Klinefelter: By the Numbers
Danny Klinefelter DTN Farm Business Advisor
Mon Nov 17, 2014 02:01 PM CST
(Page 1 of 3)

I think I've seen both sides of the commercial banking and Farm Credit System debates: My family's farm borrows from a community bank and we own stock in three commercial banks. I was one of the organizers of a Texas state bank and served on the bank's board. I am currently on the board of AgTexas Farm Credit Services as an outside director. I also worked several years for both a commercial bank and a Farm Credit Bank. I'm a professor of agricultural finance and was director of the Masters of Agricultural Banking program at Texas A&M University until it was merged into Masters of Agribusiness. Having said all that, America's farmers and ranchers, as well as rural communities, need both.

Both country banks and Farm Credit Associations receive favorable treatment from the federal government, so there's no need for the tug-of-war between farm lenders. Rural communities and farmers need both types of lenders. (DTN photo illustration by Nick Scalise)

One of the reasons is that it creates competition. Another is that when one can't or won't provide loan rates or terms that meets the borrower's needs, the other is there so long as the borrower is credit worthy. On many levels, the two cooperate in loan participations and syndications. Of the Farm Credit Associations I know personally, over 90% of their rural investment loan portfolios were originated by commercial banks.


While Farm Credit can access long-term funds on the national money markets through its Government-Sponsored Entity (GSE) status, commercial banks have been able to access the national money markets through the Federal Home Loan Banks, plus they can access funds through their depositing authority, which Farm Credit does not possess. What's more, after the 1980s Farm Credit System bailout, Congress also created another GSE, Farmer Mac, to give country banks access to long-term, fixed mortgage money just like the Farm Credit System. In many ways, they are twins.

Sometimes, due to mismanagement, adverse economic cycles, loan concentrations, loan losses, a bank or Farm Credit Association will pull back and become more conservative. Then it's really important that the other one is there. Sometimes, when independent community banks merge into or are acquired by a larger banking system, the new bank may not emphasize agricultural loans. When two Farm Credit Associations merge, they still are only chartered to make agricultural and rural loans.

There were also times like the 1980s when the Farm Credit System was basing its interest rates on its pooled (average) cost of funds. They were below the market when rates were rising and above the market when rates began to fall. Fortunately, they are now using marginal pricing so they more closely track the current market. A study by the Office of Management and Budget (OMB) found that the Farm Credit System (FCS) lost as much on mismatched funding in the 1980s as they did on loans. Savings and loans also had this problem, but fortunately, most commercial bankers didn't. A 2009 study by the Federal Reserve Bank of Kansas City found the ag banks' funding costs, or total interest paid to fund their earning assets, were lower than the funding costs of the FCS as a whole.


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