2010 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 AdministraƟ on 5

 Overview and Mission 5 

 The Board 5 

 

Farm Credit System—An Overview of Events and CondiƟ ons 9

 FCS Role 9

 FCS Structure 9 

 The Safety and Soundness of the FCS 11

 Financial CondiƟ on of the FCS 11

Borrowers Served 18

 System Funding for Other Lenders 19

 Farm Debt and Market Shares 22

Serving Young, Beginning, and Small Farmers and Ranchers 25

 YBS Lending Results 26

 Assessment of YBS Results for Individual AssociaƟ ons 28

 YBS Borrowing Trends, 2001–2010 29

 YBS Programs 29

Regulatory Policy and Approvals 33

 Regulatory AcƟ vity in 2010 33

 Corporate AcƟ vity in 2010 35

 Funding AcƟ vity in 2010 37

 Mission-Related Investments 38

Maintaining a Dependable Source of Credit for Farmers and Ranchers 41

 ConducƟ ng a Risk-Based ExaminaƟ on and Oversight Program 41

 MeeƟ ng Statutory ExaminaƟ on Requirements 41

 IdenƟ fying and Responding to PotenƟ al Threats to Safety and Soundness 41

 Measuring the System’s Safety and Soundness 42

 Providing Diff erenƟ al Supervision and Enforcement 43

 Working with Financially Stressed Borrowers 45

CondiƟ on of Farmer Mac 46

 Capital 47

 Program AcƟ vity 48

 Asset Quality 48

 Earnings 49

Challenges Facing the Agricultural Economy and the Farm Credit System 51

 Prospects for the General Economy 51

 Economic Seƫ ng for Agriculture and Credit 53

 Credit Risk in the System’s Porƞ olio 56

Appendix 58

 Farm Credit AdministraƟ on Offi ces 58

 Agency Offi cials 60

CONTENTS
2

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

STATEMENT OF THE CHAIRMAN AND CEO

Dear Reader,

On behalf of the Board and the dedicated employees of the Farm Credit Administration, I present the 2010 Annual Report on the 

Farm Credit System (FCS or System). 

I am pleased to report that, despite volatile commodity prices and stress to some individual institutions, the System’s overall condition and performance remained sound in 2010. It is well positioned to withstand the continuing challenges posed by the general 

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

Financial Indicators Are Strong

Both earnings and asset growth increased in 2010 from 2009. Driven largely by higher net interest income and lower provisions for 

loan losses, System earnings were $3.495 billion in 2010, up 22.6 percent from 2009. System assets grew to $230.0 billion, up $14.5 

billion or 6.7 percent from 2009.

Asset quality also improved despite lingering stress to the dairy, livestock, forestry, and nursery industries. As of December 31, 

2010, nonperforming loans amounted to $3.4 billion or 1.93 percent of gross loans, down from $3.5 billion or 2.14 percent at yearend 2009. Loan delinquencies (that is, accruing loans that are 30 days or more past due) declined to 0.33 percent of total accruing 

loans from 0.53 percent at year-end 2009.

In 2010, the System had largely overcome the funding challenges it experienced in 2008 and 2009 as a result of the credit crisis. The 

System had reliable access to the capital markets, and investor demand for System debt was favorable across all maturities in 2010. 

The System’s liquidity position declined slightly in 2010. It had 173 days of liquidity at year-end 2010, compared with 178 days at 

year-end 2009, but this level is still well above the regulatory liquidity standard of 90 days.

In addition, the System’s total capital remains strong. Capital increased to $33.3 billion at year-end 2010 from $30.0 billion at yearend 2009. 

Lending to YBS Farmers Increases in 2010

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

ranchers. Through these programs, FCS associations may off er 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. 

Loans made in calendar year 2010 (including new loans and renewals) for YBS farmers rose in both number and dollar volume, 

reversing the decline in new lending activity that occurred in 2009. The volume of loans made was up by 10.3 percent to young 

farmers, 10.0 percent to small farmers, and 8.6 percent to beginning farmers. 

In 2010, the lending to the three YBS categories was consistent with trends in overall System lending to farmers. Therefore, the 

share of total System farm lending going to the YBS categories did not change signifi cantly from that of 2009.

FCA Monitors Increases in Farmland Values

Because farmland accounts for about 84 percent of all farm assets, farmland values strongly aff ect the ability of farmers and ranchers to borrow money, and infl ated, unsustainable land values pose a real risk both to agricultural producers and lenders. 

In the past six years farmland prices have doubled in some Midwest States like Iowa, raising concerns that current values may be 

unsustainable. Therefore, FCA is closely monitoring farmland values across the country and especially in the Midwest. 

In addition, the Agency has issued guidance on collateral risks to System lenders through a series of Informational Memorandums. 

Links to this and other guidance are provided on the Agency’s Farmland Collateral Risk Web page at 

www.fca.gov/info/farmlandcollateralrisk. In February 2011, FCA also hosted a Regulators Roundtable to lead a discussion among fi nancial 

regulators about agricultural land values, risks to loan collateral, and how regulators should address these risks.

June 2011
3

The System is also taking action. Many System institutions are improving underwriting standards and appraisal guidelines on 

farmland collateral. Some institutions are also conducting land value studies and stress testing their lending portfolios for changes 

in land values. 

FCA Increases Supervision and Enforcement Activities 

Because of persistent stress in certain agricultural industries, the condition of certain individual System institutions deteriorated 

in 2010. As of December 31, 2010, FCA had 11 associations under special supervision. The assets of these associations represented 

5 percent of the System’s total assets. In comparison, at year-end 2009, the Agency had 10 associations under special supervision, 

whose assets represented less than 2 percent of the System’s assets. 

As a result of FCA enforcement actions, the Agency had formal writt en agreements with fi ve System associations as of December 

31, 2010, representing $1.5 billion in assets. At year-end 2009, FCA had formal writt en agreements with two associations, representing $423 million. 

In addition to providing additional supervision and oversight of troubled institutions, FCA has provided guidance in recent months 

to help all System institutions bett er manage risks associated with volatile economic conditions. 

• In March 2011, FCA issued an Informational Memorandum to convey the Agency’s expectations regarding the collection of borrower fi nancial information and the impact that this information should have on loan underwriting standards.

• In December 2010, FCA issued a Booklett er on the Agency’s expectations for System institutions to use prudent investment 

asset management to ensure that they maintain a pool of highly liquid assets. 

• In July 2010, the FCA Board approved a proposed rule to ensure appropriate safety and soundness guidance is in place to 

limit Systemwide credit exposure to a single borrower/entity. 

• In June 2010, FCA issued an Informational Memorandum to encourage System boards and senior management to improve collateral risk management practices.

• In May 2010, FCA issued a Booklett er to provide guidance for the pricing and structure of loans to ensure appropriate earnings 

performance.

• In March 2010, FCA issued an Informational Memorandum describing the Agency’s expectations for portfolio stress testing at 

System institutions. 

FCA Addresses Borrower Complaints 

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

have diffi culty 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. 

In 2010, when some FCS borrowers were under stress from the weakened economy, FCA received an increase in the number of 

borrower complaints. Generally, borrowers who contact FCA with complaints are seeking clarifi cation, additional information, and 

options to redress their concerns. If FCA fi nds violations of law or regulations, the Agency has several enforcement options to bring 

about corrective action.

FCA Remains Committ ed to Its Mission 

As the regulator of the FCS, FCA will continue working to ensure that the System remains safe and sound by identifying risks 

to the System, providing guidance to mitigate risks, and strong examination and supervisory programs. 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 committ ed to ensuring that the System can fulfi ll 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 FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM NUAL REPORT ON THE FARM CREDIT SYSTEM

The Farm Credit Administration ensures a 

safe, sound, and dependable source of credit 

and related services for agriculture and rural 

America.
5

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 

fi nancial 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 Committ ee on Agriculture, 

Nutrition, and Forestry and the U.S. 

House of Representatives Committ ee 

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 specifi c 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 fi nancial 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 

fi nancial disclosure and governance. FCA also approves corporate charter changes, System debt 

issuance, and other fi nancial and 

operational matt ers. 

The Agency maintains its headquarters and a fi eld offi ce in McLean, 

Virginia. FCA also has fi eld offi ces 

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 confi rmed 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 Offi -

cer (CEO). 

FCA Board members also serve as 

members of the Farm Credit System Insurance Corporation board of 

directors.
6

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

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 in 

Northern Illinois; AgriBank, FCB; and 

the Farm Credit Council, the national 

trade organization representing FCS 

in Government aff airs.

Mr. Strom has served in several 

capacities with the Illinois Farm 

Bureau and was a member of the 

Illinois Ag Leadership Program Class 

of 1988. 

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 fi rst 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. He also att ended 

the Harvard Kennedy School Executive Education program. In 2011 

he received an Honorary Doctorate 

of Humane Lett ers from 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, a daughter-in-law, and a 

son-in-law.
7

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 fi nance, 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 fi nancial 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, fi nancial, 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 committ ee 

and the board governance committ ee. 

Before entering agriculture, Mr. 

Spearman was involved with development of a public accounting fi rm 

in Chicago, Illinois, and worked as 

an accountant for a major public 

accounting fi rm. 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
8

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

Jill Long Thompson

Board Member

Jill Long Thompson was appointed 

to the FCA Board by President 

Barack Obama in March 2010. Her 

term continues to May 2014. 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 Farm 

Credit 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 Committ ee on Agriculture, the 

Committ ee on Veterans’ Aff airs, and 

the Select Committ ee on Hunger. As 

congresswoman, she introduced one 

of the nation’s fi rst 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 offi cer and 

senior fellow at the National Center 

for Food and Agricultural Policy, a 

nonprofi t research and policy organization in Washington, D.C.

The fi rst and only woman to be 

nominated by a major party to run 

for Governor of Indiana, Ms. Long 

Thompson is also the fi rst and only 

Hoosier woman to be nominated 

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

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. 
9

Farm Credit System—An Overview of Events and CondiƟ ons

FCS ROLE

The Farm Credit System (FCS or System) is a network of borrower-owned 

cooperative fi nancial 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 Governmentsponsored enterprise (GSE).1

FCS institutions provide credit and 

fi nancially related services to farmers, ranchers, producers or harvesters 

of aquatic products, and agricultural 

and aquatic cooperatives. They also 

make credit available for agricultural 

processing and marketing activities, 

rural housing, certain farm-related 

businesses, 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.

When Congress established the FCS, 

its purpose was to provide a permanent, reliable source of credit and 

related services to agriculture and 

aquatic producers, farmer-owned 

cooperatives, and farm-related businesses in rural America. Congress 

intended the FCS to improve the 

income and well-being of American 

farmers and ranchers. It formed the 

FCS as a system of farmer-owned 

cooperatives to ensure the participation of farmer- and rancher-borrowers in the management, control, 

and ownership of these cooperative 

institutions. The participation of 

member-borrowers helps keep the 

institutions 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 benefi ts all eligible borrowers, including young, beginning, 

and small (YBS) farmers, as well as 

rural homeowners.

FCS STRUCTURE

The Lending InsƟ tuƟ ons

As of January 1, 2011, the System 

was composed of 89 banks and associations. Loan funds were provided 

to 81 Agricultural Credit Association (ACA) parent organizations and 

3 stand-alone Federal Land Credit 

Associations (FLCAs) by the following fi ve 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, as amended, the FLCA 

is exempt from State and Federal 

income taxes.

CoBank, one of the fi ve 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 fi nances 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 affi liated ACAs, 

which serve New York, New Jersey, 

Connecticut, Rhode Island, Maine, 

Massachusett s, New Hampshire, Vermont, Alaska, Oregon, Washington, 

Montana, and Idaho.

Each ACA contains two subsidiaries, a Production Credit Association 

(PCA), which can make only shortand intermediate-term loans, and an 

FLCA.2

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

wholly owned PCA and FLCA as 

subsidiaries, accounted for 96 percent 

of all associations as of January 1, 

2011. The ACA and its two subsidiaries operate with a common board of 

directors and staff , and each of the 

three entities is responsible for the 

debts of the others. For most regulatory and examination purposes, FCA 

treats the ACA and its subsidiaries as 

a single entity; however, the Agency 

 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.
10

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

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 off ers several other benefi ts 

as well. It allows the ACA to build 

and use capital more effi ciently 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 

fl exibility in serving their customers and allows credit and related 

services to be delivered to borrowers 

more effi ciently. 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. 

Special-Purpose EnƟ ty and Service 

CorporaƟ ons

In addition to the banks and lending 

associations, the System also contains 

a special-purpose entity known as 

the Federal Farm Credit Banks Funding Corporation (Funding Corporation). 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. 

The System also contains the following fi ve 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 

affi liated with U.S. AgBank, FCB. 

AgVantis is owned by the bank 

and 18 of its affi liated 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 four affi liated associations; two associations affi liated 

with U.S. AgBank, FCB; one association affi liated with AgriBank, 

FCB; and two System-related 

entities. FPI is owned by CoBank, 

ACB, and the seven associations 

to which FPI provides services.

4. The FCS Building Association, 

which acquires, manages, and 

maintains facilities to house the 

Farm Credit Administration’s 

(FCA’s) headquarters and fi eld 

offi ce staff . The FCS Building 

Association is owned by the FCS 

banks, but the FCA Board oversees the Building Association’s 

activities.

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

which previously off ered 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.

Farmer Mac

Also part of the FCS is 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 

fi nancial organizations, and FCS 

institutions. Nonvoting stock may 

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.
11

be owned by any investor. Farmer 

Mac is regulated and examined by 

FCA through the Offi ce 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.

THE SAFETY AND SOUNDNESS 

OF THE FCS

The Farm Credit Administration, 

which produces this report, regulates the FCS—its lending institutions, the Funding Corporation, the 

service corporations, and Farmer 

Mac. 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. For an 

overview of FCA, see page 5 or visit 

the FCA website at www.fca.gov.

Also serving to protect the safety 

and soundness of the FCS is the 

Farm Credit System Insurance 

Corporation (FCSIC). FCSIC was 

established by the Agricultural 

Credit Act of 1987 in the wake of the 

agricultural credit crisis of the 1980s, 

when the FCS, like most lenders 

heavily concentrated in agriculture, 

experienced severe fi nancial diffi -

culties. The purpose of FCSIC is to 

protect the FCS against future crises 

by ensuring the timely payment of 

principal and interest on insured 

notes, bonds, and other obligations 

issued on behalf of FCS banks. It 

ensures timely payment by maintaining the Farm Credit Insurance Fund, 

a reserve that represents the equity 

of FCSIC. The balance in the Insurance Fund at December 31, 2010, was 

$3.23 billion. For more information 

about FCSIC, go to www.fcsic.gov. 

Also see FCSIC’s 2010 annual report.

Investors in Systemwide debt securities are further protected by the joint 

and several liability provision of the 

Farm Credit Act, which applies to all 

FCS banks. The banks are jointly and 

severally liable for the principal and 

interest on all Systemwide debt securities. Therefore, if a bank is unable 

to pay the principal or interest on 

a Systemwide debt security and if 

the Farm Credit Insurance Fund has 

been exhausted, then FCA must call 

all nondefaulting banks to satisfy the 

security. 

FINANCIAL CONDITION OF THE 

FCS4

The overall condition and performance of the FCS remained safe and 

sound during 2010. Earnings, assets, 

and capital levels indicate that the 

System remains in a solid fi nancial 

position despite the high level of 

volatility in commodity prices. See 

tables 1 and 2 for a breakdown of 

major fi nancial indicators of the FCS. 

While the overall FCS remained 

fi nancially sound, the condition and 

performance of some individual 

System institutions declined. FCA 

addressed these declines by increasing its supervision of these institutions, which resulted in enforcement 

actions for some entities. For more 

information on measures FCA took 

to address weaknesses at individual 

institutions, see “Maintaining a 

Dependable Source of Credit for 

Farmers and Ranchers” on pages 41 

to 45 of this report. More detailed 

information on the System’s performance and condition may be found 

in the 2010 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 System faced a generally favorable but volatile operating environment in 2010. Grain prices moved 

up sharply in the second half of the 

year in response to strong demand 

and tight global supplies. Supported 

by a weaker dollar and stronger 

global economic growth, agricultural 

exports were up in 2010 and are 

projected to reach record levels in 

2011. Volatile commodity prices challenged livestock and dairy producers, 

who came under increasing stress in 

2010 because of soaring feed costs. 

Farmland values continue to escalate, 

particularly in regions where cash 

grains are grown. 

The System continues to have reliable 

access to capital markets to support 

its mission. Financial markets contin4. The information presented in this section pertains to all Farm Credit Banks, the Agricultural Credit Bank, and the affi liated 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, 2010, 

and is presented on a combined basis, refl ecting eliminations of transactions between System entities.
12

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

Table 1 

Farm Credit System Major Financial Indicators, Annual Comparison 

As of December 31

Dollars in Thousands 

 31-Dec-10 31-Dec-09 31-Dec-08 31-Dec-07 31-Dec-06 

FCS Banks1

Gross loan volume 161,069,141 152,412,187 149,491,137 131,191,826 112,260,474

Accruing restructured loans2 48,457 4,651 5,125 4,301 5,378

Accrual loans 90 or more days past due 8,695 28,816 21,594 12,917 5,439

Nonaccrual loans 477,341 759,134 582,160 46,069 107,556

Nonperforming loans/total loans3 0.33% 0.52% 0.41% 0.05% 0.11%

Capital/assets4 6.00% 5.59% 4.89% 5.43% 5.65%

Unallocated retained earnings/assets 3.03% 2.80% 2.50% 2.69% 2.95%

Net income 1,917,143 1,442,328 1,231,430 981,688 845,191

Return on assets 0.95% 0.74% 0.65% 0.60% 0.60%

Return on equity 15.00% 13.13% 12.44% 10.59% 10.24%

Net interest margin 1.22% 1.17% 0.97% 0.83% 0.80%

OperaƟ ng expense rate5 0.30% 0.33% 0.31% 0.30% 0.33%

AssociaƟ ons 

Gross loan volume 124,148,362 118,575,715 114,026,889 105,620,488 93,413,704

Accruing restructured loans2 65,385 58,926 30,381 47,212 51,384

Accrual loans 90 or more days past due 34,029 68,508 65,703 43,840 19,504

Nonaccrual loans 2,751,042 2,634,046 1,706,613 465,414 425,545

Nonperforming loans/gross loans3 2.30% 2.33% 1.58% 0.53% 0.53%

Capital/assets7 16.54% 15.82% 15.46% 15.57% 16.27%

Unallocated retained earnings/assets 15.07% 14.56% 13.51% 13.58% 13.89%

Net income 2,416,816 1,585,984 1,805,929 1,934,968 1,662,255

Return on assets 1.85% 1.29% 1.57% 1.74% 1.75%

Return on equity 10.91% 8.13% 9.84% 10.82% 10.44%

Net interest margin 2.79% 2.64% 2.50% 2.57% 2.64%

OperaƟ ng expense rate5 1.38% 1.49% 1.45% 1.49% 1.58%

 

Total Farm Credit System7 

Gross loan volume 175,351,000 164,830,000 161,423,000 142,906,000 123,436,000

Nonperforming loans 3,386,000 3,535,000 2,416,000 621,000 615,000

Nonaccrual loans 3,229,000 3,369,000 2,282,000 512,000 533,000

Nonperforming loans/gross loans3 1.93% 2.14% 1.50% 0.43% 0.50%

Bonds and notes 189,575,000 178,358,000 179,769,000 155,295,000 134,466,000

Capital/assets8 14.46% 13.90% 12.65% 14.17% 15.00%

Surplus/assets 11.80% 11.48% 10.80% 11.52% 12.25%

Net income 3,495,000 2,850,000 2,916,000 2,703,000 2,379,000

Return on assets 1.60% 1.32% 1.41% 1.53% 1.56%

Return on equity 10.90% 9.86% 10.70% 10.38% 9.99%

Net interest margin 2.82% 2.65% 2.41% 2.43% 2.48% 

Sources: Farm Credit System Call Report as of December 31, 2010, 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 defi ned as nonaccrual loans, accruing restructured loans, and accrual loans 90 days or more past due.

4. Capital excludes mandatorily redeemable preferred stock. 

5. Operating expenses divided by average gross loans. 

6. Capital excludes protected borrower capital. 

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

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

capital. 
13

Table 2 

Farm Credit System Major Financial Indicators, by Districta 

As of December 31, 2010 

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 30,781,566 20,905,165 115,720 14,873 9,522,281 817,333 1,053,119 1,902,781 

AgriBank 70,996,366 59,517,358 73,575 12,956 10,715,270 1,727,643 1,953,894 3,595,144 

CoBank 65,825,890 49,992,338 166,973 400,744 14,563,830 2,268,989 2,137,394 4,406,197 

Texas 14,108,416 10,464,033 120,199 28,678 3,540,894 710,399 418,965 1,150,858 

U.S. AgBank 25,386,018 20,190,247 874 2,504 4,946,873 856,379 717,942 1,366,700 

 

Total 207,098,256 161,069,141 477,341 459,755 43,289,148 6,380,743 6,281,314 12,421,680 

 

AssociaƟ ons 

AgFirst 18,404,354 16,935,253 679,355 167,456 527,034 197,537 2,870,453 3,044,185 

AgriBank 63,735,262 58,204,674 886,244 393,389 2,413,909 226,538 10,005,959 10,232,570 

CoBank 13,772,699 13,148,173 334,646 175,721 68,829 191,160 2,078,898 2,224,452 

Texas 13,155,037 12,467,288 562,643 134,467 300,910 82,643 2,015,092 2,099,576 

U.S. AgBank 24,991,698 23,392,974 288,154 116,053 493,331 563,334 4,010,324 4,578,660 

 

Total 134,059,050 124,148,362 2,751,042 987,086 3,804,013 1,261,212 20,980,726 22,179,443 

 

Total Farm 

Credit System 229,973,000 175,351,000 3,229,000 1,447,000 46,282,000 1,542,000 27,136,000 33,251,000 

 

Sources: Farm Credit System Call Report as of December 31, 2010, 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 certifi cates, excludes mandatorily redeemable preferred stock and protected borrower capital.

4. Includes allocated and unallocated surplus.

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

Credit System amount, total capital also includes $3.226 billion of restricted capital, which is the amount in the Farm Credit Insurance Fund. Excludes 

mandatorily redeemable preferred stock and protected borrower capital.
14

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

ued to improve in 2010, and investor 

demand for Systemwide securities 

has been favorable. The current low 

interest rate environment has enabled 

System banks to lower their cost of 

funds by refi nancing callable bonds. 

Depending on the rules that will be 

issued to implement the Dodd-Frank 

Act, System banks may have to 

adjust their risk management strategies involving the use of derivatives 

if their use becomes too costly.

These conditions are expected to 

continue to challenge the System in 

2011. For a discussion of how this 

environment is likely to aff ect the 

agricultural economy and the System 

in 2011 and beyond, see “Challenges 

Facing the Agricultural Economy and 

the Farm Credit System” on pages 51 

to 57.

Earnings

System earnings were up 22.6 percent in 2010, increasing to $3.495 

billion compared with $2.850 billion 

in 2009 (See fi gure 1). This increase 

in earnings was largely driven by 

higher net interest income and lower 

provisions for loan losses. Net interest income increased by $498 million 

as net interest spread improved by 

18 basis points from year-end 2009 

to 2.61 percent at year-end 2010. The 

System’s return on average assets 

increased to 1.60 percent in 2010 

from 1.33 percent the prior year. The 

return on average capital was also 

higher, increasing to 10.90 percent in 

2010 from 9.92 percent in 2009. 

Provisions for loan losses dropped 

to $667 million in 2010 from $925 

million in 2009, in part because of 

improved operating margins in the 

swine and ethanol sectors. Certain 

agricultural sectors did experience 

increased credit stress as higher 

commodity and other input prices 

adversely aff ected some System borrowers, particularly dairy and livestock producers. In addition, System 

borrowers in other agricultural sectors, such as forestry, continue to feel 

the impact of the downturn in the 

U.S. economy and the general weakness in the housing market.

As cooperative institutions, the FCS 

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

borrower-owners as patronage distributions. For 2010, System institutions declared a total of $1.016 billion 

in patronage distributions. Of that 

amount, $648 million was paid in 

Figure 1

FCS Net Income, 2002–2010

As of December 31

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

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

cash, $300 million was issued in the 

form of allocated retained earnings, 

and $68 million was issued as stock. 

The System also distributed $83 million in cash from patronage allocations of earlier years. Strong earnings 

performance in 2010 allowed System 

institutions to pay out, in total, a 

larger percentage of net income in 

2010 (29 percent) compared with 

2009 (26 percent). 

Asset Growth

Overall, the System experienced 

moderate growth in 2010, principally 

in the second half of the year as 

sharply rising commodity prices led 

to increased loan volume, particularly 

in agribusiness loans to fi nance grain 

inventories and real estate mortgage 

loans. In total, System assets grew 

to $230.0 billion, up $14.5 billion or 

6.7 percent from 2009. Loan growth 

accounted for the majority of asset 

growth in 2010 as the System’s portfolio of loans outstanding increased 

by 6.4 percent compared with 2.1 

percent in 2009 (see fi gure 2). 

Asset Quality

While credit quality in the System’s 

loan portfolio is generally favorable, 

certain System borrowers, particularly those in the dairy and livestock 

sectors are under increasing stress. In 

addition, certain sectors such as the 

forestry and nursery industries continue to be affected by general economic conditions and the state of the 

housing market. As of December 31, 

2010, nonperforming loans equaled 

$3.4 billion or 1.93 percent of gross 

loans, down from $3.5 billion or 2.14 

percent at year-end 2009 (see fi gure 

3). Loan delinquencies (that is, accruing loans that are 30 days or more 

past due) declined to 0.33 percent of 

total accruing loans from 0.53 percent 

at year-end 2009. 

The allowance for loan losses 

remained essentially unchanged 

at $1.45 billion, or 0.83 percent of 

loans outstanding at year-end 2010, 

compared with $1.36 billion, or 0.82 

percent of loans outstanding at yearend 2009. As previously indicated, 

Figure 2

Annual Growth Rate of FCS Loans Outstanding, 2000 to 2010

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

 
16

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

Figure 3

FCS Nonperforming Loans, 2005–2010

As of December 31

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

 

provisions for loan losses were down 

in 2010, dropping to $667 million in 

2010 from $925 million in 2009. Net 

charge-off s were up in 2010, increasing to $596 million from $518 million 

in 2009. 

While the outlook remains favorable 

for agriculture in 2011, conditions 

in both the general and agricultural 

economies remain volatile. Some 

additional deterioration in asset quality is possible as certain agricultural 

sectors continue to be adversely 

aff ected by high commodity prices. 

Nevertheless, the overall level of 

nonperforming loans continues to be 

well within the System’s risk-bearing 

capacity.

Funding 

The System continues to have reliable access to the capital markets, 

and investor demand for System 

debt was favorable across all maturities in 2010. The System’s funding 

composition shifted in 2010 as shortterm debt made up 36.1 percent of 

total Systemwide debt securities at 

December 31, 2010, compared with 

34.8 percent at December 31, 2009. 

Total Systemwide debt increased 6.5 

percent in 2010, with securities due 

within a year increasing by 10.2 percent and securities due after one year 

increasing by 4.5 percent. (See section 

titled “Funding Activity in 2010” on 

page 37 for further discussion on the 

System’s funding environment.)

Liquidity

As of December 31, 2010, the System’s liquidity position equaled 173 

days, down slightly from 178 days 

at year-end 2009, but still signifi -

cantly above the 90-day regulatory 

minimum.5 The System banks continued to improve the quality of 

their liquidity reserves in 2010. This 

liquidity provides each bank with 

a cushion against signifi cant negative events in the U.S. and global 

markets and also creates fi nancial 

fl exibility to operate more eff ectively 

5. 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 refl ect potential exposure to adverse market value changes that might 

be recognized upon liquidation or sale.
17

Figure 4

FCS Capital, 2003–2010

As of December 31

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

in a challenging funding environment. Investments available for sale 

(based on fair value) increased 7.8 

percent to $37.6 billion in 2010, and 

had a weighted average yield of 1.9 

percent. Investments held to maturity remained steady at $3.7 billion, 

with a weighted average yield of 3.9 

percent. 

By regulation, System banks may 

acquire and hold certain investments 

provided they have a triple-A rating from at least one major rating 

agency. If the investment no longer 

meets the credit rating criteria, the 

investment becomes ineligible, and 

the investing bank must dispose of 

the investment within six months or 

receive writt en approval from FCA to 

divest the investment over a longer 

period of time. As of December 31, 

2010, the FCS had 148 ineligible securities because of rating downgrades, 

which, at fair value, represented 

3.9 percent of Federal funds and 

available-for-sale securities. FCA has 

approved, or is reviewing requests 

for approval for, divestiture plans to 

hold these investments longer than 

six months. For 2010, the System 

recognized $90 million of otherthan-temporarily impaired losses on 

securities. 

Capital

The System’s capital position 

remained strong as total capital 

increased to $33.3 billion at year-end 

2010 compared with $30.0 billion at 

year-end 2009. The most signifi cant 

factors contributing to the increase 

in System capital were net income 

earned and retained, the issuance of 

$300 million in preferred stock by 

one System bank, and a reduction 

in accumulated other comprehensive 

loss. With the increase in total capital, the System’s capital-to-assets ratio 

at year-end improved from 13.9 percent in 2009 to 14.5 percent in 2010. 

As fi gure 4 shows, surplus accounts 

for the overwhelming majority of 

capital. 
18

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

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 defi ned in 613.3030 of the FCA regulations).

FCA regulations establish minimum 

capital requirements that each System 

bank and association must achieve 

and maintain. As of December 31, 

2010, the permanent capital ratios 

for all System banks and associations 

were above the regulatory minimum 

of 7.0 percent and ranged between 

14.3 percent and 22.0 percent for System banks and between 11.3 percent 

and 28.4 percent for System associations. At year-end, two associations 

did not meet the minimum regulatory requirement of 3.5 percent for 

the core surplus ratio. One association had a core surplus ratio of 3.1 

percent and assets of less than $450 

million; the other association had a 

core surplus ratio of 2.9 percent and 

assets of less than $300 million. Both 

associations have corrective action 

plans in place. All other associations 

had a core surplus ratio in excess of 

10.0 percent.

The System has augmented regulatory capital through third-party 

capital, including $2.35 billion in 

various forms of preferred stock and 

$1.65 billion in subordinated debt. 

See “Funding Activity in 2010” on 

page 37 for additional information on 

System third-party capital. In addition, at December 31, 2010, the FCS 

had $3.2 billion of restricted capital 

in the Farm Credit Insurance Fund. 

BORROWERS SERVED

The System fulfi lls its overall mission by lending to agriculture and 

rural America. Its lending authorities 

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 fi nance 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 $175.4 

billion in gross loans outstanding as 

of December 31, 2010 (see table 3). 

Agricultural producers represented 

by far the largest borrower group, 

with $118.6 billion, or 67.6 percent, of 

the total dollar amount of loans outstanding.7

 As of December 31, 2010, 

44.5 percent of the dollar volume of 

Table 3

FCS Gross Loans Outstanding, 2006–2010

As of December 31

Dollars in Millions

 Percent 

 change 

 2006 2007 2008 2009 2010 from 2006

ProducƟ on agriculture

 Long-term real estate 

 mortgage loans 56,489 63,458 71,892 75,352 78,021 38.1

 Short- and intermediate-

 term loans 28,731 32,267 37,468 39,610 40,584 41.3

Agribusiness loans* 21,141 28,091 26,901 23,626 29,581 39.9

Rural uƟ lity loans 9,569 10,846 13,931 14,562 15,091 57.7

Rural residenƟ al loans 3,408 3,965 4,611 4,977 5,475 60.7

InternaƟ onal loans 2,183 2,135 4,077 3,956 4,036 84.9

Lease receivables 1,489 1,708 1,952 2,160 2,021 35.7

Loans to other fi nancing 

 insƟ tuƟ ons 426 436 591 587 542 27.2

Total 123,436 142,906 161,423 164,830 175,351 42.1

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

* At December 31, 2010, agribusiness loans consisted of loans to cooperatives of $16.2 billion, processing and marketing loans of $11.1 

billion, and farm-related business loans of $2.3 billion.
19

the System’s loans outstanding was 

in long-term real estate loans, 23.1 

percent in short- and intermediateterm loans to agricultural producers, and 16.9 percent in agribusiness 

loans. Agribusiness loans are broken 

down further into 9.2 percent for 

loans to cooperatives, 6.4 percent for 

processing and marketing enterprises, 

and 1.3 percent for farm-related businesses. Loans to fi nance rural utilities represented 8.6 percent of the 

System’s loan volume, while rural 

residential real estate loans made 

up 3.1 percent of the System’s total 

loans. International loans (export 

fi nancing) represented 2.3 percent of 

the System’s loan portfolio, and lease 

receivables accounted for 1.2 percent of the overall portfolio. Finally, 

loans outstanding to “other fi nancing 

institutions” represented a small but 

important segment of the System’s 

portfolio (see “System Funding for 

Other Lenders” below). 

As required by law, borrowers own 

stock or participation certifi cates in 

System institutions. The FCS had 

nearly 880,000 loans and approximately 488,000 stockholders in 

2010. Approximately 85.0 percent 

of the stockholders were farmers 

or cooperatives with voting stock. 

The remaining 15.0 percent were 

nonvoting stockholders, including 

rural homeowners and other fi nancing institutions that borrow from the 

System. Over the past fi ve years, the 

number of System stockholders has 

increased gradually, rising more than 

6.2 percent since year-end 2005. 

According to the U.S. Department of 

Agriculture (USDA), net cash farm 

income in the United States experienced a sharp increase in 2010 to 

$91.3 billion, up $22.2 billion from 

2009 and up $19.5 billion from its 

10-year average of $71.8 billion. Thus, 

the core segments of the System’s 

portfolio—farm real estate mortgages and production and intermediate-term loans—grew 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 (see “Challenges 

Facing the Agricultural Economy and 

the Farm Credit System” on pages 

51 to 57 for a discussion of stressed 

sectors). 

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

grew by $10.5 billion, or 6.4 percent, 

during the year ended December 31, 

2010. Both the dollar volume and the 

percentage growth in 2010 were signifi cantly more than the gain in the 

previous year. In 2009, gross loans 

grew 2.1 percent, which followed 

growth of 13.0 percent in 2008 and 

15.8 percent in 2007. Since year-end 

2006, total System loans outstanding 

increased by $51.9 billion, or 42.1 

percent. 

The System’s increase in loan volume 

in 2010 stemmed primarily from its 

core customer base—farmers and 

their cooperatives. Long-term real 

estate loans increased $2.7 billion, or 

3.5 percent, because of rising land 

values, while short- and intermediate-term loans increased $974 million, 

or 2.5 percent, because of rising costs 

for production inputs. Agribusiness 

loans grew sharply in 2010, increasing $6.0 billion, or 25.2 percent. This 

increase was driven primarily by 

the 53.7 percent increase in loans 

to cooperatives, which amounted to 

$16.2 billion. Agricultural cooperatives, which keep large inventories 

of grain commodities, were aff ected 

by the sharp price increases in corn, 

soybeans, and wheat. They had to 

borrow more to fi nance the increased 

cost of their inventories. In addition, 

largely because many electric distribution cooperatives were refi nancing loans from other lenders and 

making capital expenditures, rural 

utility loans (energy, water, waste 

disposal, and communication loans) 

increased $529 million, or 3.6 percent. Rural residential real estate 

loans increased $498 million, or 10.0 

percent. The other categories posted 

modest changes for the year, either 

up or down, including a 2.0 percent 

increase for international loans.8

SYSTEM 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 fi nancing 

institutions” (OFIs). OFIs include 

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

agricultural credit corporations, and 

other specifi ed agricultural lenders that are signifi cantly involved in 

lending to agricultural and aquatic 

8. A majority of the System’s international loan portfolio is guaranteed by the Commodity Credit Corporation (CCC) through the U.S. Department of 

Agriculture’s GSM-102 and GSM-103 export credit programs. Overall, 85 percent of the System’s international loans in 2010 carried a CCC guarantee.
20

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

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, 2010, the System 

served 28 OFIs, the same as in 2009, 

and 27 in 2008. Outstanding loan 

volume to OFIs was $542 million 

at year-end, down $45 million from 

2009. 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.

Loan ParƟ cipaƟ ons and SyndicaƟ ons 

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 fi nancial institutions outside the System, 

including commercial banks, in making loans to agriculture and rural 

America. Generally, System institutions partner with these fi nancial 

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 fi nancial institutions work together to 

provide funds for a borrower. 

Usually one fi nancial 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 

example, a fi nancial 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 fi gure 5 

shows, activity from loan participations and syndications with non-System lenders grew four of the last six 

years. This activity began to decline 

in 2009 and continued to decline in 

2010 because of reduced need for 

bank credit by some large agribusinesses, credit quality concerns in 

some agricultural sectors, and more 

conservative standards in the capital 

markets. 

The fi rst group of bars shows gross 

loan syndications outstanding by FCS 

banks and associations.9

 Gross loan 

syndications by the System with nonSystem lenders totaled $10.3 billion 

at year-end 2010, down more than 

$1.0 billion from the 2009 fi gure but 

still well above the totals of earlier 

years. Although syndication volume 

as a percentage of the System’s loan 

portfolio decreased from 6.9 percent at year-end 2009 to 5.9 percent 

at year-end 2010, the overall level 

of activity was still the third highest in the history of the FCS despite 

the general market conditions noted 

above. This use of syndications 

refl ects 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 fi gure 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 

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.
21

Figure 5

SyndicaƟ ons and Net Loan ParƟ cipaƟ ons Involving Non-System Lenders, 2005 –2010

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 fi gure 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).
22

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

with customers who are also 

eligible to borrow from the FCS. 

The net total of these participations was $7.6 billion, a slight 

increase above 2009. Much of 

the lending activity in this group 

probably results from gross loan 

syndications (the first group of 

bars in this fi gure) and the subsequent sale of participations in 

these loan syndications 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 fi gure 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 2010, the net amount 

of similar-entity participations in 

the System amounted to $6.9 billion, a decrease of $1.7 billion, or 

19.7 percent, from 2009.

The net total of all loan participations involving non-System lenders 

was $14.6 billion at year-end 2010, 

compared with $16.1 billion the year 

before. Not only did the recession 

reduce the demand for participations, 

but System institutions also tightened 

standards on participation lending. 

FARM DEBT AND MARKET 

SHARES

USDA’s forecasted estimate of total 

farm business debt for the year 

ended December 31, 2010, was $240 

billion, down 2.1 percent from its 

estimate for year-end 2009 of $245 

billion. This estimate could increase 

after USDA releases its next estimate, as the outstanding farm debt 

reported by most major classes of 

lenders rose in 2010. Data for the 

FCS and commercial banks show that 

their farm loan portfolios grew 3.2 

percent and 2.1 percent, respectively. 

The rise in outstanding farm debt 

reported by lenders refl ected recordhigh farm income, rising farm real 

estate prices, and the higher input 

costs in 2010. On the supply side, 

lenders had adequate funds to lend, 

but credit underwriting practices 

remained relatively stringent in the 

past year. According to the USDA 

forecast for 2011, farm debt will 

change litt le in 2011, rising less than 

1 percent over 2010. The forecast 

includes a 2 percent increase in nonreal estate farm debt but a 0.6 percent decline in farm real estate farm 

debt in 2011. Strong farm incomes, 

increasing real estate values, greater 

capital investments, and improving 

off -farm income opportunities in 2011 

are supportive of debt accumulation 

and could alter USDA’s next forecast 

update.

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

2009.10 USDA’s estimate of debt by 

lender shows that commercial banks 

held 43.8 percent of the $245 billion 

in total farm business debt at the end 

of 2009. The System’s market share 

rose to 40.1 percent from a 38.9 percent share the previous year. Except 

for the USDA Farm Service Agency, 

all other lender groups, including 

banks, life insurance companies, and 

merchants and dealers had small 

market share losses. Commercial 

banks and the FCS now represent 

84 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 brief periods, the FCS 

has typically had the largest market 

share of farm real estate mortgages. 

The System’s share of debt secured 

by farm real estate increased to 43.4 

percent at year-end 2009, con-tinuing 

the upward trend of the past 10 

years. At year-end 2009, commercial 

banks held 37.4 percent of the farm 

real estate mortgage debt, up slightly 

from 2008. Commercial banks have 

historically dominated non-real estate 

farm lending, but that dominance has 

been eroding, falling one percentage 

point to 51.4 percent at the end of 

2009. The System’s share of non-real 

estate farm debt was 36.0 percent at 

year-end 2009, continuing an upward 

trend since the late-1990s when it 

was slightly less than 20 percent. 

10. Market share is calculated by USDA for farm business debt only. The information for 2010 will not be available until USDA issues its planned update 

in August 2010. 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. 
23

Figure 6

Market Shares of U.S. Farm Business Debt, 1989–2009

Sources: USDA, Economic Research Service, as of February 14, 2011.

Note: Year-end 2009 fi gure is a preliminary estimate.
24

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 
25

Serving Young, Beginning, and Small Farmers and Ranchers

Programs to provide fi nancially 

sound and constructive credit and 

related services to young, beginning, 

and small (YBS) farmers and ranchers 

are a statutory mandate and thus are 

a priority for the Farm Credit System. Loans to YBS borrowers help to 

provide a smooth transition of farm 

businesses to the next generation and 

to maintain a diversifi ed customer 

base, from very small enterprises to 

large commercial operations, for the 

FCS. Through its regulatory agenda, 

data collection and reporting, disclosure requirements, and examination 

activities, FCA is strongly committ ed 

to ensuring that the System fulfi lls 

its responsibility to support these 

important segments of the agricultural industry.

Young farmers are the smallest 

segment of the farming population 

that the YBS mandate targets. The 

number of young farm operators in 

the United States has been trending 

down for decades, refl ecting years 

of farm consolidations, integrations, 

and older retirement ages for current 

farm operators. According to USDA’s 

Agricultural Resource Management 

Survey (ARMS), only 4 percent of all 

primary family farm operators were 

34 years or younger in 2009, which 

compares with 5.5 percent 10 years 

earlier.11 These farmers overwhelmingly operate smaller farms, with 

only 14 percent having production 

valued at more than $250,000 in 

2009. Many farmers that belong in 

the young category also belong in 

the beginning category—more than 

three-quarters of all young operators 

have farmed for 10 years or less, and 

nearly half of them consider farming 

to be their primary occupation. 

For 2009, the ARMS shows that 

approximately 20 percent of all family farms had operators who would 

be considered beginning farmers—

having farmed for no more than 10 

years. Although beginning farmers 

are generally believed to be young, 

only 14 percent of these principal 

operators were under 35 years of 

age, and 10 percent of them were of 

retirement age (65 or older). Within 

this group, only 25 percent of these 

principal operators considered farming to be their primary occupation. 

Beginning farmers can also be part 

of established farms with multiple 

operators; 10 percent of all beginning 

operators were associated with farms 

that had primary operators with 

more than 10 years of experience. 

Small farms, which represented 90 

percent of all U.S. farms in the 2009 

ARMS, are diffi cult to characterize because of their diversity. Like 

other YBS borrowers, small farmers 

typically rely heavily on off -farm 

incomes and hence their credit needs 

are more consumer based. Within 

this large segment are farming operations that are growing in size or 

producing higher-margin agricultural 

products for local markets, often on 

a seasonal basis. The segment also 

includes farmers who are in the process of retiring. The majority of small 

farms do not use agricultural credit 

within a given year and hence would 

not be potential YBS borrowers. 

In a very general sense, the relative shares of Systemwide total farm 

lending going to the three separate 

YBS categories has been consistent 

with the share of these farmer segments in the total farmer population, 

with the smallest share of total System farm lending going to the young 

farmer segment and the largest share 

going to the small farm segment. 

The range of YBS demographics and 

the changing economic conditions in 

rural America, as well as the wide 

range of credit needs of YBS farmers 

beyond their agricultural production 

activities, can pose challenges for 

System institutions in meeting their 

YBS program goals. Each System 

bank is required to adopt writt en 

policies that direct each association 

board to have a program for furnishing sound and constructive credit 

and fi nancially 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 29.)

11. The System’s defi nition of a young farmer diff ers slightly from USDA’s defi nition. See the note below table 4B. A family farm is one for which the 

majority of the farm business is owned by individuals related by blood, marriage, or adoption. In 2009, more than 97 percent of all farms were considered to be family farms according to ARMS.
26

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

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. In addition, FCA 

continues to review and consider 

various policy options for supporting 

the System’s YBS programs.

YBS LENDING RESULTS 

The number and volume of loans 

made during the year is a good 

indicator of current service to YBS 

borrowers. Loans made in calendar 

year 2010 (including new loans and 

renewals) for each of the three YBS 

categories rose in both number and 

dollar volume from 2009, reversing 

the decline in new lending activity 

that had occurred in that year.12 This 

increase in credit demand refl ected 

improvement in both the general 

economy and the farm economy, 

and an increase in capital purchases 

among farmers in 2010. All three 

YBS categories experienced similar 

increases in new lending activity during 2010, with the volume of loans 

made during the year up 10.3 percent to young farmers, 10.0 percent 

to small farmers, and 8.6 percent to 

beginning farmers. The percentage 

increases in the numbers of loans 

made (5.5 to 7 percent) were not 

as great as the increase in volume, 

refl ecting a signifi cant increase in the 

average size of loans made in 2010. 

In 2010, the volume of YBS loans 

outstanding also increased for each 

of the three borrower categories, as 

it has for the previous nine years. 

The volume of outstanding loans 

increased by 3.1 percent to young 

farmers, by 2.2 percent to small farmers, and by 0.6 percent to beginning 

farmers. 

In 2010, the lending to the three YBS 

categories was consistent with trends 

in overall System lending to farmers. 

Therefore, the share of total System 

farm loans going to the YBS categories did not change signifi cantly from 

that of 2009. In 2010, the volume of 

all System farm loans made (including commitments) during the year 

($64.1 billion) was up 9.5 percent 

over that of 2009, whereas the 

volume of outstanding farm loans 

(including commitments) at year-end 

($179.6 billion) was up 2.4 percent 

from the amount at the end of 2009. 

The total number of farm loans made 

in 2010 (330,693) was 7.3 percent 

higher than the number made in 

2009, while the number of outstanding loans (889,780) at the end of 2010 

was 3.7 percent higher than at the 

end of 2009. 

In the section on YBS borrowing 

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

the fi rst year institutions reported 

their results using the current defi -

nitions for young, beginning, and 

small farmers and ranchers. Table 4A 

contains information on loans outstanding in each category at the end 

of 2010; table 4B provides information on loans made during the year. 

Loans and commitments to YBS 

farmers include real estate loans, and 

short- and intermediate-term loans, 

but do not include rural home loans. 

In the percentages below, young, 

beginning, and small farmer lending 

is compared with all System lending 

and commitments to farmers. 

Young—The System’s extension of 

credit to young farmers, those aged 

35 or younger, consisted of 53,470 

loans totaling $7.3 billion in 2010. 

During 2009, 50,689 loans totaling 

$6.6 billion were made to young 

borrowers. The loans made to young 

borrowers in 2010 represented 16.2 

percent of all farm loans the System made during the year and 11.4 

percent of the dollar volume of loans 

made. The average size of loans 

made to young farmers in 2010 was 

$136,917, up 4.6 percent from the 

$130,915 average for 2009. At the end 

of 2010, there was $21.1 billion in 

outstanding loans as compared with 

$20.4 billion at the end of 2009.

Beginning—Defi ned as those borrowers with 10 or fewer years of farming 

experience, these borrowers received 

65,653 loans totaling $10.3 billion 

in 2010. During 2009, 61,387 loans 

totaling $9.5 billion were made to 

beginning borrowers. The loans made 

to beginning farmers in 2010 represented 19.9 percent of all farm loans 

made during the year and 16 percent 

12. 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. Borrowers may have more than one 

loan and thus the loan numbers reported here do not directly measure the number of borrowers.
27

Table 4A 

YBS Loans Outstanding

As of December 31, 2010 Dollar 

 Number Percentage volume Percentage Average

of of total of loans of total loan

 loans numbera in millionsb volumea size

Young farmers/ranchers 162,982 18.3 $21,066 11.7 $129,255

Beginning farmers/ranchers 231,975 26.1 $34,326 19.1 $147,973

Small farmers/ranchers 485,148 54.5 $43,717 24.4 $90,110 

 

Table 4B

YBS Loans Made During 2010

As of December 31

 Dollar 

 Number Percentage volume Percentage Average

of of total of loans of total loan

 loans numbera in millionsb volumea size

Young farmers/ranchers 53,470 16.2 $7,321 11.4 $136,917

Beginning farmers/ranchers 65,653 19.9 $10,278 16.0 $156,557

Small farmers/ranchers 155,371 47.0 $13,089 20.4 $84,243 

 

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

Note: A “young” farmer/rancher is defi ned as 35 years old or younger when the loan is made; a “beginning” farmer/rancher has been operating for not more than 10 years; 

and a “small” farmer/rancher generates less than $250,000 in annual sales of agricultural or aquatic products. Since the totals are not mutually exclusive, one cannot add across 

young, beginning, and small categories to count total YBS lending.

a. Totals include loans, advancements, and commitments made to farmers, ranchers, and aquatic producers by the associations, and excludes such activity 

from rural home, Title III, and the Leasing Corporation.

b. The volume fi gures for loans made and loans outstanding include both advances and commitments.
28

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

of the dollar volume of loans made. 

The average size of loans made was 

$156,557 in 2010, up 1.5 percent from 

the $154,169 average for 2009. At the 

end of 2010, there was $34.3 billion 

in outstanding loans to beginning 

farmers as compared with $34.1 billion at the end of 2009.

Small—FCS institutions made 155,371 

loans, totaling $13.1 billion to small 

farms (those with gross annual sales 

of less than $250,000) in 2010. This 

compares with 145,618 loans totaling $11.9 billion that were made to 

small farms in 2009. The loans made 

in 2010 to small farms represented 

47.0 percent of all farm loans made 

during the year and 20.4 percent of 

the dollar volume of loans made. 

The average size of loans made was 

$84,243 in 2010, which was up 3.1 

percent from the $81,713 average for 

2009. At the end of 2010, there was 

$43.7 billion in outstanding loans to 

small farms as compared with $42.8 

billion at the end of 2009.

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 every 

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 

The diversity in farm types and sizes 

and farmer demographics across 

the United States inevitably leads to 

wide diff erences among institutions’ 

YBS results. 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 diff erences make comparisons among individual associations diffi cult and explain why YBS 

regulations do not specify fi xed 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 guarantees, and 

local economic conditions—also aff ect 

individual association results. Beginning with 1999, specifi c YBS data by 

institution, by district, and for the 

System as a whole are available on 

FCA’s website at www.fca.gov under 

Consolidated Reporting System 

Reports. 

As a result of diversity and other 

factors, there was considerable range 

in the total share of lending made to 

YBS borrowers across FCS associations again during 2010. While the 

share of total new System farm loans 

made to young farmers was 16.2 

percent, this share ranged from as 

litt le as 1.9 percent at one association 

to as high as 31.6 percent at another. 

Larger ranges were evident in the 

share of total new loans made to the 

beginning and small farm categories 

by associations. Whereas 19.9 percent of the System’s total farm loans 

went to beginning farmers in 2010, 

this share ranged from as litt le as 5.8 

percent to as much as 62.4 percent at 

one association. And for small farms, 

the 47 percent share was bounded by 

a range from 11.2 percent to 92.9 percent at the associations. 

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 

depending on the demographics and 

agriculture of their service territory. 

While new volume was up in each 

of the YBS categories during 2010 for 

the System as a whole, 47 percent of 

the associations had declines in new 

lending volume to both beginning 

and small farmers, and 42 percent 

had declines to young farmers. 

Likewise, outstanding loan volumes 

rose for each YBS category in 2010 

for the System as a whole, but at the 

association level the number expe-
29

riencing an increase in volume for 

each category was about the same as 

the number of associations seeing a 

decline in outstanding loan volume. 

Small associations can experience 

signifi cant variability in their lending 

shares because of their small lending 

base.

YBS BORROWING TRENDS, 

2001͵2010 

FCA now has 10 years of System 

YBS results under the defi nitions 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 shows 

fairly strong upward trends in dollars of loans outstanding and new 

lending activity for each of the three 

categories from 2001 through 2008, 

but there is some divergence in these 

trends over the past two years. The 

dollar value of new lending activity 

fell signifi cantly for all three groups 

in 2009, as the recession and a slower 

farm economy reduced demand 

for credit in general, but then 

rebounded in 2010 with a stronger 

farm and nonfarm economy. This 

same trend occurred in the number 

of loans made, with the number of 

loans made for each YBS categories 

rebounding in 2010 after falling in 

2009. While outstanding loan volume 

fl att ened for beginning and small 

farmer categories in 2009 and 2010, 

outstanding loan volume increased 

for young farmers over the entire 10 

years. 

Over time, the infl ation of farm 

assets, such as farmland, increases 

loan volume growth and makes 

evaluating long-term trends more 

problematic. Therefore, measuring 

the share of the System’s total new 

farm lending to YBS borrowers can 

more accurately show changes in 

performance over longer periods. 

Figures 7A, 7B, and 7C show that 

the percentage of new farm loan 

volume going to the three YBS borrower categories has been relatively 

constant over the past 10 years. 

Over this period there was more of 

a downward trend in the share of 

new farm loan volume made to small 

farms, whereas the share made to 

young farmers was more constant. In 

the last fi ve years the share going to 

beginning farmers has trended down 

slightly, from 18.3 percent in 2005 to 

16.0 percent in 2010. 

Comparisons between the System’s 

YBS lending results and the results 

reported by other organizations 

are diffi cult to make. One reason 

these comparisons are not feasible 

is that other Federal regulators do 

not require reporting on young and 

beginning farmer loans. Although 

large banks are required to report on 

small farm loans, small farm lending 

is defi ned 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 diff erences in data defi nitions and data 

collection methods, annual YBS data 

are not directly comparable with 

Census of Agriculture data, which 

are collected only once every fi ve 

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-tovalue ratios or lower debt coverage 

requirements, to make it easier for 

potential YBS borrowers to qualify 

for loans.

During 2010, System institutions used 

four types of loan concessions for 

YBS borrowers. 

• Interest rate concessions—off ered 

by 40 percent of associations, 

down slightly from 43 percent in 

2009

• Exceptions to underwriting standards—off ered by 53 percent of 

associations, compared with 52 

percent in 2009

• Lower loan fees—off ered by 26 

percent of associations, down 

slightly from 30 percent in 2009
30

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

30

FARM CREDIT ADMINISTRATION 2010ANNUAL REPORTON THE FARM CREDIT SYSTEM

Figure 7A

Young Farmers and Ranchers

Figures 7A, 7B, and 7C

Loans Made to, and Loans Outstanding for, YBS Farmers and Ranchers, 2001–2010

As of December 31
31

Figure 7B

Beginning Farmers and Ranchers

Figure 7C

Small Farmers and Ranchers

Sources: Annual YBS reports submitt ed by System lenders through the FCS banks.

Note: In past reports these charts have shown the percentage of young, beginning, or small loans outstanding to total FCS loans outstanding. This year, 

FCA concluded that showing the percentage of young, beginning, or small loans made in a given year to the total FCS loans made in that year would 

be a bett er measure for comparing lending performance from year to year.
32

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

• Loan covenants designed specifi -

cally for YBS borrowers—off ered 

by 8 percent of associations, 

down from 12 percent in 2009

Most of the loan concessions made 

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

beginning categories. Altogether, 60 

percent of the System’s 86 associations provided some form of loan 

concessions to the young or beginning borrower category in 2010; and 

56 percent used one or more of these 

concessions for small farmers. Results 

for 2010 were comparable with 2009.

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 might 

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

In 2010, 97 percent of the 86 FCS 

associations used USDA Farm Service 

Agency loan guarantees for some of 

their YBS lending, while 17 percent 

used Small Business Administration 

loan guarantees and 15 percent of 

the associations used State and local 

programs. 

FCS institutions use guaranteed lending programs from Federal, State, 

and local sources for both conventional and YBS lending. About 25 

percent of the System’s overall loans 

with guarantees went to young farmers; about 26 percent went to beginning farmers; and about 41 percent 

went to small farmers (numbers are 

not additive because categories overlap). At year-end 2010, the loans with 

guarantees for young, beginning, and 

small farmer/rancher loans outstanding were 10,700, 11,300, and 18,000, 

respectively. System associations 

obtained guarantees on more loans 

in 2010 than in 2009, an increase of 

about 2,000 loans to young farmers, 

1,000 loans to beginning farmers, and 

1,000 loans to small farmers. However, the percentage of loans receiving guarantees was slightly down, by 

about 1 percent per category.

Delivering Insurance, Training, and 

Other Services

In addition to off ering credit, FCS 

institutions also serve YBS producers by offering insurance services, 

business training, and other services. 

Almost 71 percent of the associations off ered insurance services to 

YBS farmers in 2010, and a similar 

percentage of associations provided 

training services to these borrowers. 

FCS associations off er training opportunities in estate planning, recordkeeping, tax planning and preparation, and farm business consulting. 

Strengthening the business and 

fi nancial management skills of its 

borrowers is one of the System’s key 

training objectives. In some cases, 

they discount or waive the cost of 

these programs for YBS borrowers.

System institutions off er numerous 

opportunities to educate existing 

and potential YBS borrowers. System 

associations off er Systemwide online 

training programs for YBS farmers, which in some cases include a 

mentoring component. Associations 

coordinate with State and national 

agricultural organizations and educational centers to off er educational 

training and in some cases to provide funding to allow YBS farmers to 

att end training. Examples of training 

opportunities include the Ag Leadership Institute, Ag Biz Planner, and 

a course titled “Succeeding through 

Knowledge,” which is off ered in conjunction with the Farm Bureau. 

System associations are actively 

involved in marketing to potential 

YBS borrowers. Some associations 

att end and help sponsor local trade 

shows, fairs, and training workshops 

specifi cally targeting young farmers. Some also conduct outreach and 

marketing activities in partnership 

with 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. In addition, many FCS 

associations provide fi nancial support 

for college scholarships and for FFA, 

4-H, and other agricultural organizations. 
33

Regulatory Policy and Approvals

FCA routinely issues regulations, as 

well as policy statements and other 

guidance to ensure that the Farm 

Credit System complies with the law, 

operates in a safe and sound manner, 

and effi ciently carries out its statutory mission. The regulatory philosophy of FCA is to provide a fl exible 

regulatory environment that enables 

the System to safely and soundly 

off er high-quality, reasonably priced 

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 fl exible 

regulations whose benefi ts outweigh 

their costs. FCA’s objectives are 

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

rural America while ensuring that 

it remains 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 2010

The following paragraphs describe 

some of FCA’s regulatory eff orts in 

2010, along with several projects that 

will remain active in 2011. Full text 

for the items below is available on 

the FCA website. To access Board 

Policy Statements, FCA Booklett ers, 

and Informational Memorandums, go 

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

To access proposed and fi nal rules, 

go to www.fca.gov/law/pending.html 

and select “FCA Pending Regulations 

and Notices database.”

Governance

Serving the Members of Farm 

Credit System Institutions—The 

FCA Board adopted Policy Statement 

FCA-PS-80, “Cooperative Operating 

Philosophy—Serving the Members 

of Farm Credit System Institutions,” 

in November 2010, which reaffi rmed 

FCA’s commitment to FCS members’ 

participation in their institutions and 

emphasized that operating in a cooperative manner requires the boards of 

directors and management to engage, 

communicate with, and provide 

value-added benefi ts to members.

Disclosure to Shareholders and 

Investors on Senior Offi cer Compensation—The FCA Board approved an 

advance notice of proposed rulemaking in November 2010 requesting 

public comments on ways to clarify 

and enhance FCA rules related to the 

disclosures of senior offi cer compensation and the responsibilities and 

authorities of FCS institution compensation and audit committ ees. 

Nominating Committ ee Brochure—

FCA issued an Informational Memorandum in November 2010 to remind 

FCS institutions of the importance of 

nominating committ ees in election of 

boards of directors.

Director Elections—The FCA Board 

approved a fi nal rule in March 2010 

that amended FCA regulations to 

consolidate Farm Credit bank and 

association director election and 

voting rules and to enhance election 

reporting and disclosure rules. 

Maximum Bank Director 

Compensation for 2011—FCA issued 

an Informational Memorandum in 

February 2011 that communicated the 

annual adjustment in the maximum 

annual compensation payable to 

FCS bank directors. The adjustment 

refl ects the change in the Consumer 

Price Index. 

Mergers

Farm Credit System Bank Merger 

Applications—FCA issued a Booklett er in July 2010 to communicate 

FCA’s expectations for the submission of proposals to merge FCS 

banks.

Guidelines on Submission of Proposals to Merge Banks—FCA issued 

an Informational Memorandum in 

August 2010 distributing guidelines 

for the submission of proposals to 

merge banks. 

Lending

Lending and Leasing Limits and 

Risk Management—The FCA Board 

approved a proposed rule in July 

2010 and a fi nal rule in May 2011 

that would amend FCA regulations 

to ensure appropriate safety and 

soundness requirements are in place 

to limit Systemwide credit exposure 

to a single borrower/entity. In addition, the rule would consider policy 
34

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

requirements to limit exposure to 

loan portfolio concentrations by 

industry segment, repayment source, 

etc. 

Loan Purchases from the Federal 

Deposit Insurance Corporation—The 

FCA Board approved a proposed 

rule in April 2010 and a fi nal rule 

in May 2011 to amend FCA regulations to permit FCS institutions with 

direct-lending authority to purchase 

agricultural and cooperative loans 

from the FDIC that meet the System’s eligibility and scope of fi nancing requirements. 

Registration of Mortgage Loan Originators—The FCA Board approved 

a fi nal 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.

Loan Underwriting Standards – Borrower Financial Information—FCA 

issued an Informational Memorandum in March 2011 to convey FCA’s 

expectations regarding the collection 

of borrower fi nancial information and 

the impact of this information on 

loan underwriting standards.

Collateral Risk Management in 

Farm Credit System Institutions—

FCA issued an Informational Memorandum in June 2010 to encourage 

boards and senior management to 

improve collateral risk management 

practices in FCS real estate lending 

activities. 

Evaluating Strategies and Risks for 

Loan Pricing and Structure—FCA 

issued a Booklett er in May 2010 to 

provide guidance for the pricing and 

structure of loans to ensure appropriate earnings performance.

Accounting and Disclosure of 

Troubled Debt Restructurings—FCA 

issued an Informational Memorandum in March 2011 to provide 

guidance to FCS institutions on 

complying with Financial Accounting Standards Board requirements for 

troubled debt restructurings and on 

making related disclosures in reports 

to shareholders.

FACT Act Regulations – Risk-Based 

Pricing Notices—FCA issued an 

Informational Memorandum in January 2010 to inform System institutions about the recently published 

fi nal rules that implement the riskbased pricing provisions of the Fair 

and Accurate Credit Transactions Act 

of 2003 (FACT Act), which amends 

the Fair Credit Reporting Act.

Loan Syndications and Assignment 

Markets Study—FCA continued to 

study loan syndication and assignment markets to determine whether 

its regulations should be modifi ed 

to refl ect signifi cant changes in the 

markets. 

Capital and Investments

Capital Adequacy—The FCA Board 

approved an advance notice of 

proposed rulemaking in June 2010 

that solicited public input on amending FCA’s regulations to replace 

the current core and total surplus 

capital standards with a “Tier 1/Tier 

2” capital framework that is more 

consistent with the Basel Accord 

and more closely aligned with that 

of other Federal fi nancial regulatory 

authorities. 

Farm Credit System Investment 

Asset Management—FCA issued 

a Booklett er in December 2010 that 

provided clarifi cation and guidance regarding FCA’s regulations 

and expectations with respect to the 

key elements of a robust investment 

asset management framework that 

each institution should establish to 

prudently manage its investments in 

changing markets.

USDA Guaranteed Investments—

FCA issued an Informational Memorandum in March 2011 to reiterate 

and clarify that FCS institutions have 

broad authority to invest in obligations (including loans and bonds) 

that are fully insured or guaranteed 

by the U.S. Department of Agriculture and its agencies.

Investments in Rural America—FCA 

continued 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 fulfi lling mission objectives. These 

projects may be considered in future 

rulemakings. 
35

Amendment to Conditions of 

Approval for Rural America Bond 

(RAB) and Agriculture and Rural 

Community (ARC) Pilot Investment 

Programs—In September 2010, the 

FCA Board amended the “defi nition 

of rural area” condition of approval 

for the RAB and ARC bonds and 

securities pilot investment programs.

Farmer Mac

Farmer Mac Nonprogram Investments and Liquidity—The FCA 

Board approved an advance notice 

of proposed rulemaking in May 2010 

that solicited public input to questions related to regulations governing 

Farmer Mac’s liquidity and investment management. 

Farmer Mac Risk-Based Capital

Stress Test Revisions—The FCA 

Board approved a proposed rule in 

December 2009 and a fi nal rule in 

April 2011 that would modify Farmer 

Mac’s Risk-Based Capital Stress Test. 

The revised version of the test incorporated the addition of rural utility 

program business authority into the 

stress test and revised the existing treatment of risk mitigations of 

general obligations for the AgVantage 

Plus program and related structures.

Other

Joint and Several Liability Reallocation Agreement—The FCA Board 

approved a notice and request for 

public comments in August 2010 and 

a notice of approval in October 2010 

of the “Joint and Several Liability 

Reallocation Agreement” among the 

fi ve FCS banks and the Federal Farm 

Credit Banks Funding Corporation. 

FCA’s Stress Testing Expectations 

for All FCS Institutions—FCA issued 

an Informational Memorandum in 

March 2010 that communicated its 

expectations of an institution’s board 

and management in the stress testing 

process.

Technical Changes—The FCA Board 

approved a direct fi nal rule in June 

2010 that amended FCA’s regulations 

to eliminate unnecessary, redundant, 

or outdated regulations, to correct 

cross-reference errors, and to clarify 

the intent of a regulatory provision. 

National Oversight and Examination Program for 2011—FCA issued 

an Informational Memorandum in 

December 2010 that provided a summary of the National Oversight Plan 

for 2011, which details strategies 

for addressing critical risks or other 

areas of focus in the System. 

CORPORATE ACTIVITY IN 2010 

In 2010 and early 2011, FCA analyzed and approved four corporate 

applications, compared with nine 

applications processed in 2009. 

• On July 1, 2010, two ACAs affi liated with the Farm Credit Bank 

of Texas merged their operations 

following stockholder approval of 

the merger. The PCA and FLCA 

subsidiaries associated with the 

ACAs also merged. 

• On November 1, 2010, FCA 

amended the charters of an ACA 

and its subsidiaries affi liated with 

the Farm Credit Bank of Texas to 

refl ect a new headquarters location. No stockholder vote was 

required to relocate the association’s headquarters. 

• On December 1, 2010, two ACAs 

affi liated with the Farm Credit 

Bank of Texas merged their 

operations following stockholder 

approval of the merger. The PCA 

and FLCA subsidiaries associated 

with the ACAs also merged. 

• On January 1, 2011, three ACAs 

affi liated with the AgFirst Farm 

Credit Bank merged their operations following stockholder 

approval of the merger. The PCA 

and FLCA subsidiaries associated 

with the ACAs also merged. A 

name change for the continuing 

ACA and its subsidiaries also 

took eff ect on the same date. 

The total number of associations as 

of January 1, 2011, was 84, compared 

with 88 associations at January 1, 

2010. As of January 1, 2011, 81 ACAs 

and 3 FLCAs made up the System’s 

structure of associations. The number 

of banks remains at fi ve. On December 15, 2010, two of the banks signed 

a lett er of intent to merge. Figure 8 

shows the chartered territory of each 

FCS bank. Details about specifi c corporate applications are available on 

FCA’s website at www.fca.gov/info/

mergers.html. 
36

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

Figure 8

Chartered Territories of FCS Banks

As of January 1, 2011

Note: As of January 1, 2011, CoBank was funding 4 associations in the indicated areas and serving cooperatives nationwide; U.S. AgBank, FCB, was funding 

26 associations; Farm Credit Bank of Texas was funding 17 associations; AgriBank, FCB, was funding 17 associations; and AgFirst Farm Credit Bank was 

funding 20 associations. The FCS contains a total of 89 banks and associations.
37

FUNDING ACTIVITY IN 2010

During 2010, the System experienced 

a return to normal market conditions. The System had regular and 

fl exible access to debt markets over 

the full maturity spectrum although 

demand by certain prior large investors remained weak. As the severe 

fi nancial market stresses of 2008 

continued to dissipate, corporate debt 

issuance increased and borrowing 

rates improved. The System’s funding costs declined markedly both 

in terms of the overall pricing of 

securities as well as their corresponding spreads to U.S. Treasuries. The 

System’s status as a Governmentsponsored enterprise (GSE), as well 

as its fi nancial strength, enabled it to 

have continual access to debt capital 

markets. Despite the placement of 

two housing-related GSEs13 in conservatorship, investor perceptions of 

the System have become favorable 

again. As a result, the System is now 

able to issue debt at very competitive 

rates.

The System continued to enhance its 

marketing programs and strengthened its internal liquidity reserve 

requirements. The System also 

continued to issue third-party capital 

(preferred stock and subordinated 

debt); however, overall activity has 

been curtailed by the high costs of 

these transactions relative to conventional funding costs. The amount of 

mandatorily redeemable preferred 

stock outstanding at year-end 2010 

was $225 million, unchanged from 

December 31, 2009. The System also 

had perpetual preferred stock that 

totaled $2.12 billion at December 31, 

2010, up from the $1.78 billion for 

the preceding year-end. Outstanding 

subordinated debt totaled $1.65 billion at December 31, 2010, up slightly 

from $1.55 billion at December 31, 

2009.

The System funds its loans with a 

combination of consolidated Systemwide debt and capital. The Funding 

Corporation, the fi scal agent for the 

fi ve System banks, sells debt securities such as discount notes, bonds, 

and designated bonds on behalf of 

the System.14 This process allows 

funds to fl ow from worldwide capital-market investors to agriculture 

and rural America, providing rural 

communities with highly effi cient 

access to global resources. At yearend 2010, outstanding Systemwide 

debt was $188.8 billion, up from 

$177.3 billion a year earlier, representing a 6.5 percent increase.15 

The sizable increase of $11.5 billion in Systemwide debt was an 

outgrowth of several factors. Gross 

loans increased $10.5 billion in 

2010, prompting the majority of this 

increase. The System’s combined 

investments, Federal funds, and 

cash balances also contributed to the 

increase in debt as these amounts 

increased by $4.1 billion in 2010. 

Record net income in 2010 and 

increased third-party capital provided 

the additional funding necessary. 

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 

effi ciently. 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 2010, FCA approved $119 billion 

in longer-term debt issuances.

To participate in the issuance of an 

FCS debt security, a System bank 

must maintain, free from any lien or 

other pledge, specifi ed eligible assets 

(available collateral) that are at least 

equal in value to the total amount 

of its outstanding debt securities. 

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

14. 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 fi ve 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 fi nancial disclosure and the release of public information concerning the fi nancial 

condition and performance of the System as a whole.

15. 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. Investors in Systemwide debt securities are also protected by a joint and several liability provision 

that applies to all System banks. If a bank is unable to pay the principal or interest on a Systemwide debt security and if the Farm Credit Insurance 

Fund has been exhausted, then FCA must call all nondefaulting banks to satisfy the security. However, an FCS bank may issue debt individually, as 

well. Debt issued by an individual bank is uninsured, and the issuing bank is solely liable for the principal payments.
38

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

Securities subject to the available 

collateral requirements include Systemwide debt securities for which 

the bank is primarily liable, investment bonds, and other debt securities that the bank may have issued 

individually. As a safe and sound 

practice, FCA regulations require 

the five System banks to maintain a 

net collateral ratio (primarily assets 

divided by liabilities) of not less 

than 103 percent. In connection with 

preferred stock and subordinated 

debt off erings, 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 105.6 

percent being the lowest for any 

single bank as of December 31, 2010. 

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 a fi nancial, economic, 

agricultural, or national defense 

emergency is deemed to exist. This 

resolution would go into eff ect 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. 

In 2010, the System banks agreed 

to improve the quality of liquidity by establishing a framework 

under which each bank at all times 

met stringent requirements for debt 

maturing in the next 15 days, as well 

as the subsequent 30 days. 

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 

fi nancial thresholds that provide the 

Funding Corporation with operational oversight and control over the 

System banks’ participation in Systemwide debt obligations.16 Third, the 

amended and restated Contractual 

Interbank Performance Agreement 

(CIPA) is tied to the MAA and establishes certain measures that monitor 

the fi nancial condition and performance of the institutions in each 

System bank district. For all of 2010, 

all Farm Credit banks maintained 

scores in excess of the established 

CIPA benchmarks. 

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 capitalize on 

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 and 2010, debt 

issuances increased further as the 

System called debt (multiple times 

in some cases) and reissued it at 

lower rates. For the 12 months ended 

December 31, 2010, the System issued 

$534 billion in debt securities, compared with $523 billion for 2009, $519 

billion for 2008, $484 billion for 2007, 

and $387 billion for 2006. 

Previous investor preference for 

shorter-term debt instruments dissipated in 2010, thereby allowing the 

System to extend its debt maturities 

in 2010. The System’s weightedaverage remaining maturity for all 

outstanding insured debt was 3.5 

years as of December 31, 2010, compared with 3.1 years as of December 

31, 2009, and 3.3 years as of December 31, 2008. The weighted-average 

interest rates for the insured debt 

decreased from 1.8 percent as of 

December 31, 2009, to 1.5 percent as 

of December 31, 2010.

MISSIONͳRELATED 

INVESTMENTS

FCA is committ ed to helping ensure 

a dependable and aff ordable fl ow 

of funds to agriculture and to rural 

areas so that farmers, ranchers, and 

rural communities can fl ourish. Agri16. The amended and restated Market Access Agreement began in the late 1990s and is periodically amended (updated) to adjust fi nancial targets, economic incentives, and other matt ers.
39

culture 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 benefi t from investment 

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

att racting 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, 2010, the missionrelated investment securities held 

under these regulatory authorities 

totaled $3.07 billion, including $820.3 

million in AMBS as held-to-maturity 

and $564.9 million as availablefor-sale, $1.09 billion in securities 

backed by guaranteed portions of 

USDA loans and agricultural equipment loans, and $10.2 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.17 As of December 31, 2010, 

investments in successor-in-interest 

contracts totaled $580.2 million. 

The Agency realizes, however, that 

these investment vehicles may no 

longer be suffi cient to meet the 

growing and changing demands of 

agriculture and of rural communities 

for dependable, aff ordable, and fl exible fi nancing 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 given System 

institutions a provisional opportunity 

to make addi-tional 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 website at 

www.fca.gov). 

The pilot programs are intended to 

strengthen the System’s mission to 

provide for an adequate and fl exible fl ow of funds, under specifi ed 

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 fulfi ll 

its mission and to increase the availability and effi ciency of funding to 

rural areas. The pilot program structure also enables FCA to gain critical 

insight and understanding of rural 

fi nancial markets.

FCA has placed controls on these 

pilot investment programs to ensure 

their legal suffi ciency, 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. 

Since 2005, FCA has approved a 

number of pilot programs and 

specifi c investments involving the 

fol-lowing 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, fi rst-lien residential mortgage loans originated by 

non-System lenders in “rural areas” 

(as defi ned by the Farm Security 

and Rural Investment Act of 2002). 

These pilot programs are expected to 

provide additional liquidity for rural 

17. 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 fi nancial institution the right to receive payments under a 

contract with the Secretary of Agriculture. FCA determined that FCS institutions meet the Tobacco Act’s fi nancial institution criteria and are therefore 

eligible to participate in the Tobacco Transition Payment Program.
40

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

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-eff ective credit for rural 

homeowners. As of December 31, 

2010, only one of the Farm Credit 

banks was participating in this program; it had $906.4 million in RHMS 

classifi ed as held to maturity. 

Agriculture and Rural Community 

Bonds and Securities—During 2010, 

all FCS institutions continued to 

be authorized to participate, under 

specifi c conditions, in pilot programs 

that provide funding for economic 

development, infrastructure, essential 

community facilities, and revitalization and stabilization projects that 

are necessary to sustain 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-eff ective 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, 2010, FCS institutions held $679.7 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,18 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, 2010, the amount of 

mission-related equity investments 

outstanding totaled $5.8 million for 

investments in the starter farmer 

program, venture capital funds, and 

RBICs. 

18. The Farm Security and Rural Investment Act of 2002 authorizes FCS institutions to establish or 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 25 percent of the shares of an RBIC, the RBIC may not provide equity investments or fi nancial assistance to entities that are not otherwise eligible to receive 

fi nancing 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 benefi t their borrowerstockholders and meet their public 

mission. For FCS institutions to keep 

providing a dependable source of 

credit and fi nancially related services 

for rural America, they must operate 

with suffi cient capital and appropriately manage and control risk. FCA 

deploys examination and supervisory 

resources to monitor systemic risks in 

the FCS as a whole and specifi c 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 aff ect 

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 

whether 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 RISKͳBASED 

EXAMINATION AND OVERSIGHT 

PROGRAM

FCA’s examination and oversight 

program is designed to monitor and 

address FCS risk as eff ectively and 

effi ciently 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-specifi c 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, FCA 

ensures that FCS institutions have the 

programs, policies, procedures, and 

controls to eff ectively identify and 

manage risks. The oversight program 

also ensures compliance with laws 

and regulations. For example, FCA 

regulations require FCS institutions 

to have eff ective loan underwriting 

and loan administration processes. 

FCA also has specifi c regulations 

requiring FCS institutions to maintain strong asset-liability management capabilities. For approximately 

20 years, FCA has used a comprehensive regulatory and supervisory 

framework for ensuring System 

safety and soundness. FCS institutions, on their own and in response 

to FCA’s eff orts, continue to build 

the capabilities of their risk management systems.

MEETING STATUTORY 

EXAMINATION REQUIREMENTS

In accordance with the Farm Credit 

Act, FCA examines each FCS institution at least once every 18 months. 

The Agency also conducts 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 diff erential riskdriven examination activities for all 

institutions.

As of January 1, 2011, FCA was overseeing and examining the following 

FCS institutions:19

• 84 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 fi nancial 

industries, FCA must ensure that 

FCS institutions have the culture, 

governance, policies, procedures, and 

management controls to eff ectively 

identify and manage risks. To be 

fully eff ective in meeting this challenge, the Agency employs various risk supervision processes for 

MAINTAINING A DEPENDABLE SOURCE OF CREDIT 

FOR FARMERS AND RANCHERS

19. 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 2010, FCA also performed contract 

work for the U.S. Department of Agriculture. However, the safety and soundness of the FCS remains FCA’s principal focus and responsibil¬ity.
42

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

evaluating systemic risks emerging in 

agriculture and the fi nancial services 

industry that can aff ect an institution, 

a group of institutions, and the System as a whole. These risk supervision processes address material risks 

and emerging issues in a proactive, 

nationally focused way. 

Also, as part of its examination 

approach, FCA uses the following methods to communicate with 

regulated institutions about systemic 

issues:

• FCA Board Policy Statements 

• Informational Memorandums

• Booklett ers

• Examination Bulletins

In addition to e-mailing the communiqués to each institution as they are 

issued, the Agency keeps an online 

inventory of each form of communication. For Board Policy Statements, 

Informational Memorandums, and 

Booklett ers, go to 

www.fca.gov/law/guidance.html. 

For Examination 

Bulletins, go to 

DZȦȦ  řǯǯȦȦ

¡ǯ

.

FCA is addressing numerous risks 

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

• Loan Portfolio Management. FCA 

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. FCA provides 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. 

FCA evaluates how collateral risk 

is being routinely monitored and 

assessed and whether operational 

adjustments are being made to 

manage increased collateral risk.

• Compensation Programs and 

Corporate Governance. The 

Agency has increased its 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 fi nancial 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 

signifi cant fi nancial, 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 fi nancial, 

management, or compliance weaknesses ranging from moderately 

severe to unsatisfactory. A 5 rating 

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

failure.20

Through its ongoing monitoring and 

oversight programs, FCA examiners continually evaluate institutional 

risk and regularly review and update 

FIRS ratings to refl ect 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 fi nancial 

condition and performance of the 

institution.

FIRS ratings for 2010 show that the 

fi nancial condition and performance 

of the FCS remained relatively strong 

and stable throughout the year. However, in 2009, risk did increase from 

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

the low risk levels of previous years. 

As shown in fi gure 9, FIRS ratings 

declined in 2009 when stresses from 

the general economy, the credit crisis, 

and volatility in commodity prices 

surfaced and aff ected some institutions. At December 31, 2010, 29 FCS 

institutions were rated 1 (33 percent), 46 were rated 2 (52 percent), 

12 were rated 3 (13 percent), and 2 

were rated 4 (2 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 fi gure 9.) Although 

there has been some decline, the 

ratings still refl ect a fi nancially safe 

and sound FCS. Stresses in the 

dairy, livestock, nursery, timber, and 

ethanol industries largely drove the 

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

fi nancial strength maintained by the 

System reduces the risk to investors in FCS debt, to the Farm Credit 

System Insurance Corporation, 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 Offi ce 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 diff erentially 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—in this 

case, agriculture—presents an additional challenge for FCS lenders. If 

FCA discovers unacceptable risks, it 

takes action to ensure that the identifi ed 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 

identifi ed 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 fi rm regulatory guidance to address identifi ed 

weaknesses, and the institution is 

allowed time to correct the problems. 

As of December 31, 2010, FCA had 

11 associations under special supervision, whose assets totaled $10.9 

billion, amounting to 5 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 fi nancial 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 identifi ed. 

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 offi cers, 

directors, and other persons

If an enforcement action is taken, the 

FCS institution must operate under 
44

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

Figure 9

Financial InsƟ tuƟ on RaƟ ng System (FIRS) 

Composite RaƟ ngs for the FCS, 2006–2010

Source: FCA’s FIRS Ratings Database.

Note: Figure 9 refl ects 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 refl ect 

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.
45

the Agency’s enforcement program 

and report back to FCA. FCA’s 

examiners oversee the institution’s 

performance to ensure compliance 

with the enforcement action. As of 

December 31, 2010, FCA had entered 

into formal writt en agreements with 

fi ve associations, whose assets totaled 

$1.6 billion. The writt en agreements 

require the associations to take corrective actions with respect to certain 

areas of their operations, including 

fi nancial condition and performance, 

portfolio management, and asset 

quality.

WORKING WITH FINANCIALLY 

STRESSED BORROWERS

Agriculture involves signifi cant 

inherent risks and volatility because 

of many factors, including adverse 

weather, changes in Government 

programs, international trade issues, 

fl uctuations in commodity prices, and 

crop and livestock diseases. The signifi cant risks in agriculture can sometimes make it diffi cult for borrowers 

to repay loans. The Farm Credit Act 

provides System borrowers certain 

rights when they apply for loans and 

when they have diffi culty 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 and agricultural real estate 

is acquired by the FCS, 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 eff orts, 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. In 2010, when some 

FCS borrowers were under stress 

from the weakened economy, FCA 

received an increase in the number 

of borrower complaints. Generally, 

borrowers who contact FCA with 

complaints are seeking clarifi cation, 

additional information, and options 

to redress their concerns. If FCA 

fi nds violations of law or regulations, 

FCA has several enforcement options 

to bring about corrective action.
46

FARM CREDIT ADMINISTRATION 2010 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 agricultural real estate mortgage 

loans, rural housing loans, and rural 

utility cooperative loans. 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 benefi ts of 

capital markets pricing and product 

innovation. 

Farmer Mac conducts activities 

through three programs:

• Farmer Mac I, which accepts 

mortgage loans secured by fi rst 

liens on agricultural real estate 

and rural housing

• Farmer Mac II, which accepts 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, which 

accepts loans to fi nance electrifi cation 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 Offi ce of Secondary Market Oversight (OSMO), which was 

established by the Food, Agriculture, 

Conservation, and Trade Act Amendments of 1991. This offi ce 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 offi ce 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 offi ce, FCA performs 

the following functions:

• Examines Farmer Mac at least 

annually for capital adequacy, 

asset quality, management performance, earnings, liquidity, and 

interest rate sensitivity

• Supervises and issues regulations 

governing Farmer Mac’s operations

• Oversees and 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 2005 to 

2010. 

CONDITION OF FARMER MAC

Table 5 

Farmer Mac Condensed Balance Sheets, 2005–2010 

As of December 31 

Dollars in Millions

 Percentage 

 growth

 2005 rate 

 Restated 2006 2007 2008 2009 2010 2009–2010

Total assets 4,341.4 4,953.7 4,977.6 5,107.3 6,138.8 9,479.9 54.4

 

Total liabiliƟ es 4,095.4 4,705.2 4,754.0 4,947.7 5,798.4 9,001.0 55.2

 

Net worth or 

 equity capital 246.0 248.5 223.6 15.3 196.2 478.9 144.1

 

Sources: Farmer Mac’s Securities and Exchange Commission Form 10-Ks.
47

Table 6 

Farmer Mac Capital PosiƟ ons, 2005–2010 

As of December 31 

Dollars in Millions

2005

Restated 2006 2007 2008 2009 2010

GAAP equity $246.0 $248.5 $223.6 $15.3 $196.2 $478.9

Core capital $230.8 $243.5 $226.4 $207.0 $337.2 $460.6

Regulatory capital $239.4 $248.1 $230.3 $223.4 $351.3 $480.7

Statutory requirement $142.5 $174.5 $186.0 $193.5 $217.0 $301.0

Regulatory requirement $29.5 $42.9 $42.8 $57.3 $35.9 $42.1

Excess over statutory or regulatory requirement* $88.3 $69.0 $40.4 $13.5 $120.2 $159.6

Capital margin excess > minimum 62.0% 39.6% 21.7% 7.0% 55.4% 53.0%

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

* Farmer Mac is required to hold capital at or above the statutory minimum capital requirement or the amount required by FCA regulations as determined 

by the Risk-Based Capital Stress Test, whichever is higher. 

 

CAPITAL

On December 31, 2010, Farmer Mac’s 

net worth (that is, equity capital 

determined using generally accepted 

accounting principles [GAAP]) was 

$478.9 million, compared with $196.2 

million a year earlier. Net worth was 

5.1 percent of on-balance-sheet assets 

as of December 31, 2010, compared 

with 3.2 percent at the end of 2009. 

The increase resulted primarily from 

the issuance of $250 million in 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 virtually 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 

its Series B Preferred Stock. When 

Farmer Mac’s off -balance-sheet program assets (that is, its guarantee 

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

is 3.2 percent. As of December 31, 

2010, Farmer Mac continued to be 

in compliance with all statutory and 

regulatory minimum capital requirements. 

At year-end 2010, 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).21 Farmer Mac’s core 

capital as of December 31, 2010, 

totaled $460.6 million, exceeding the 

statutory minimum capital requirement22 of $301 million by $159.6 million. Farmer Mac’s regulatory capital 

totaled $480.7 million as of December 31, 2010, exceeding the regulatory risk-based capital requirement 

of $42.1 million by $438.6 million. 

Regulatory capital was 4.4 percent of 

total Farmer Mac I and rural utility 

program volume (including both onand off -balance-sheet agricultural and 

utility program volume but excluding Farmer Mac II). Risk exposure 

on Farmer Mac II loans is extremely 

low as they are guaranteed by the 

U.S. Department of Agriculture. Table 

6 off ers a historical perspective on 

capital and capital requirements for 

2005 through 2010.

FCA published a proposed rule in 

December 2009 and a fi nal rule in 

April 2011 to revise the risk-based 

capital regulations. The revisions 

address new program authorities for 

rural utility fi nancing and update the 

RBC Model in response to changing 

fi nancial markets, new business practices, and the evolution of the loan 

portfolio at Farmer Mac, as well as 

continued development of best industry practices in fi nancial modeling.

In addition to supporting program 

assets, Farmer Mac’s capital supports nonprogram investments. 

Nonprogram investments provide 

21. See the FCA Website at www.fca.gov for more information about the RBC Model.

22. 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 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

liquidity in the event of a short-term 

disruption in the capital markets 

that would prevent 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 eff ective 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. FCA expects to issue 

a proposed rule on this topic in 2011 

that would, among other things, 

address certain requirements of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act of 2010 

(DFA).

PROGRAM ACTIVITY

Farmer Mac’s total program activity 

increased to $12.2 billion on December 31, 2010, from $10.7 billion a 

year earlier (see fi gure 10). The net 

increase was largely att ributable to 

new on-balance-sheet business (both 

agricultural and rural utility cooperative business) completed through 

the Farmer Mac AgVantage program. 

AgVantage transactions are general 

obligations of the issuing fi nancial institution that are guaranteed 

by Farmer Mac. In addition to the 

general obligation of the fi nancial 

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 the Standbys, a 

fi nancial institution pays an annual 

fee in return for Farmer Mac’s commitment to purchase loans in a specifi c pool under specifi ed conditions 

at the option of the institution. As 

shown in fi gure 11, standbys represented 14.4 percent of Farmer Mac’s 

total program activity in 2010.

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 

2010, 45 percent of program activity 

consisted of off -balance-sheet obligations. 

ASSET QUALITY

On December 31, 2010, the portion 

of the Farmer Mac I program portfolio that was nonperforming was 

$81.8 million, or 1.9 percent of the 

principal balance of all loans purchased, guaranteed, or committ ed to 

be purchased.23 This compares with 

$62.0 million, or 1.41 percent, on 

23. Farmer Mac assumes 100 percent of the credit risk on loans purchased (and on most loans underlying Standby commitments) after enactment of the 

Farm Credit System Reform Act of 1996, whereas the loans purchased prior to enactment of the act are supported by mandatory 10 percent subordinated interests, which mitigate Farmer Mac’s exposure. For that reason, loans purchased 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 signifi cantly mitigated by 

the general obligation of the issuer.

Figure 10

Farmer Mac Program AcƟ vity and Nonprogram Investment Trends

As of December 31 

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

December 31, 2009. Assets are considered to be nonperforming when 

they are 90 days or more past due, 

in foreclosure, or in bankruptcy; real 

estate properties acquired by Farmer 

Mac through foreclosure are also 

reported as nonperforming assets. As 

of December 31, 2010, Farmer Mac’s 

90-day delinquencies were $70.2 

million, or 1.63 percent, compared 

with $49.5 million, or 1.13 percent, 

as of December 31, 2009. Real estate 

owned as of December 31, 2010, was 

$2 million, up from $739,000 a year 

earlier. Of the 90-day delinquencies in Farmer Mac’s loan portfolio, 

16 percent were on ethanol loans. 

Delinquencies on non-ethanol loans 

increased primarily because of loans 

on crops (largely corn) and permanent plantings. Farmer Mac reported 

no delinquencies or nonperforming loans in its pools of rural utility 

cooperative loans. 

On December 31, 2010, Farmer Mac’s 

allowance for losses totaled $20.1 

million, compared with $14.2 million 

on December 31, 2009. Farmer Mac 

att ributed the change in the allowance for losses primarily to a $4.3 

million provision for loan losses, 

charge-off s of $0.6 million recognized 

during the year, and $2.2 million in 

recoveries on a loan secured by an 

ethanol plant. 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 $22.1 million (in accordance with 

GAAP) for the year ended December 

31, 2010, down from the $82.3 million 

loss reported at year-end 2009. Core 

earnings for 2010 were $25.4 million, 

compared with a loss of $16.1 million 

on a core earnings basis in 2009.24 

Net interest income, which excludes 

guarantee fee income, was $96.0 

million in 2010, up from $85.9 in 

2009. Guarantee fee income, at $24.1 

million, was 24.3 percent lower in 

2010 than in 2009. This reduction was 

due in part to the reclassifi cation of 

$4.6 million in guarantee fees to net 

interest income to comply with new 

GAAP accounting guidance requiring 

securities previously reported as off 

balance sheet to be reported as on 

balance sheet. Nonprogram investments accounted for an estimated 12 

percent of interest income for 2010, 

down from 16 percent for 2009. Table 

7 shows a fi ve-year trend for the 

basic components of income.

Figure 11

Farmer Mac Total Program AcƟ vity

As of December 31, 2010

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

AMBS = agricultural mortgage-backed securities

Total = $12.17 billion

24. Core earnings is a non-GAAP measure of fi nancial results that excludes the eff ects of certain unrealized gains and losses and nonrecurring items. 

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

are at Farmer Mac’s discretion.
50

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

Table 7 

Farmer Mac Condensed Statements of OperaƟ ons, 2005–2010 

As of December 31 

Dollars in Millions 

 

2005 Growth Rate

Restated 2006 2007 2008 2009 2010 2009–2010

 

Total revenues $83.9 $67.8 $31.5 ($140.6) $181.8 $99.1 (45%)

Total expenses $36.8 $38.0 $27.1 $13.5 $99.5 $77.0 (23%)

Net income available 

 to shareholders $47.0 $29.8 $4.4 ($154.1) $82.3 $22.1 (73%)

Core earnings $28.7 $25.9 $29.9 ($81.5) $16.1 $25.4 57%

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

Figure 12

Allowance, Nonperforming Asset, and Delinquency Trends, 2005–2010

As of December 31 

Sources: Farmer Mac’s Annual Reports on Securities and Exchange Commission 10-Ks.
51

Challenges Facing the Agricultural Economy 

and the Farm Credit System

During 2010, the Farm Credit System operated in an improving farm 

and rural economy. The United 

States and most of the world continued to recover from one of the 

worst economic downturns since 

the Great Depression. Consequently, 

both domestic and foreign demand 

for agricultural products improved, 

particularly for higher-end items like 

meats and dairy products, which had 

been particularly aff ected by slumping demand. Dairy, catt le, and hog 

producers experienced a rebound in 

profi t margins by the end of 2010 as 

price increases generally outpaced 

higher input costs, particularly for 

feed. Rising demand for commodities from emerging markets and poor 

harvests in key production regions 

led to much higher prices for major 

grains, oilseeds, and fi bers, particularly in the second half of the 

year. This boosted farm incomes 

signifi cantly compared with 2009, 

with the USDA forecasting that net 

farm income rose 27 percent over 

that of 2009. The ethanol industry, 

which struggled throughout 2009, 

also rebounded in 2010 as gasoline 

demand picked up and oil prices 

rose. Industries tied to the housing 

sector, such as timber, nursery, and 

sod, remained weak in 2010 as building starts failed to recover from 2009 

lows. 

Economic conditions in the United 

States and throughout the world are 

expected to improve in 2011 and 

2012, with economic growth strongest 

in developing countries. Modest GDP 

growth is most likely for the United 

States in 2011 according to consensus 

forecasts. In general, rural economies 

fared somewhat bett er than metro 

areas in the past recession and are 

expected to continue to improve in 

2011. For the farm economy, the U.S. 

Department of Agriculture forecasts 

that net farm income for 2011 will 

rise by 20 percent over that of 2010. 

If the forecast proves correct, net 

farm income, when adjusted for 

infl ation, will be the second highest 

in the past 35 years. 

With the recovering general economy 

and strong farm economy in 2010, 

the FCS experienced growth in loan 

volume and in earnings. However, 

the System’s fi nancial performance 

was still negatively aff ected by continued weakness in loan performance 

in some of its business segments, 

such as dairy and catt le. Furthermore, the sluggish housing market 

continues to adversely aff ect the System’s forestry and nursery portfolio. 

A number of factors, both domestic 

and foreign, could aff ect the System’s 

long-term ability to profi tably fi nance 

agricultural enterprises. In the following paragraphs, FCA identifi es 

some of these risks, including conditions in the macro-economy and the 

farm economy, government policies, 

foreign trade, and other longer-term 

challenges. Through its regulatory 

and examination activities, FCA 

will continue to closely monitor and 

address these risks.

PROSPECTS FOR THE GENERAL 

ECONOMY

Key economic indicators in the fi rst 

half of 2010 suggest that economic 

growth will continue into 2012, thus 

providing a fi rmer fi nancial footing 

for businesses and consumers alike. 

Indicators of business spending and 

confi dence in the manufacturing and 

the service sectors continued to show 

strength in the fi rst half of 2011, 

suggesting that employment growth 

will likely continue in the second 

half. While payroll growth in early 

2011 was sluggish relative to past 

recoveries, it is nonetheless bolstering 

consumer confi dence and spending 

ability. Even so, in all likelihood, the 

unemployment rate for the year will 

remain above 8.0 percent as structural changes in the labor market 

slow the pace to full employment. 

On balance, the economic outlook for 

2011 suggests that consumer demand 

will be suffi cient to promote sustainable moderate growth, with many 

forecasters expecting moderate real 

GDP growth of 3.0 to 3.5 percent this 

year, up from 2.9 percent for 2010. 

Consumer spending will be a key 

factor in the economy’s performance, 

as it represents 70 percent of the U.S. 

economy. The gradual improvement 

in employment earnings, some recovery in household wealth, and more 

credit availability should promote 

further strength in consumer spending. 
52

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

While some of the problems that 

precipitated the recession have now 

been addressed, a few still continue 

to be a drag on economic activity. 

One of those areas is the servicing of 

household debts that accumulated in 

the last decade. Total household debt 

receded below $14 trillion in 2010 

from the $14.5 trillion peak before 

the recession, but relative to disposable incomes it remains historically 

high. However, low interest rates are 

aiding consumer spending by lowering the cost of servicing outstanding 

debts. In the fourth quarter of 2010, 

the percentage of disposable personal 

income going toward household 

fi nancial obligations fell to 16.6 percent from the 18.8 percent peak prior 

to the recession. 

Another one of these problems is 

the housing sector, which was at 

the epicenter of the fi nancial crisis. 

In a typical recovery, housing spurs 

economic activity as confi dent buyers 

begin to purchase homes, new furniture, and other home improvements. 

This time, however, the housing 

sector continues to face an imbalance 

of supply and demand as foreclosure 

activity remains high in many major 

housing markets, and consumer ability to qualify or secure credit is less 

than in the past. As a result, housing prices continued to decline in 

many areas in the fi rst part of 2011. 

Although housing accounts for about 

6 percent of the economy, housing 

values impact consumer confi dence, 

consumer credit, and spending, and 

hence have an outsized impact on 

the overall economy. New home 

sales have remained stagnant in the 

fi rst half of 2011, while housing starts 

and building permits hovered near 

the lows of the recession. New home 

sales have a large impact on the forestry, sod, and nursery industries.

The U.S. export sector is also expanding with the improving world economy, but so too are imports. While 

the net trade balance will remain in a 

negative position for 2011, the trade 

balance for agriculture should remain 

positive. Trade disruptions caused 

by the economic consequences of 

the Japanese earthquake and tsunami, while believed to be temporary, could disrupt agricultural and 

forestry trade for an extended period. 

Sovereign debt problems have ratt led 

fi nancial markets over the past year, 

and these problems represent a drag 

on growth in Europe going forward.

An issue of rising concern is the size 

of the Federal budget defi cit and its 

potential eff ect on infl ation. The defi -

cit for fi scal year 2011 is projected to 

exceed the $1.3 trillion gap recorded 

in fi scal year 2010. Outstanding 

public federal debt in the past two 

fi scal years rose from $5.8 trillion to 

$9.0 trillion and is forecast to surpass 

$10 trillion by the end of fi scal 2011 

according to the Congressional Budget Offi ce. Ongo-ing defi cits of this 

magnitude could lead to structural 

imbalances in the capital and credit 

markets that would threaten the confi dence of market participants—both 

domestic and foreign—and spark 

infl ationary fears and a rise in interest rates. While budget defi cits had 

been viewed as necessary to address 

the economic recession, the focus is 

now shifting to greater fi scal discipline. Such a move, while enhancing 

consumer and business confi dence, 

also means cuts to spending programs such as farm programs. 

With respect to infl ation, most of 

the current data point to low rates 

of increase in core consumer prices 

despite sharp jumps in energy, food, 

and some commodities in late 2010 

and early 2011. For the fi rst quarter of 2011, the seasonally adjusted 

annual consumer infl ation rate was 

6.1 percent; when food and energy 

are excluded, the annualized rate was 

just 2 percent. Most observers believe 

infl ation will remain in check for the 

rest of this year, refl ecting household 

and business economic uncertainty, 

slack labor markets and manufacturing capacity. However, over the 

longer term, infl ation may rise further. Agriculture feels the impact of 

infl ation in the rising costs of inputs, 

as well as in the potential reduction 

in demand for high-value consumer 

items such as meats. 

Other factors aff ecting the outlook 

for the FCS are funding costs and the 

future direction of borrower interest 

rates. As noted on page 37, the System maintained regular and fl exible 

access to the debt markets in 2010 

although demand for longer-term 

securities remained moderate and 

pricing was volatile, as spreads over 
53

Treasury securities show. Because 

of the Federal Reserve’s low interest 

rate policies, rates paid by System 

borrowers have been near historic 

lows. It is uncertain how markets 

will react this summer, when the 

Federal Reserve’s latest round of 

quantitative easing comes to an end. 

Over the longer term, rate increases 

are likely although future interest 

rate movements are highly unpredictable and events could occur that 

prolong the current low rate environment in the United States. However, because of the safety of System 

securities, investors are expected to 

continue purchasing them in 2011 at 

favorable spreads over U.S. Treasury 

securities. 

ECONOMIC SETTING FOR 

AGRICULTURE AND CREDIT

Overall, the agricultural sector 

entered 2011 on a fi rm footing. Net 

farm income for 2010 was estimated 

by USDA to have rebounded to $79 

billion from the $62 billion recorded 

in 2009. Net cash farm income 

(refl ecting cash transactions during the year) rebounded even more 

strongly, surging 32 percent and 

surpassing the $90 billion recorded in 

2008. The overall strength of the U.S. 

farm economy is evidenced by the 

fact that the top fi ve years of earnings of the past three decades have 

occurred since 2004.

USDA’s forecast for 2011 suggests 

that the farm economy will build 

on the gains made in 2010, with net 

farm income forecast to rise nearly 20 

percent to $95 billion (forecasts as of 

February 14, 2011). If achieved, this 

level would be the second highest 

infl ation-adjusted net farm income 

recorded in the past 35 years. Historically, extended periods of U.S. farm 

prosperity such as this are relatively 

infrequent and have been associated 

with war-time supply disruptions. 

As a testimony to the breadth of 

farm earnings, direct government 

farm program payments are forecast 

to total just $10.6 billion in 2011, 

down from $12.2 billion estimated 

for 2010. If so, these payments would 

represent just 11 percent of net farm 

income, the lowest share in three 

decades, and well below the 10-year 

average of 20 percent.

The balance sheet of the farm sector improved in 2010 and is forecast 

to strengthen further in 2011. Total 

farm assets are forecast to rise 6 

percent and, if realized, total farm 

equity would surpass $2 trillion. The 

sector’s debt-to-asset ratio would 

fall below 11 percent at year-end 

2011. This ratio would be 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 carry litt le or 

no debt from one year to the next.

Behind the favorable sector-wide picture, some commercial farms remain 

weak fi nancially. While producers of 

the major fi eld crops have enjoyed 

record incomes and hefty gains in 

wealth, producers with incomes 

dependent on the sale of livestock 

and livestock products in 2010 were 

recovering from poor earnings and 

an erosion of their equity positions 

(particularly if they had to rely on 

purchased feed grain items). Similarly, the fi nancial circumstances for 

producers of housing-related products, such as nursery plants and 

timber, have also been slow to mend. 

Naturally, considerable regional differences exist, refl ecting enterprise 

mixes and local economic conditions. 

With about 84 percent of the farm 

sector balance sheet made up of 

farmland assets, land values have an 

outsized infl uence on the strength of 

farm balance sheets and farmer creditworthiness. Surveys conducted by 

appraisers, universities, and by Federal Reserve district banks all suggest 

that farmland prices rose signifi cantly 

in 2010 and that the upward trend 

continued into the fi rst quarter of 

2011. The strongest reported gains 

were for cropland in the Midwest, 

particularly high-quality land in 

major corn- and soybean-producing 

regions. These surveys indicated that 

Statewide average farmland values 

for 2010 increased by more than 10 

percent, and for some States, average 

price increases exceeded 15 percent. 

The volume of farmland sales was 

low in 2010 as potential sellers held 

on to land and thus limited the 
54

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

available supply. When sales did 

occur, farmers remained the primary 

purchasers of farmland. Pasture and 

ranchland values, as well as the 

value of farmland in transition—

that is, farmland located near metro 

regions, did not change as signifi -

cantly in 2010, refl ecting a less robust 

livestock sector and weak housing 

construction. While outstanding farmland debt rose 3.5 percent at System 

associations, farm leverage is generally viewed as modest, and anecdotal 

reports of cash purchases of farmland 

or use of large cash down payments 

have been frequent.

Land value surveys show that, in 

some Midwest States like Iowa, farmland prices have doubled in the past 

six years, raising concerns that current values may be unsustainable and 

that a destabilizing correction similar 

to that which occurred in the 1980s is 

looming. The higher cropland values 

reported in 2010 were supported by 

a surge in the crop prices for major 

acreage crops—corn, oilseeds, wheat, 

and cott on—in the latt er half of 

the year. Because production costs, 

including land rental costs, did not 

rise as much as crop prices, crop producers enjoyed favorable net returns 

and future profi t expectations. Valuation models generally agree that the 

higher 2010 average cropland values 

reported were not signifi cantly out of 

line with these higher expected profi t 

margins, especially in this historically 

low interest rate environment. 

To address the rising risks associated with farmland values, FCA has 

issued guidance on collateral risks to 

System lenders through a series of 

Informational Memorandums. Many 

System institutions are improving 

underwriting standards and appraisal 

guidelines on farmland collateral, as 

well as improving eff orts to identify 

portfolio risk through land value 

studies and stress testing of land 

value changes. To improve the monitoring of these risks and to form the 

appropriate future regulator response 

to them, FCA organized a meeting 

in early 2011 with the other Federal 

fi nancial regulators regarding agricultural land values and associated risks 

to loan collateral. 

Farm prices for a range of farm 

products rose signifi cantly during 

2010, continuing a patt ern of more 

volatility in farm prices that presents decision-making challenges for 

producers and lenders alike. Prices 

received by farmers in January 2011 

were at least 30 percent higher than 

a year earlier for feed grains, food 

grains, oilseeds, and upland cott on. 

Positive price gains were recorded 

for the livestock sector, with broilers 

and eggs being the only major livestock enterprises experiencing weaker 

pricing at the start of 2011 than the 

start of 2010. 

Through herd downsizing and higher 

demand, the excess capacity problem 

in the livestock industry eased in 

2010. But the recovery of the livestock sector has been hampered by 

the rise in feed prices since mid-2010, 

once again hurting profi t margins 

despite a more favorable, but also 

volatile, pricing environment for 

livestock products. The impact of 

high feed ration costs is not always 

uniform in livestock. For example, 

negative margins are expected for 

broilers in 2011, whereas margins in 

turkey production are expected to 

stay positive. Margins for cow-calf 

production look favorable for 2011, 

and dairy, which has been slow to 

heal from 2009 losses, is likely to 

stay positive for the year. Because of 

the large amount of feed that must 

be purchased, margins for farrowto-fi nish hog operations and catt le 

feedlots are especially aff ected by 

rising grain prices. The generally 

weak margins reduce the incentives 

for capital investments in production 

expansion. Other rising input costs, 

such as fertilizers and fuel, represented a challenge to crop producers. 

There are concerns that, if crop prices 

were to collapse, some producers will 

be caught in a cost squeeze because 

input costs decline more slowly. Of 

course, this would be good news for 

livestock producers because it would 

decrease their input costs. 

Higher prices for major farm commodities are being driven by U.S. 

biofuels demand, strong emerging 

market demand for basic foodstuff s 

and protein, and tighter world stocks 

brought on by a series of poor crops 

in major producing regions around 

the world. A reversal in the direction of any one or all of these factors 
55

could alter the current pricing picture 

for a particular commodity and 

quickly erode profi t margins. Not 

only does high volatility in profi ts 

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 fl ow relative to debt 

and are looking more closely at the 

risk management practices of credit 

applicants, including the use of risk 

management tools such as forward 

contracting, futures, options, and 

USDA revenue insurances.

Rapidly rising U.S. ethanol production in recent years has pushed up 

corn demand, but that ramp-up 

in corn demand may have largely 

ended. U.S. ethanol production grew 

238 percent in the past fi ve years, 

reaching 13.2 billion gallons in 2010 

and is expected to grow further this 

year. In the process, the industry is 

expected to utilize 5 billion bushels 

or about 40 percent of the 2010 U.S. 

crop. Policy changes with respect to 

blender tax credits and permitt ed 

blending levels of ethanol in gasoline 

present risks to future demand. Also, 

under current legislation, a maximum 

of 15 billion gallons of the annual 

renewable fuel standard mandate 

is to be derived from conventional 

biofuels by 2015, suggesting that 

future growth could be limited in the 

absence of changes in policies. The 

conventional mandate for 2011 is 

12.6 billion gallons. 

Farm program and foreign trade 

agreements are two important policy 

forces that help shape farm income 

and thus aff ect borrower repayment risk. The fl ow of Government 

payments has generally supported 

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

but sometimes at a heavy cost to 

taxpayers. More recent policies have 

shifted more of this responsibility to Government-supported revenue insurance policies. This year’s 

higher crop prices gave producers 

the opportunity to purchase various revenue insurance products at 

aff ordable prices that protected their 

profi t margins and thus their ability 

to meet debt payments if prices or 

yields decline signifi cantly this year. 

A key concern for agricultural lenders will be the outcome of the 2012 

Farm Bill debate. As the 2012 legislative debate approaches, the current 

budgetary environment suggests that 

farm program costs will be scrutinized closely as part of the continuing eff orts to reduce defi cits 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 -

sett ing farmer repayment risk in the 

near future.

U.S. agricultural exports have been 

an important driver of past farm 

income growth, and future directions 

in trade will continue to shape the 

farm economy. In the past fi ve years, 

the value of U.S. farm exports has 

nearly doubled, reaching $115 billion 

in 2010. The relatively weak value 

of the dollar compared with the 

currency value of our trading partners has likely contributed to recent 

growth. While trade growth has 

occurred in a range of agricultural 

products with a range of countries, 

the most notable growth in agricultural trade occurred with China, 

which has become the second largest 

world economy. China has become 

a major purchaser of the United 

States’s second largest crop, soybeans, accounting for approximately 

one-quarter of last year’s production 

volume. Changes in economic growth 

or trade policies of a handful of 

major trading partners can alter the 

economic landscape for U.S. producers quickly. 

Increasing future trade opportunities hinges on trade negotiations. 

While the Doha Round of multilateral negotiations under the World 

Trade Organization (WTO) remains 

stalled, progress was made last year 

on bilateral agreements that could 

boost future agricultural exports. Perhaps most notable was the fi nalization of U.S.–Korea trade agreement, 

known as the KORUS agreement. 

If approved by Congress, the trade 

pact would improve the access of 
56

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

U.S. farm products to South Korea’s 

$1 trillion economy and its 49 million consumers. Already, Korea is the 

fi fth largest export market for U.S. 

farm products. In addition, progress 

was made on other trade pacts with 

important agricultural markets, notably the 2006 U.S.–Colombia Trade 

Promotion Agreement and the TransPacifi c Partnership Agreement. 

CREDIT RISK IN THE SYSTEM’S 

PORTFOLIO25

The System’s loan portfolio resumed 

its growth in 2010 although some 

sectors remained exposed to elevated 

stress levels. Increased farm income 

and agricultural real estate values 

in many parts of the United States 

mitigated the credit stress on the System’s overall portfolio. Loan growth 

largely came in areas where cash 

grain is produced, as higher commodity prices caused loan demand 

for production inputs, inventories, 

and real estate to increase. However, 

some sectors and regions continued 

to experience signifi cant credit distress in 2010, particularly the dairy, 

forestry, livestock, and biofuel sectors, and the southeastern portion of 

the United States. In some cases such 

as dairy, operating margins were 

tight because of the increase in price 

of production inputs; as a result, 

producers were unable to reduce 

their debt levels. In other cases, such 

as the forestry sector, it was the 

reduced demand for housing and 

weaknesses in the general economy 

that kept producers from reducing 

their debt. Nonaccrual loans to dairy, 

forestry, livestock, and biofuel sectors 

accounted for $1.6 billion of the $3.2 

billion in System nonaccrual loans at 

year-end. The remaining nonaccruals were scatt ered across the other 

business segments of the portfolio 

but were more concentrated in loans 

for real estate. Also, charge-off s of 

$354 million, representing about 60 

percent of all FCS charge-off s, were 

realized in loans to these agricultural 

sectors. These four sectors totaled 

about $46.7 billion, or 27 percent of 

System loans, and are discussed in 

more detail below. 

Dairy

System loans outstanding to the 

dairy sector totaled $14.1 billion 

at December 31, 2010, up about 5 

percent from the fi gure a year earlier. 

Many producers continued to face 

stressful conditions as high feed costs 

eroded profits from increased milk 

prices and caused many of those 

producers with high debt levels to 

continue to rely on forbearance from 

their lenders. Most producers who 

had seen debt levels escalate in 2008 

and 2009 were unable to make much 

progress in reducing their debt and 

remain vulnerable to factors such 

as reduced milk prices, higher feed 

costs, and interest rate increases. System loans not accruing interest rose 

slightly to $656 million at year-end 

2010, and $153 million in charge-off s 

were realized. Loans to this sector 

amounted to about 8 percent of total 

loans and 42 percent of total System 

capital. 

25. See page 11 for an overview of the System’s fi nancial condition.
57

Livestock (CaƩ le, Hogs)

The System’s loans outstanding to 

the catt le and hog industry totaled 

$20.3 billion at year-end, down 

slightly from the past year-end. 

Catt le loans were up modestly; 

however, hog loans declined to 

$4.1 billion at year-end, refl ecting a 

decrease of $0.6 billion during 2010 

as producers repaid operating loans 

or, in some cases, raised capital from 

investors. Most producers returned 

to profi tability because catt le and 

pork prices rose more than feed 

costs during the year. Prices rose in 

response to a return of strong export 

demand. System livestock loans not 

accruing interest fell dramatically to 

$376 million at year-end from almost 

$680 million at the end of 2009, and 

$70 million in charge-off s were realized. Loans to livestock operations 

amounted to less than 12 percent of 

total loans and 61 percent of total 

System capital.

Biofuels

At the end of 2010, loans outstanding to the biofuels (primarily ethanol) 

industry totaled $2.4 billion, down 

about 8 percent from a year earlier. 

Loans declined as fi rms paid down 

debt with revenue from improved 

operating margins and some renewed 

ability to raise capital. Some of the 

fi rms that had fi led bankruptcy or 

had idled their plants during 2009 

were able to restructure debt and 

restart plants, while FCS institutions were able to sell some plants 

acquired from loan collection actions. 

System loans not accruing interest totaled $175 million at year-end, 

and charge-off s totaled $29 million. 

Biofuel loans outstanding represented 

7 percent of capital and less than 2 

percent of total loan volume. Both 

losses and nonaccrual assets are concentrated in a few fi rms. In addition 

to its loan holdings in the biofuels 

industry, the System also originates 

and participates out a signifi cant 

amount of debt to non-System lenders. 

Forestry

System loans outstanding to the 

forestry sector totaled $10.0 billion, down about 3 percent from a 

year earlier. Forestry loans declined 

because demand for housing and 

lumber products remained soft, 

particularly in the Southeast. Many 

producers reduced debt as a result 

of scheduled loan pay downs, as 

well as the liquidation of properties 

to ease cash fl ow diffi culties. System 

loans not accruing interest rose to 

$422 million at year-end, and $102 

million in charge-off s were realized. 

Loans to this sector amounted to 

about 6 percent of total loans and 30 

percent of total System capital. 
58

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

APPENDIX

FARM CREDIT ADMINISTRATION 

OFFICES

As of December 31, 2010, FCA had 

291 full- and part-time employees. 

These employees are divided among 

the following offi ces, with the majority serving in the Offi ce of Examination.

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 fi eld 

offi ce 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 

Offi cial for the FCA Board. 

The Chairman of the FCA Board

serves as the chief executive offi cer 

(CEO). The CEO enforces the rules, 

regulations, and orders of the FCA 

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

adopted by the FCA Board. The 

Figure 13

FCA OrganizaƟ onal Structure

As of January 2011
59

Offi ce of the Chief Executive Offi cer 

plans, organizes, directs, coordinates, 

and controls FCA’s day-to-day operations and leads the Agency’s eff orts 

to achieve and manage a diverse 

workforce. 

The Offi ce of Congressional and 

Public Aff airs (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, facilitates 

intergovernmental relations, and 

prepares testimony for the Chairman 

and other Board members. The offi ce 

also provides information to external 

audiences through news releases, fact 

sheets, reports, and other publications. It cultivates relationships with 

media representatives who report on 

matt ers related to agriculture and 

rural credit, and it manages the content of the FCA website. OCPA also 

organizes special meetings, briefi ngs 

for international visitors, and fi eld 

hearings. 

The Offi ce of Examination is responsible for examining and supervising 

each FCS institution in accordance 

with the Farm Credit Act and applicable regulations. The offi ce 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 fulfi lls its public policy 

purpose. For more information about 

the role of the Offi ce of Examination, 

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

html and click View Board Policy 

Statements to read “Examination 

Policy” (FCA-PS-53). 

The Offi ce of General Counsel

(OGC) provides the FCA Board 

and staff with legal counsel as well 

as guidance on general corporate, 

personnel, ethics, and administrative matt ers. 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 offi ce serves as the liaison to 

the Federal Registrar and maintains 

the Agency’s public rulemaking 

fi les. OGC also handles Freedom of 

Information Act requests and matt ers 

pertaining to the Privacy Act. 

The Offi ce 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 offi ce promotes economy 

and effi ciency within FCA and seeks 

to prevent and detect fraud, waste, 

abuse, and mismanagement in the 

Agency’s programs and operations. 

The Offi ce 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 Offi ce of Management Services (OMS) manages and delivers 

the Agency’s information technology, fi nancial, human capital, and 

administrative services. The offi ce 

coordinates planning eff orts, including information resources management, security, human capital, and 

fi nancial plans for the Agency. By 

centrally planning, managing, and 

delivering resource services, OMS 

enables the Agency’s program offi ces 

to fully focus their time and att ention 

on their respective mission-related 

responsibilities. 

The Offi ce 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. 
60

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

Carl A. Clinefelter is the FCA 

Inspector General. 

Before becoming 

Inspector General in July 2005, 

Mr. Clinefelter 

headed several 

offi ces at FCA 

over a number of 

years. Primarily, his background with 

the Agency is in fi nancial institution 

examination, supervision, and regulation. Before joining the Agency in 

1980, Mr. Clinefelter was an assistant 

vice president in the Federal Intermediate Credit Bank of New Orleans, 

which was regulated by FCA. He 

received an M.B.A. from Auburn 

University in 1975 and served as an 

offi cer in the U.S. Navy from 1968 to 

1971. In addition to being the Agency’s Inspector General, Mr. Clinefelter has served since January 2009 as 

the Vice Chairperson of the Council 

of the Inspectors General on Integrity 

and Effi ciency, which is composed of 

Inspectors General from 73 Federal 

departments and agencies.

Samuel Robert Coleman is 

Director of the 

Offi ce of Examination.1

 Before 

being named to 

this position in 

October 2010, 

he was Director 

of the Agency’s 

Offi ce of Secondary Market Oversight 

for fi ve years. Mr. Coleman joined 

FCA in 1986 as an examiner in the 

Offi ce of Examination. He held various positions in that offi ce, providing 

technical support to FCA fi eld offi ces 

and to the Policy Development 

and Planning Division. During this 

period, Mr. Coleman completed the 

commissioning program and became 

a commissioned examiner in 1990. In 

1994, he transferred to the Offi ce of 

Policy and Analysis, where he served 

as a policy analyst specializing in 

regulation development, and then as 

a senior policy analyst. Mr. Coleman 

was named Director of the Regulation and Policy Division in June 2003. 

He holds the Chartered Financial 

Analyst designation, which the CFA 

Institute awarded him in 2000.

C

f

I

B

I

e

M

h

o

o

years Primarily his

S

e

D

O

n

b

th

O

h

o

Offi f S d M

AGENCY OFFICIALS 

1. Mr. Coleman became Director of the Offi ce of Examination in October 2010, replacing Thomas G. McKenzie, who served in this position from late 2004 

through September 2010.

William J. Hoff -

man is Chief 

Operating Offi cer. 

Before accepting 

this position in 

July 2008, Mr. 

Hoff man 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 Offi ce 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. Hoff man fi rst joined 

FCA in 1976 as a credit and operations offi cer. In 1984 he was named 

Associate Deputy Governor for the 

Offi ce 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 fi nance in 

the private sector and several international projects. 

W

m

O

B

t

J

H

E

t

M

fo e Chai a a d
61

Laurie A. Rea2

is Director of the 

Offi ce of Secondary Market Oversight (OSMO). 

She was named 

to this position in 

January 2011. Ms. 

Rea joined FCA in 

1986 after graduating from San Diego State University. 

She has held several positions with 

the agency, beginning with the Offi ce 

of Examination where she became 

a commissioned FCA examiner in 

1989. In 1992, she joined the Offi ce 

of Policy and Analysis (now the 

Offi ce of Regulatory Policy), where 

she gained experience in policy 

and regulation development. Since 

2005, Ms. Rea has served as associate director and fi nance and capital 

markets team leader in the Offi ce of 

Regulatory Policy, where she managed the approval of Systemwide 

debt securities and led the agency’s 

regulatory capital and investment 

policy development. Ms. Rea is a 

Chartered Financial Analyst from the 

CFA Institute and a Certifi ed Risk 

Professional.

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2. Ms. Rea replaced Daniel Fennewald, who served as Acting Director of OSMO after Samuel Robert Coleman became Director of the Offi ce of Examination in October 2010. 

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 Committ ee 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 Committ ee on Agriculture. He was Counsel to the House 

Agriculture Subcommitt ee on Forests, 

Family Farms, and Energy from 1983 

to 1985. 

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Stephen G. 

Smith is the 

Chief Financial Offi cer and 

Director of the 

Offi ce 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 

fi eld offi ce 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 Offi cer in 1996, 

directing all technology and information operations for FCA. Before 

joining the Agency, he worked at the 

North Central Jersey Farm Credit 

Associations. 

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FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

Michael Stokke

is Director of the 

Offi ce of Congressional and 

Public Aff airs. 

Prior to joining 

FCA, Mr. Stokke 

was founder 

and president of 

Prairie Strategies, 

a consulting fi rm based in Illinois, 

where he advised corporations and 

nonprofi t 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 Offi ce of the 

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

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

from 1991 through 1994. From 1987 

to 1991, he was Assistant Director 

of Personnel for the Offi ce of the 

Governor of Illinois. He also served 

as Assistant to the Secretary of the 

Illinois Department of Transportation 

from 1985 to 1987. 

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Gary K. Van 

Meter is Acting Director 

of the Offi ce 

of Regulatory 

Policy (ORP).3

He was named 

to this position 

in November 

2010 after having served as the Deputy Director 

of ORP for fi ve years. Prior to this, 

he served in the Offi ce of General 

Counsel (OGC) for 17 years. In OGC, 

he served fi rst as a senior att orney 

and later as senior counsel before 

joining ORP. Mr. Van Meter holds 

a J.D. from West Virginia University College of Law and a master of 

law in taxation from Georgetown 

University Law Center. He is also 

a certifi ed public accountant. From 

1972 to 1974, Mr. Van Meter was an 

enlisted member of the U.S. Marine 

Corps, and he was an offi cer in the 

U.S. Navy Judge Advocate General’s 

(JAG) Corps from 1981 to 1986.

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3. In June 2011, Mr. Van Meter became Director of the Offi ce of Regulatory Policy.

Mark McBeth

is the Executive Assistant 

to Leland A. 

Strom, Chairman and CEO of 

FCA.4 His duties 

include advising 

the Chairman on 

policy, administrative, and management issues 

aff ecting 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 Offi ce of 

Congressional and Public Aff airs 

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. 

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4. Mr. McBeth retired at the end of May 2011, and Michael Stokke, who also serves as the Director of the Offi ce of Congressional and Public Aff airs, 

became the Acting Executive Assistant to the Chairman. 
63

Dale L. Aultman 

became Secretary to the FCA 

Board in January 

2011.5 He began 

working at FCA 

in 1988. For the 

fi rst 10 years, he 

worked in the 

Offi ce of Examination, where he became a commissioned examiner. Then for 12 years, 

he was a policy analyst in the Offi ce 

of Regulatory Policy. Mr. Aultman is 

a member of the National Association of Parliamentarians. In 2010, he 

became Virginia’s eighth electronic 

notary. In 2007, he completed FCA’s 

Supervisory Development Program. 

Mr. Aultman graduated with distinction from Southwestern Graduate 

School of Banking at the Southern 

Methodist University and holds a 

fi nance degree from the University of 

Oklahoma.

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5. Mr. Aultman replaced Roland E. Smith, who served as Secretary to the Board from January 2006 until January 2011.
64

FARM CREDIT ADMINISTRATION 2010 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 fi nance 

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 fi nancial services to farmer-owned cooperatives, 

rural utilities (electric and telephone), 

and rural sewer and water systems. 

It was also authorized to fi nance 

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 recodifi ed 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 

offi cio 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 fi nance the loans 

made by FCS institutions. It uses a 

network of bond dealers to market 

its securities. 

Federal Intermediate Credit Bank—

The Agricultural Credits Act of 

1923 provided for the creation of 12 

FICBs to discount farmers’ shortand intermediate-term notes made 

by commercial banks, livestock loan 

companies, and thrift institutions. 

The Farm Credit Act of 1933 autho-
65

rized farmers to organize PCAs, 

which could discount notes with 

FICBs. As a result, PCAs became 

the primary entities for delivery of 

short- and intermediate-term credit to 

farmers and ranchers. The FICBs and 

the Federal Land Banks in all Farm 

Credit districts merged to become 

FCBs or the ACB. Thus, no FICBs 

remain within the FCS. 

Federal Land Bank—The Federal 

Farm Loan Act of 1916 provided for 

the establishment of 12 Federal Land 

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

and later to rural home buyers. All 

Federal Land Banks and FICBs have 

merged to become FCBs or part of 

the ACB. Thus, no Federal Land 

Banks remain. 

Federal Land Bank Association—

These associations were lending 

agents for FCBs. Federal Land Bank 

Associations made and serviced 

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

housing. The associations did not 

own loan assets but made loans only 

on behalf of the FCB with which 

they were affi liated. 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 

refl ect the nondepository nature of 

FCS institutions. The FIRS provides 

a general framework for assimilating 

and evaluating all signifi cant fi nancial, 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 fi ndings 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 fi nancial 

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 profi le. 

These institutions give no cause 

for regulatory concern. 

• Rating 2—Institutions in this 

group are fundamentally sound 

but may refl ect modest weaknesses correctable in the normal 

course of business. Since the 

nature and severity of defi -

ciencies are not material, such 

institutions are stable and able 

to withstand business fl uctuations. Overall risk management 

practices are satisfactory for the 

size, complexity, and risk profi le 

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 fi nancial, management, operational, or compliance weaknesses 

ranging from moderately severe 

to unsatisfactory. When weaknesses relate to asset quality or 

fi nancial condition, such institutions may be vulnerable to the 

onset of adverse business conditions and could easily deteriorate 

if concerted action is not eff ective in correcting the areas of 

weakness. Institutions that are in 

signifi cant noncompliance with 

laws and regulations may also be 

accorded this rating. Risk management practices are less than 

satisfactory for the size, complexity, and risk profi le of each 
66

FARM CREDIT ADMINISTRATION 2010 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 defi ciencies. Overall strength and fi nancial 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 fi nancial or 

operating weaknesses. Serious 

problems or unsafe and unsound 

conditions exist that are not 

being satisfactorily addressed or 

resolved. Unless eff ective 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 profi le 

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 

att ention, fi nancial surveillance, 

and a defi nitive 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 

fi nancial assistance. Risk management practices are inadequate 

for the size, complexity, and risk 

profi le 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 fi ll a credit gap or 

to enhance competitive behavior in 

the loan market. Each is given certain 

features or benefi ts (called GSE att ributes) 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 fi nancial GSE. 

P 

Participation—A loan participation is 

usually a large loan in which two or 

more lenders share in providing loan 

funds to a borrower to manage credit 

risk or overcome a legal lending limit 

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

and documents the loan. Generally, 

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

aware of the other participating 

institutions. 

Production Credit Association—

PCAs are FCS entities that deliver 

only short- and intermediate-term 

loans to farmers and ranchers. A 

PCA borrows money from its FCB to 

lend to farmers. PCAs also own their 

loan assets. As of January 1, 2003, all 

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

S 

Syndication—A loan syndication 

(or “syndicated bank facility”) is a 

large loan in which a group of banks 

work together to provide funds for 

a borrower. Usually one bank takes 

the lead, acting as an agent for all 

syndicate members and serving as 

the focal point between them and the 

borrower. All syndicate members are 

known at the outset to the borrower 

and they each have a contractual 

interest in the loan. 
67

ACA—Agricultural Credit Association

ACB—Agricultural Credit Bank

AMBS—agricultural mortgage-backed securities 

CAMELS—capital, assets, management, earnings, liquidity, and sensitivity

CEO—chief executive offi cer 

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 fi nancing institutions

PCA—Production Credit Association 

RBC—Risk-Based Capital (Model) 

RBIC—rural business investment company

SBA—Small Business Administration

USDA—U.S. Department of Agriculture

WTO—World Trade Organization

YBS—young, beginning, and small (farmers and ranchers)

ACRONYMS AND ABBREVIATIONS
68

FARM CREDIT ADMINISTRATION 2010 ANNUAL REPORT ON THE FARM CREDIT SYSTEM 

The Farm Credit Administration 2010 Annual Report on the Farm Credit System is available on FCA’s website at 

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

Offi ce of Congressional and Public Aff airs 

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 fi nancial press releases, the System’s Annual and 

Quarterly Information Statements, and the System’s combined fi nancial statements contained therein, with the support of the System banks. These documents are available on the Funding Corporation’s website at 

www.farmcredit-ff cb.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 website 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 
0711/200

Copies Available From:

Offi ce of Congressional and Public Aff airs

Farm Credit Administration

1501 Farm Credit Drive

McLean, VA 22102

703-883-4056

www.fca.gov