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1 

The Farm Credit System 

The cooperative Farm Credit System currently supplies about 30% of the credit used by 

farmers and 60% of that required by farmer cooperatives. In 1960 the system had $4.4 

billion in outstanding loans. Today it has about $64 billion. 

CRITICS were convinced that 

farmers could not run their own 

credit business back in 1916 when the 

Federal Land Banks (FLBs) were 

chartered by the federal government. 

They were sure the government would 

lose its $9 million investment. 

But the story had a happy ending. 

The go vernment didn 't lose a cent. In 

fact, the cooperative Farm Credit System is often desc ribed as one of the 

most successful examples of government partnership with a segment of its 

people - in this case, farmers - to 

obtain a needed service. 

Today, the cooperative Farm Credit 

System supplies about 30% of the 

erect it used by farmers and a I ittle more 

than 60% of the financing required 

each year by farmer cooperatives. This 

amounts to about $64 billion loaned to 

farmers, ranchers and aquatic producers and their cooperatives. 

Over its 64-year history, the Farm 

Credit System has grown from a 

government -capitalized institution into 

the completely farmer- and user-owned 

cooperative financing system that it 

is today , with net worth of more than 

$7 billion, of which $4.3 billion has 

been invested by borrowers. 

The triumvirate that forms the Farm 

Credit System today - the 12 FLB s 

and the 500 Federal Land Bank AssoBy Donald E. Wilkinson 

elations (FLBAs), the 12 Federal Intermediate Credit Banks (FICBs) and 

the 424 Production Credit Associations 

(PCAs), and the 13 Banks for 

Cooperatives (BCs) (the thirteenth is 

the central BC in Denver) - was not 

envisioned by the framers of the Federal Farm Loan Act of 1916, which 

established the FLBs. The various 

parts of the Farm Credit System came 

into being at different times in history 

to fill different needs. 

Federal Land Banks 

The 20 to 30 years just before the 

establishment of the FLBs and the 

FLBAs (then cal led National Farm 

Loan Assocaitions) were characterized 

by agrarian distress. In 1890 , the director of the census declared the frontier closed , which meant farmers no 

longer had an out when times got 

tough. No longer could they pack up 

and move on to new territory. Now 

they had to stick it out. 

Farmers also faced price dec I ines 

caused by overproduction for the 

world markets. Yet the prices of things 

farmers had to buy did not decline . By 

the close of the century nearly a third 

of the nation's fa rms were heavily 

mortgaged . 

Available erect it was geared to the 

needs of industry, not to agriculture . 

Interest rates ranged from 7% to I 0% 

Dona ld E. Wilkinson , as governor of 

the Farm Credit Administration, heads 

the independent federal agency responsible for s upervisin g the nationwide 

fam1er-owned Fann Credit System. He 

became governor in 1977 after serving as 

administrator of USDA ·s Agricultural 

Marketin g Service. Prior to that he 

served as sec retary of the Wisconsin Department of Agriculture for six years. He 

earned degrees in agricultural economics 

and agricultural education from the UniveFsity of Wisconsin. He has served as 

president of both the National Assn. of 

State Depanments of Agriculture and the 

National Assn. of Marketing Officials. 

He has served on several federal ag advisory committees. 
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and were nearly doubled by specia l 

charges and fee s. Foreclosures rose 

alarmingly as farmers we re unable to 

make payments to absentee mo11gage 

holde rs. A c redit system for agriculture was badly needed . 

Congress recognized this need and, 

after considerable study, approved the 

Farm Loan Act of 1916, which filled 

the need for a permanent and dependable source of long-term borrowed capital at reasonable rates and on terms 

suited to agriculture . 

Initially the FLBs we re capitalized 

by the fed e ral government, but the 

1916 Act provided a means by which 

they would ultimately be owned by 

their borrowers through the FLBAs. 

By 1947 a ll fede ral "seed money'" 

was paid back and the Federal Land 

Banks became complete ly owned by 

the ir farmer borrowers. 

Production credit beginnings 

Although there was conce rn in Congress over the need for sho11- and inte rmed iate-term cred it , it was six years 

before a serio us solutio n was tack led. 

The financial crisis of 1920-2 1, followed by the agricultural depression 

that continued through the decade, 

emphasized the difficulty farme rs had 

in obtaining sho11-te rm operating c redit. 

Commercial banks in rura l a reas, 

dependent o n deposits for the ir lending 

funds, made loans for 30 to 90 days. 

Crops and livestock, howeve r, took 

longer to prod uce . Farme rs expected to 

renew the ir loans. But rural commercial banks, often sho 11 of fund s, had 

the legal right to demand payment , and 

often did at times when farme rs did not 

have the money. 

In an eff011 to provide agriculture 

with more c redit - pm1icularly of a 

sho rt- and inte rmed iate-te rm nature 

- Congress passed the Agricultural 

Credit Act of 1923 . The Act provided 

fo r the establishme nt and capitali zation 

of 12 FICBs. 

It was ex pec ted that the F ICBs 

would provide a new flow of funds 

from the money markets to rural commercial banks by discounting the notes 

of agricultural produce rs g iven to various financin g institutions, thereby helping to fill the existing credit gap in 

which farmers were trapped . However, fin anc ial institutions did no t use 

the services of the FICBs to the extent 

expected. The flow of funds was not 

mo re than a trickle, which left the 

c redit needs of farmers unfilled. 

The situation continued to deteriorate through the 1920s as a depression 

gripped the agricultural sector. Then in 

the early 1930s the entire nation faced 

the Great Depression . By the fall of 

1932, farmers were in dire circumstances. Hundred s of thou sand s of 

farmers we re finding it impossible to 

produce e no ug h net income to pay 

their de bts. Foreclosure sales we re 

commo n occurre nces. Bank s we re 

closing all over the country - espeAgriculture will continue to 

require increasing amounts 

of credit. As the borrower's 

operations become more 

complex, the lender will be 

called upon to serve more 

as a financial advisor 

rather than simply a processor of loan applications. 

cially in rural areas - which compounded the problem. All sources of 

c red it had vi11ually dried up. 

Congress again acted, with passage 

of the Farm Creel it Act of 1933. This 

ac t autho rized the establishme nt of 

local PCAs, whic h could disco unt 

farmers' notes with the FICBs. In effect, the PCAs became the retail o utlets for creel it available at wholesale 

from the FICBs. The act also provided 

for the initial capitalization and staffin g of these institutions and brought 

c redit service closer to borrowe rs. 

Like the FLBs, FICBs and the PCAs 

were initia ll y capitali zed by the federa l 

gove rnment. Although no t initia ll y 

established to become borrowe rowned like the FLBs, late r changes in 

the laws governing these institutions 

paved the way fo r them to repay the 

government's investme nt. Complete 

owne rship of the FICBs by the PCAs 

was achieved in 1968. 

Serving farmer cooperatives 

The Farm Act of 1933 also estab1 ished a nd initiall y capita li zed the 

BCs. The law was intended to help 

farmers gain greater control of the ir 

own economic destinies by providing 

dependable credit for the ir marketing, 

supply and service coope ratives. 

Although the Agricultural Credit 

Act of 1923 did provide for cooperative financing through the FICBs, for 

whatever reasons, it did not work to 

the extent expected . A few cooperatives were highly successful pioneers. 

However, gene rally the growth and 

development of ea rl y cooperatives 

were severely handicapped by the 

cooperatives not be ing able to borrow 

suffic ient amounts of money. 

Local banks were re luctant to finance new ventures owned by farmers 

who lacked expe ri e nce in running 

businesses beyond the ir property lines. 

Even when cooperatives were re lative ly successful or had potential for 

success, the coope ratives' local competitors were often on the local banks' 

boards of d irecto rs. Local bankers 

usually could see cooperatives' weaknesses, but often did not understand 

the o rgani zational differences between 

cooperatives and othe r businesses. 

As a result , cred it for agricultural 

cooperatives before 1933 was virtually 

nonexistent. With the 1933 Act, however, credit needs of fanners' marketing, supp ly and business se rvi ce 

cooperatives we re recognized . 

Like the PCAs and the FICBs, the 

BCs became complete ly owned by 

the ir borrowers in 1968. 

The Farm Credit Administration 

Althoug h now comple te ly borrower-owned , the bank s and assoc iations of the cooperative Farm Credit 

System operate under federal law and 

are chartered by the federal government. As a result , they are supervised , 

Loan Activity of the Banks for Cooperatives 

Number (000 omll!edl $ BilhOf'ls 

20000 

- Numoor of Loans Made 

" c=J Number of Loans Outstandtng 

~ Amount of loans Made 

~ Amount of Loans Outstandmg 

12.000 

10.000 

8000 

Year End1ng Dec 31 

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according to the law and in the public 

interest, by the Farm Credit Administration , an independent agency of the 

executive branch of the government. 

The Farm Credit Administration 

was established by an executive order 

of the President in 1933. At that time, 

all Farm Credit in stitutions were 

placed under its supervision . It remained an independent agency until 

1939 when it was made pm1 of the 

U.S. Department of Ag riculture. Its 

independent status was returned by the 

Farm Credit Act of 1953. That act also 

provided for increased participation by 

borrowers in the control of the system 

by establishing a Federal Farm Credit 

Board as its top policy-making body . 

Although the Farm Credit Administration is an official agency of the government, its expenses are paid by the 

banks and associations of the system. 

Thus, not only does the system operate 

at no expense to the taxpayer, but so 

does its supervisory agency. 

Gathering funds 

The Farm Credit System has been 

particularly successful in its ability to 

gather funds from the national money 

markets and distribute that money to 

farmers across the country through its 

financial pipeline. In 1979 , the Farm 

Credit Bank s issued a total of $75.6 

billion in securitie s. Only the U.S. 

Treasury exceeds the Farm Credit 

System in amount of money raised 

through the money markets. 

During its 64-year history , the Farm 

Credit Banks have never fai led to pay 

principal and interest on their obligations when due . As a result , Farm 

Credit securities enjoy a very high 

rating , falling just below the ratin g 

given to U.S . Treasury bond s. To 

fu11her protect the investor, the Farm 

Credit Act of 1971 requires collateral 

- promissory notes, other obligations 

representing loans, other readily marketable securities approved by FCA , or 

cash- to be held in an amount at least 

equal to securities outstanding. 

Raising the capital for agriculture 

begins in the heart of the New York 

financial district at the Fiscal Agency. 

Maintained by the 37 Farm Credit 

Banks, the Fiscal Agency issues, markets and handles Farm Credit securities 

through a selling group of approximately 170 dealers. 

The Farm Credit Bank s raise their 

funds by issuing two types of securities 

- the Federal Farm Credit Banks 

Con so lidated Systemwide bonds are 

issued in book-entry form 16 times a 

year on the first of each month and on 

the 20th of January , April , July , and 

October. 

Bonds with six- and nine-month 

maturities are issued on the first of 

each month and sold only in multiples 

of $5,000. Longer-term bonds are issued at least quarterly. Bonds with 

maturities of 13 months or longer are 

available in multiples of $1 ,000. With 

book-entry securities, an investor receives a custody receipt from his bank 

or brokerage firm instead of the usual 

certificate. Investors are assigned an 

account through the Federal Reserve 

Banks' computerized records of 

book-entry securities in the names of 

member banks. Member banks, in 

turn , issue a custody receipt to the investor which serves as proof of ownership. 

Sy stemwide notes , on the other 

hand, are designed to provide flexibility in obtaining funds when unexpected demands occur by allowing 

financing between bond sales. These 

discount notes are issued daily with 

maturities of 5 to 270 days and are sold 

only in certificate form in $50,000, 

$100,000, $500,000, $1 million and 

$5 million amounts. 

When a new issue of Systemwide 

bonds is offered, the Fiscal Agency 

places notices in financial publications 

and major newspapers such as the Wall 

Street Journal, The New York Times, 

American Banke r and The Bond 

Buyer. No public announcement is 

Loan Activity of the Federal Land Banks 

Number (000 omitted) 

Loan Activity of the Production Credit Associations 

$Billions Number (000 omitted) $ Billions 

1,200 35 

- Number of Loans Made - Number of Loans Made 

c:===:J Number of Loans Outstanding 30 r:::=:::=J Number of Loans Outstanding 

IWWflhttl Amount of Loans Made I!HHNMWJ Amount of Loans Made 

~ Amount of Loans Outstanding - Amount of Loans Outstanding 

20 

15 

10 

Year Ending Dec. 31 Year Ending Dec. 31 
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made of the da il y sales of Systemwide 

notes. 

Anyone can purchase Farm C redit 

securities and the list o f in vesto rs reflects a varie ty of gro ups who have 

benefited by prov iding capital to the 

nation's foo d and fibe r produce rs. 

Commerc ia l bank s make up th e 

la rgest sin g le gro up of investors in 

Fa rm C red it securities, fo ll owed by 

state and local gove rnments, savings 

and loan assoc iations, c redit unions, 

corporations and insurance companies. 

To a lesse r extent mutual funds, savings banks, pension funds and indi viduals also in vest in Farm C redit securities. Fore ign in vesto rs, which a re most 

large Euro pean bank s, also ho ld a 

small pe rcentage of sec uriti es o utstanding . 

O ne a ttrac tive fea tu re o f F a rm 

Cred it securities is that income fro m 

interest is exempt from state, municipal and local taxes. The inte rest in -

come, however, is subjec t to fede ral 

income taxes. 

Interest rates o n new security issues 

are set at the time they are sold and a re 

consistent with current rates. This process of pric ing Farm Credit bonds begins a week before the ac tual sa le. The 

F isca l Age ncy ' s Fin a ne ia l ex pe rts 

contact the vario us deale rs handlin g 

Farm Credit securities to get a " fee l" 

for the ma rke t and custome rs' inte rests. This market survey also inc ludes 

an analysis of Federal Rese rve bu y ing 

and se lling acti vity. 

At the same time the 37 banks ind icate the ir interest in partic ipating in the 

upcoming bond sale. Once the Fiscal 

Agency comple tes its market survey, 

price recommendations are formali zed 

and submitted to a nine-membe r finance subco mmittee co mprised o f 

three preside nts fro m each banking 

system . Afte r the subcommittee approves the inte rest rates for the iss ue, 

fin a l app rova l must come fro m the 

gove rnor of the Farm Credit Administration, who ac ts in the public inte rest. 

Getting funds to borrowers 

Once the Fisca l Age ncy collects the 

capital for ag riculture, it's the job of 

the banks and assoc iations to distribute 

those fund s by makin g sound loans to 

fa nne rs, ra nc he rs, rura l resid e nts, 

aqu atic produce rs and the ir coope rati ves at the lowest possible cost. 

Before making a loan, however, the 

bank s and assoc ia ti ons look a t fi ve 

c redit facto rs in de te rmining what constitutes a so und loan th at will benefit 

both the bo rrower and the lender. 

( I) The most impo rt ant c red it facto r 

is the indi vid ual o r, as in the case of a 

coope rati ve, the manageme nt. Does 

the pote ntial bo rrowe r show responsible and coope rative management? This 

aspec t is so impo rtant that it can affect 

the we ight pl aced on the othe r c red it 

fac tors. 

(2) The second c rite rion conside red 

is fin anc ial position and progress. Will 

the potentia l bo rrowe r be ab le to meet 

obi igations, continue business operations and protec t the lende r from. undue 

One definite prediction that 

can be made is that it will 

take the best eff orts of all 

agricultural lenders working toge ther to mee t the 

credit needs of fa rmers and 

their cooperati ves in the 

future . 

risk and othe rwise show fin anc ial respo nsibility? Total asse ts contro lled , 

equity owned, contingent li abilities, 

and histo ry of ea rnings are examined 

because these are measures o f fin ancial 

responsibility. 

(3) Will the potential bo n·owe r be 

able to pay bac k the loan? To de te rmine this, an analysis of cash flow 

history and projection is made . Ge ne rall y, le nde rs look for a cash fl ow th at 

will cove r all obligati ons and leave 

eno ugh funds to cove r continge ncies. 

(4 ) T he le nde r has direc t contro l 

ove r the amount of the loan , use o f 

fund s and loan te rms. The refo re , one 

of the key qu esti o ns ra ised wh e n 

eva lu a tin g a loa n a pplica ti o n is 

whethe r the loan will be constructi ve 

in amo unt and pnpose and whe the r 

re payment te rms will be practical fo r 

both the bo rrowe r and the lende r. Loan 

conditions such ~ loan ag reements, 

pe rsonal I iability, add itional coll ate ral, 

insurance and so fo11h are required as 

conditions wa rrant. 

(5) Does the borrowe r have 

adequate coll ate ral? Requirements of 

the law and the strengths and weaknesses of all c red it facto rs dictate what 

th e po te nti a l bo rro wer's co ll a te ra l 

needs w ill be. Basica ll y, the coll atera l 

requirement and coll ate ral taken must 

reasonably protec t the le nder, prov ide 

the necessary contro l of eq uity and repayment , and leave the bo rrower in a 

position to manage his business constructive ly. 

The FLBs and FLBAs 

The long-term lende rs of the Farm 

Credit System a re the 12 FLBs. Loans 

are made on fa rm and rural rea l estate 

thro ug h th e 500 FLB As, most of 

which have one o r more branch offices. 

Loa ns a re made to fa rmers and 

ranche rs fo r a varie ty of purposes, 

such as pu rc hasi ng farms, fa rmland , 

mac hinery , equipment and I ivestock; 

refin anci ng ex istin g mo rtgages and 

pay ing other debts; constructing and 

re pai ring b uil d in gs; a nd fin anc in g 

othe r farm and fam il y needs. In add ition , rural reside nts are e lig ible for 

loans for build ing , buy ing, remode ling , improving, refinanc ing or repairing a rural home. 

Loan maturities range from 5 to 40 

yea rs a nd are sec ure d by a first 

mo rtgage on the prope 11 y taken as se -

curity o r its equi va le nt. Most loans are 

made on va ri ab le- interst-ra te pl ans. 

Under these plans, inte rest rates may 

be lowe red o r ra ised depend in g on the 

cost of mo ney to the FLB . 

The result is funds ava il ab le at the 

lowest possible cost to all borrowers. 

A ltho ug h loans ca n be made in 

amounts of up to 85% of the appraised 

market va lue of the prope11y , the average loa n-to-appra isa l ra tio o n new 

loans made during 1979 was abo ut 

6 1% . 

When appl ying fo r a loan , an ind ivid ual goes to the loca l Fede ral Land 

Bank Association se rvin g the area in 

which the prope11y is located . At the 

time the application is filed, in fo nnation is given on the applicant 's fin ancial statu s, how the loan will be used 

and other items pe rtinent to the loan. 

Next the prope 11 y o ffe red as security is 

appraised by a represe ntati ve of the assoc iation o r bank and the credit wo rthiness of the applicant is checked. 

Once the loan applicatio n is approved and accepted by the applicant , 

the title to the prope rty is examined . 

If the title is acceptabl e , the loan is 

c losed and the appli cant becomes a 

membe r of the FLBA . 

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Loan terms, however, are tlextble . 

The FLBA will work with borrowers 

to determine the best repayment plan. 

In add ition , borrowers may repay any 

part or all of the ir loans at any time 

without pe nalty. This allows more 

rapid repayment when income levels 

are high . 

When a farmer, grower, or ranche r 

borrows through an FLBA, he o r she 

purchases stock in the association in 

proportion to the amount of the loan. 

The proportion may range as high as 

10% , but the average is around 5% of 

the loan . Other classes of borrowers 

are issued participation certificates instead of stock. 

Funds raised through the stock and 

participation ce rtificates he lp 

capitalize the assoc iation . The FLBA, 

in turn , then buys a n equivalent 

amount of stock or participation certificates in the Land Bank . The stock 

and pat1ic ipation certificates are retired 

at par value when loans are repaid . 

The Land Banks, after providing for 

reserves required by law and for net 

worth objectives, may distribute any 

net earnings among the assoc iations in 

the form of dividends. Associations, in 

turn , may pass dividends on to the ir 

members. 

The p011ion retained by the assoc iations is used for expenses and to establish appropriate reserves to meet the ir 

e ndorsement liab ility on loans and 

maintain satisfactory net wo rth positio ns. Associations also defray expe nses from loan serv ice payments 

made to them by the FLBs. 

In 1979, the FLBs passed a milestone when they held the largest share 

of outstanding farm real estate debt. 

As of Jan . I , 1980 they he ld 35.5% . 

During the past 20 years, the share 

of farm real estate debt held by ind ividuals and others has declined. In addition, since 1965, life insurance companies have not yet regained the market share of farm real estate debt once 

he ld. Commercial banks and USDA's 

Farmers Home Administration have 

he ld a fairly stable market share during 

the past 15 years. 

Why the change in market share of 

farm debt? There are several reasons. 

Traditionally , se ller fin ancing has been 

favored because of lower interest rates 

and tax advantages for the selle r. In 

addition, seller financing is usually favored when interest rates are high , 

when credit conditions are tight and 

when real estate values are rising. The 

recent downtrend in seller financing is 

probably a reflection of the gene ral 

economic conditions of farmers. 

Production credit 

The short- and intermed iate-te rm 

farm le nders of the Farm Credit System are the 424 PCAs. The PCAs o bta in the ir loa n funds from the 12 

FICBs, which may a lso participate 

with the PCAs in making loans. In addition, FICBs provide loan funds to 

about 125 other financing institutions 

serving agricultural producers. PCAs 

are primary le nde rs and may partic ipate with comme rc ial banks o r with 

o ne anothe r in making loans. 

PCA borrowers inc lude fa rme rs, 

FARM CREDIT SYSTEM 

Agricultural Loans Outstanding ($000 deleted) 

Production Credit Federal Land Banks for 

Associations Banks Cooperatives 

(5-31·80) (5-31-80) (5-31 -80) 

Springfield $ 517,920 $ 728,685 $ 290,856 

Baltimore 595,434 1 ,436,004 195,244 

Columbia 2,197,953 3,475,358 490,406 

Louisville 3,228,427 3,601,870 996,189 

New Orleans 901,412 1,727,201 774,761 

St. Louis 1,601,475 3,797,739 1,004,500 

St. Paul 2,964,426 4,136,319 1,872,105 

Omaha 2,299,923 4, 135,126 733,218 

Wichita 1,487,394 3,431,301 648,388 

Texas 929,196 1,670,647 332,196 

Sacramento 1,834,769 2,591,131 664,571 

Spokane 1,298,829 2,422, 700 389,581 

Total $19,857, 158 $33,154,081 $8,263,714* 

*The Central Bank for Cooperatives, located in Denver, loaned $2,841,439 of that total through participations with the 12 district banks. The total does not include $ 128,301 of other participations that are 

included in the individual totals. 

Source: Farm Credit Administration 

ranchers, rural homeowners, commerc ial fishermen and certain farm-related 

businesses. Most loans are made for 

production or operating purposes and 

mature within a year, though loans 

made for capital purposes may have 

terms up to seven years. Loans to 

commercial fishermen can be extended 

to 15 years. 

Borrowers are required to purchase 

stock in the PCA amounting to at least 

5% of the ir loans. This investment 

usually varies in proportion to the outstanding loan balance. PCAs and other 

financ ing institutions that receive loan 

funds fro m the FICBs invest in the 

banks through the purchase of capital 

stock or partic ipation certificates. 

When applying for a loan, an individual goes to the PCA serving the 

county in which the operation is located . The prospective borrower then 

discusses plans with the PCA manager 

or field representative and fills out a 

formal application . 

The prospective borrower then o utlines the operation and , working with 

the PCA , dete rmines how muc h 

money is needed , works out a repayment plan and furnishes the PCA with 

a fin ancial statement. The PCA representative the n looks over the applicant's ope ration and togethe r they determine the best course of action. 

Regular PCA borrowers may not 

have to go through these initial steps 

each time . Many borrowers have established lines of credit with their PCA 

and e njoy over-the-counter service. 

The se bo rrowers arrange for their 

c red it ahead of time and draw money 

as they need it. No interest is charged 

on any part of a loan until the money is 

actually drawn. When any pa11 of the 

loan is repaid , no further interest is 

charged on the po rtion repaid. 

At the e nd of 1979 , PC As he ld 

24.4% of the no nreal estate debt , 

which was slig htl y above the 1978 

market share but still below the 1977 

level. Commercial banks dominate the 

no nreal esta te marke t by ho ldin g 

40.7% of the debt. But the commercial 

banks' share of the market has decreased in recent years. 

One factor affecting market share of 

both PCAs and commercial banke rs 

has been the large increase in government funds flowing to agriculture. At 

the end of 1977 , the Farmers Home 

Administration and the Small Business 

Administration held 6 . 1% of nonreal 

estate debt. This rose to II .5% in 1978 
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and inc reased f urther to 15 .9 % in 

1979. 

As PCAs an d co mme rc ia l bank s 

have gene rall y inc reased the ir ma rket 

sha res of no nrea l estate de bt sin ce 

1965 , the ma rket sha re he ld by ind ividuals and othe rs has significantl y declined . Me rchants and dea le rs make up 

a la rge po rti o n of this g ro up . T he 

inte rest charges on loans from me rchants and dea le rs a re gene rall y highe r 

than loans from other so urces, which 

has reduced the effec ti vness of c redit 

as a sales too l. 

Credit for cooperatives 

The 13 BCs are the leading source 

of c red it fo r the nation's ag ri cultural 

coope rati ves. They provide nea r! y 

two- third s o f fund s bo rro we d b y 

coo perati ves. During 1979 , the BCs 

made loans totaling $ 19 .0 billion to a 

total of 3, 152 coope rati ves. At the e nd 

of 1979, 3,478 coope rati ves had loans 

outstanding totaling $8 .4 bill ion . 

The 12 d istri ct BCs make loan s of 

all kinds to ag ricultural , aquatic and. 

public utility coo pe ratives within the ir 

respec ti ve te rrito ries. The thirteenth 

bank - the Ce ntra l Ba nk fo r 

Coope rati ves - pa11ic ipates with the 

district' banks on loans that exceed individual le ndin g capac ities. In addition , the banks may pm1ic ipate with 

one anothe r or with comme rc ial bank s 

to provide fo r the c red it needs o f the ir 

borrowe rs. 

To be e lig ible to bo rrow from a BC 

80 % of th e vo tin g co ntro l o f the 

coo pe rati ve must be he ld by ag ri cultural o r aqu atic produce rs o r by fede ratio ns o f coope ratives in whi ch the 

voting contro l is he ld . This may be reduced to 70% for coope ratives ope rating as public utilities. A coope rative 

must also do at least 50% of its business with its membe rs. Business done 

with the U. S . go ve rnment o r se rvices 

and supplies furnished by the coope rative as a public utility are exempted 

from this requirement . A coo pe rative 

must own at least one sha re of voting 

stock in a district BC to obtain a loan . 

To obtain a loan from a BC, the 

coope rati ve contacts the bank se rvin g 

the area in which it has its headquarte rs. The coope rative o utlines its c redit 

requirements fo r the bank . The request 

is conside red by bank offi ce rs and, if 

approved , a loan ag reement and othe r 

necessary legal pape rs are forwarded 

to the coope rative. The o ffi ce rs of the 

coope rati ve sign the pape rs and return 

them to the bank . Loan fund s are then 

ad vanced as needed unde r the te rms of 

the loan ag reement. Requirements may 

vary slightl y among the BCs, but these 

a re gene rall y the ste ps fo llowed . 

As with the FLBs and the PCAs, 

repay ment pl ans can be ad apted to the 

coope rative and its cash fl ow . Payment 

schedules may be vari able, monthl y, 

qu arterl y or annuall y . Seasonal loans 

are usuall y repayabl e within 12 to 18 

The most important credit 

factor is the individual or, 

in the case of a cooperative , the management. This 

aspect is so important that 

it can affec t the we ight 

placed on the other credit 

factors. 

months. Te rm loans are gene rall y repaid in installments o ve r a period of 

yea rs with the length o f te rm conside red on a case-by-case basis. 

Cooperative needs increase 

During the 1970s, coope rative debt 

grew at a faste r pace than ove r-a ll farm 

debt. Coope ratives had $6 . 1 billion in 

loan s outstanding at the close o f the 

1976 fisca l yea r, compared to $2 .8 

billion at the close of the 1970 fiscal 

yea r. This represents a 14% annual 

rate of growth compared to the I 0% 

annual growth rate in to tal farm debt 

ove r the pe riod . 

Infl atio n , fac ilities expansio n and 

greate r use of debt le ve rage a re major 

reason s fo r inc reased use of debt by 

farme rs. Coo pe ratives, just as fa rme rs, 

have come to rely on borrowed capital 

to suppl e me nt inte rn a ll y ge ne rated 

fund s. The BCs' ma rk e t sha re o f 

coope rati ve debt remained fairl y constant durin g the 10-year period . 

The largest BC bo rrowe rs are marketing coope ratives ho lding abo ut 70% 

of the loans made. About 17% o f the 

loan s a re ma de to farm s uppl y 

coope ratives with the remainder made 

to fa rm business se rvice and miscellaneous coope rati ves. 

Financially related services 

A I tho ug h prov id in g ag ri c u I tura l 

c redit and fin ancial advice are the primary business of the Farm Credit System, the banks and assoc iations also 

offe r othe r se rvices, often refe rred to 

as financ iall y re lated services. 

Fo r exampl e , most assoc ia ti o ns 

offe r c redit life insurance, g iving bo rrowe rs the peace of mind that comes 

with knowing the ir loans will be repaid 

if somethin g we re to happen to them. 

In a reas w here ha il damage is a 

hazard , some assoc iations make it possible fo r the ir membe rs to buy hail insurance, thus protectin g both the bo rrowe r and the assoc iatio n aga inst loss. 

Many PCAs o ffe r e lec troni c fa rm 

reco rdkeeping services, which provide 

membe rs with acc urate reco rd s and 

basic info rmation he lpful in mak in g 

in fo rmed management pl ans and dec isions. 

Some of the BCs o ffer counse ling 

se rvices in such areas as budgeting , 

long-range pl annin g, ope ratin g trend 

analysis, c red it standard s and aud iting 

practices. 

Othe r types of serv ices offe red by 

the bank s and assoc iations of the system include multiple pe ril insurance , 

estate pl anning, fa rm busin ess counse ling se rvice , income tax se rvice , appraisa l se rvice and equipment leasing. 

Not all fin anc iall y re lated se rvices are 

avail able in all assoc iations. 

Looking to the future 

Predictin g the future for ag ricultural 

c redit needs is difficult when we live in 

a wo rld whe re nothin g is pe rmanent 

but change. No thin g illustrates o ur 

c ha ng in g e n v iro nme nt mo re th a n 

lookin g bac k 20 years. 

In 1960 , the Farm Credit System 

had $4.4 billion in loans o utstanding . 

Today , it has about $64 billion in loans 

outstanding . In 1960 , total farm debt 

was $23 billio n. Tod ay, it 's around 

$ 160 billion . In 1960 , total farm rea l 

estate was valued at $ 130 billio n . 

Today , its value is ove r $700 billion. 

Preparing for the future - whateve r 

it may bring - is recogni zed as an 

integral pa11 of pl anning in the Farm 

Credit System . Recentl y, th e Farm 

C redit Administrati o n undertoo k a 

stud y to project what the economic environment of 1985 will hold for our 

system. 

Ba rrin g unfo reseen shoc ks from 
abroad, such as an oil embargo or 

further decline in the dollar's value, or 

from our own gove rnment , such as a 

grain embargo or an erratic monetary 

poI icy, the economy in the 1980s 

should grow at a slightly faster rate 

than during the last five years and inflation should slacken somewhat. 

The rate of inflation will fall from 

the high levels of 1979 because of increased productivity , smaller federal 

deficits, the 1980-81 recession, energy 

conservation, and a tighter monetary 

policy. 

Interest rates should remain high 

through 1985 in comparison to the 

average levels of the 1970s, but will be 

lowe r than the 1979 and early 1980 

levels. Interest rates will be more volatile than in past years because of the 

Federal Reserve 's emphasis on bank 

rese rves and money supply rather than 

interest rates. 

By 1985 the Farm Credit System may 

double the size of net bond issues, 

which now exceed $55 billion , but its 

share of the capital markets should increase very little. If the Farm Credit 

System maintains its excellent credit 

standin g as expected , it should be ab le 

to borrow whatever funds it needs. 

Farm export growth will be a major 

factor in determining favorable farm 

incomes during the early 1980s. 

Domest ic demand will not be large 

enough to support favorable fa"rm incomes. While prospects for future export growth seem good, actual sales 

will depend on world production 

leve ls, our ability to compete with 

other ex porting co untries, the purchasing power of foreign customers, 

capacity "of shippin g and handlin g 

facilities and political events. 

If a stron g export demand develops, 

it will strain the present transportation 

and storage capacities. This, in turn , 

will have several implic ations for the 

Farm Credit System with increased 

demand for PCA lending for trucking, 

on-farm storage facilities and inventory financing for longer periods. Demand will increase for BC loans for 

storage facilities, railcar leasing and 

inventory financing for longer periods. 

By the end of 1985, total farm assets 

and proprietors' eq uities are expected 

to be up sharply. Average annual 

growth for assets will be abo ut 10%, a 

slowdown from the rece nt pace. At 

this growth rate , total assets, land 

values and properietors' equities will 

nearly double by 1985. 

Farm debt is expected to grow from 

$ 161 billion in 1980 to $275 bi llior. in 

1985 . Farmers' use of debt will increase slightly , relative to income . 

Although net farm incomes should rise 

in dollar terms due to export growth 

and inflation , real incomes will not 

again reach the 1979 level during the 

next five years. 

Ma rket shares of the farm debt will 

continue to shift during the 1980s. It is 

expected that the Farm Credit System 's share of farm debt will gradually 

increase, but the level of increase will 

depend on several factors including 

funding costs, the difference between 

the system's variable rates and interest 

rates charged by other lenders, and the 

availability of funds from other lende rs, including government. 

Credit demand from cooperatives 

will also continue to be strong as 

cooperatives expand their role in exporting and integrate more fully . 

Credit dema.nds of large cooperatives, 

in particular, will become more specialized and complex, challenging the 

future role of BCs as a lead ing lender. 

The rise in farm and cooperative 

debt, plus the increase in market share 

Publications 

available 

Detailed inform ation on the 

Farm Credit System is available 

in several pub I ications available 

from the Farm Credit Bank s or 

from the Public Affairs Division , 

Farm Credit Administration, 

Washington , D.C. 20578. 

The Cooperative Farm Credit 

System - Its Functions, Organ ization, and Development 

(Circular 36). 

Federal Land Bank s - How 

They Operate (Circular 35 ). 

Production Credit Associations 

- How They Operate (Circular 37). 

Banks for Cooperatives - How 

They OperaTe (Circular 40) . 

Farm Credit FacTs - A Summa ry of OperaTions of Th e 

Farm CrediT Banks and AssociaTions (Circular 49). 

An In vesTor's Guide To Farm 

CrediT Securities. 

Farm CrediT Banks ReporT To InvesTors. 

of farm debt held by PCAs and FLBs, 

will almost double total system outstandings, reaching $ 109 billion by the 

end of 1985 , compared to $59 billion 

at the end of 1979. 

In addition to the expected loan demands from farmers and cooperatives, 

increases in loan demands are expected 

from special borrower groups. For 

example, because of continuing liquidity pre ssures at rural commercial 

banks, the share of FLB lending going 

to rural home borrowers is expected to 

increase during the next five years. For 

the same reason, lending through other 

financing institutions (OFis) will also 

continue at a high level. Aquatic 

lending - the fastest growing program 

in the system - will continue to generate high borrower demand . 

Proposed amendments 

Another aspect of preparing for the 

future is recognizing when time is ripe 

for a change. A few years ago, the 

Farm Credit System took a look at itself and questioned whether it was effectively carrying out its mandate as 

stated in the Farm Credit Act of 1971 . 

After considerable study and discussion, the decision was made to go to 

Congress with a legislative package -

the Farm Credit Act Amendments bill 

of 1980 (H. R . 7548, the Jones/ 

Mad igan Bill, and S. 1465, the Talmadge Bill). 

Proposed as an update of the Farm 

Credit Act of 1971 , the 28 amendments now before Congress would 

help the system continue to keep pace 

with the erect it needs of farmers, aquatic producers, rural residents and their 

cooperatives. 

One of the key provisions of the 

proposed legislation would authorize 

the BCs to finance agricultural export 

transactions of U.S. farn1er cooperatives. BCs would be pe rmitted to make 

deposits in foreign bank s, receive and 

hold credit balances from banks and 

borrowers, buy and sell bankers acceptances, buy time drafts payable by 

foreign buyers of farm products, take 

part in currency exchange and otherwise facilitate transactions of borrowing coo peratives. 

Another provision would lower the 

farmer-member eligibility requirement 

for BC financing to 60% of voting 

members. District Farm Credit boards 

would also have authority to set the 

eligibility requirement hi gher tha n 

60% . 

l 
Uf ---~e,Tc~--. 

• ' 

Farm Credit/ continued 

A third key prov1s1on of the proposed legislation would allow FLBs to 

make loans up to I 00% of the appraised value of farm real estate when 

these loans are guaranteed by a federal 

agency such as FmHA or SBA or in 

some instances by state government 

agencies. This would expand financing 

to fanners with limited equity, espec ially young fa nners. Another major whether these modifications to the law 

element of the proposed leg islation would create unfair competition. But 

would broaden FLB and PCA financ- the question of competition- whether 

ing to include processing and market- fair or unfair - lies in the eye of the 

Predicting the future for 

agricultural credit needs is 

difficult when we live in a 

world where nothing is 

permanent but change. 

ing activities directly related to the applicant's farm, ranch or aquatic operations. 

Other key provisions would expand 

Farm Credit System service to fishermen and increase cooperation between 

system institutions and commerc ia l 

banks in meeting credit needs of farmers. 

Critics of the Farm Credit Amendments of 1980 have questio ned 

beholder. Competition in itself is 

good. It raises standards of quality. 

Without competition there is no 

yardstick for measuring effectiveness 

or efficiency. With active competition 

among the various agricultural lenders 

the result is better financing and service to farmers and ranche rs. 

As studies have shown , agriculture 

will continue to require increasing 

amounts of credit. As the borrowe r's 

operations become more complex, the 

lender will be called upon to serve 

more as a financial advisor rather than 

simply a processor of loan appl icatio ns. One definite prediction that can 

be made is that it will take the best 

efforts of a ll ag ricultural lenders 

working together to meet the c redit 

needs of farmers and the ir cooperatives 

in the future. ~ 

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