan activity reflected the 

distressed conditions in the industry. As firms in the industry filed 

for bankruptcy or idled their plants 

during the year, the System’s nonperforming loans to this sector rose 

significantly before declining in the 

latter half of 2009. System loans not 

accruing interest totaled $370 million at year end, while charge-offs 

totaled $142 million for the year, 

which was 4.8 percent of the loans 

outstanding to the biofuel industry 

at the start of 2009. Biofuel loans 

outstanding at year end 2009 were 

less than 9 percent of capital and less 

than 2 percent of total loan volume, 

both relatively small numbers when 

compared to the System’s exposure 

to other industries or commodities. 

Furthermore, both losses and nonaccrual assets were concentrated in a 

few firms. A key risk for the FCS 

is the dependency of the biofuels 

industry on Government policy and 

support, including tax credits, protection from imports, loan guarantees, 

and Government grants. To reduce 

its risk exposure, the System has 

originated and participated out a 

significant amount of debt to nonSystem lenders. 

Forestry

The System’s loans outstanding to 

the forestry sector totaled $10.3 billion at year-end 2009, down about 

6 percent from a year earlier. The 

decline was an outgrowth of conditions in the general economy, which 

witnessed a huge shift downward in 

housing demand and, as a result, a 

significant decrease in the demand 

for lumber. As new loan demand 

fell in 2009, many producers also 

reduced their debt. Despite the 

reduction in outstanding forestry 

loans, forestry nonaccruals rose to 

$392 million at year-end 2009, and 

charge-offs for the year were $37 million. Loans to this sector represented 

about 6 percent of the System’s total 

loan portfolio and 34 percent of its 

capital. 
60

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

APPENDIX

FARM CREDIT ADMINISTRATION 

OFFICES

The 266 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 manages, administers, and establishes policies for FCA. 

The Board approves the policies, 

regulations, charters, and examination 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 serves 

as the Parliamentarian for the Board 

and keeps permanent and complete 

records of the acts and proceedings 

of the Board. He or she ensures that 

the Board complies with statutory, 

regulatory, and internal operation 

reporting requirements. The Secretary 

to the Board also serves as Secretary 

to the Farm Credit System Insurance 

Corporation Board. In addition, he 

or she serves as the Sunshine Act 

Official for the FCA Board. 

The Chairman of the FCA Board

serves as the chief executive officer 

(CEO). The CEO enforces the rules, 

regulations, and orders of the FCA 

Board. He or she directs the implementation of policies and regulations 

Figure 13

FCA Organizational Structure

As of April 2010
61

adopted by the FCA Board. The 

Office of the Chief Executive Officer 

plans, organizes, directs, coordinates, 

and controls FCA’s day-to-day 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, fact sheets, reports, 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 and current and emerging risks 

to the System; and develops supervisory strategies to ensure that the FCS 

operates in a safe and sound manner, 

complies with the law and regulations, and fulfills its public policy 

purpose. For more information about 

the role of the Office of Examination, 

go to www.fca.gov/law/guidance.

html and click View Board Policy 

Statements to read “Examination 

Policy” (FCA-PS-53). 

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 Registrar and maintains 

the Agency’s public rulemaking 

files. 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 policy and regulation 

development activities that ensure 

the safety and soundness of the FCS 

and support the System’s mission. 

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. 

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 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. 
62

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

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. 

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. 

AGENCY OFFICIALS 
63

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. 

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 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. 

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 

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. 
64

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

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. 

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. 
65

Michael Stokke

is Director of the 

Office of Con-

gressional 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 Rep-

resentatives from 1995 to 1998. He 

served as Chief of Staff for Represen-

tative 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. 
66

Farm Credit Administration 2009 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-
67

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 long-term 

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 
68

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

institution in this group. Institutions in this category generally 

give cause for regulatory concern 

and require more than normal 

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. 
69

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
70

Farm Credit Administration 2009 Annual Report on the Farm Credit System 

The Farm Credit Administration 2009 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.farmcredit-ffcb.com. Copies can 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 be obtained from 

Farm Credit System Insurance Corporation 

1501 Farm Credit Drive 

McLean, VA 22102 

Telephone: 703-883-4380

ADDITIONAL INFORMATION 
0710/200

Copies Available From:

Office of Congressional and Public Affairs

Farm Credit Administration

1501 Farm Credit Drive

McLean, VA 22102

703-883-4056

www.fca.gov