History of Farm Credit
The seeds of the Farm Credit System were planted by President Theodore Roosevelt in 1908, when he appointed a Country Life Commission to address the various problems facing a predominantly rural population.
At the time, agricultural real estate loans from commercial banks, if they were available at all, had prohibitively high rates and short terms. Until 1913, for instance, federal law prohibited national banks from making loans with maturities beyond five years.
The commission's report documented a lack of any adequate agricultural credit, whereby a farmer may readily secure loans on fair terms.
The report led to various presidential and congressional studies over the next several years, which included extensive analysis of other nations' rural credit systems.
The credit delivery method established by the 1916 Federal Farm Loan Act was based largely on Germany's Landschafts, which had operated since 1769 and appeared to be the most successful of the various European cooperative ag-credit systems.
During the pivotal congressional debate over an American agricultural credit system, nearly 100 different bills were introduced, which ultimately focused on three major approaches:
Small, independent land banks, with federal charters but private capital. Proponents of this concept favored the non-government funding, but critics feared its built-in motive for high profits would not assure low rates to farmers.
Twelve federal land banks owned by their farmer-borrowers, partly capitalized by the government and financed through the private purchase of tax-exempt bonds.
Advocates maintained this cooperative structure would guarantee low rates, but critics disliked the government sponsorship and expense involved.
Direct government loans to farmers, favored by the nation's farm organizations but opposed by most politicians.
Congressional proponents of these three approaches battled to a stalemate in 1914, which led to the creation in 1915 of a Joint Committee on Rural Credits, which in turn drafted the final compromise that was adopted in 1916.
Lawmakers chose a cooperative credit structure based on 12 Federal Land Banks (FLBs), using $125 million in government seed money but financed by private capital from investors.
One sidelight of the Farm Credit legislation is that it helped lawmakers prepare themselves for more sweeping financial legislation. The chairman of the Joint Committee on Rural Credits was Rep. Carter Glass of Virginia, who teamed up a few years later with a colleague on the House Banking Committee, Rep. H.B. Steagall of Alabama, to write the Glass-Steagall Act of 1933 the basic legal structure for most of the nation's commercial banks.
The Early Years
Creation of the Farm Credit System coincided with World War I, a very prosperous time for American farmers with the demand for food in Europe. But prices collapsed after the war, and among the resulting economic problems were severe shortages of short-term credit for farmers.
Congress responded with the Agricultural Credits Act of 1923, adding 12 Federal Intermediate Credit Banks (FICBs) to the Farm Credit System. However, these were flawed by procedural and geographic problems, and a long and complicated loan approval process.
Things went from bad to worse with the stock market crash of 1929, touching off the Great Depression, throwing thousands of farmers into foreclosure and virtually shutting down the System's ability to finance agriculture.
Three major agricultural laws followed that would lead to a sweeping reorganization of the Farm Credit System:
The first was the Agricultural Marketing Act of 1929, enacted to help stabilize farm prices and finance the development of agricultural cooperatives (which had been authorized by the Capper-Volstead Act of 1922).
In 1933, Congress passed two crucial laws affecting the future of Farm Credit. One was the Emergency Farm Mortgage Act, which recapitalized the land banks with $189 million and cut interest rates to deal with the Depression.
The other was the Farm Credit Act, which, among other things, revamped the FICBs and established a new production credit system for farmers and ranchers through local Production Credit Associations. The Act also created 13 Banks for Cooperatives.
President Franklin Roosevelt also issued an executive order in 1933 consolidating the supervision of all the federal agricultural credit agencies under the new Farm Credit Administration.
These various cooperatively owned financial entities, with the FCA as their regulator, formed the basis of the Farm Credit System as it exists today.
Post-World War II Prosperity
During and after World War II, prosperity returned to American farmers. The decade of the 1950s saw technology transform agriculture, and also marked a major period of growth for the Farm Credit System.
Various laws were passed during this period which modified the directorship arrangement of Farm Credit institutions as well as the structure of the FCA, and pushed the System towards full ownership by its farmer/rancher-borrowers.
The System began a campaign in 1940 to pay off the government capital investment, a goal the Land Banks achieved in 1947. The Banks for Cooperatives and the last of the PCAs followed suit in 1968, leaving the Farm Credit System with all federal capital repaid and completely owned by its borrowers.
With its government capital paid off, a National Services Commission on Agricultural Credit was formed in 1969 to consider where the Farm Credit System should head in the future. Its recommendations formed the basis for the Farm Credit Act of 1971, the most sweeping update of the System's charter since 1933.
The 1971 act, along with amendments added in 1980, significantly expanded the range of services Farm Credit institutions could offer, to include rural home mortgages, leasing services, international and rural utility lending. It also expanded certain authorities of local associations, and led to a major reorganization of the Farm Credit Administration.
Financial Stress in the 1980s
As American agriculture plummeted into recession in the early and mid 1980s, Farm Credit predictably suffered severe financial stress. During a three-year period from 1985-1987, Congress passed several laws to deal with recessionary economic and agricultural conditions.
After this devastating period of rising inflation and collapsing farmland values, the legislation of the mid-80s made several major revisions to the structure and operations of the Farm Credit System and provided financial assistance in the form of a fully repayable, privately financed line of credit which was guaranteed by the federal government.
As a result of the Congress' efforts:
- FCA became a fully independent arm's-length regulator;
- A limited and temporary government-guaranteed line of privately financed assistance was provided to stressed System institutions;
- Risk-based capital standards were mandated, to be determined by FCA;
- The Farm Credit System Insurance Fund was created, financed by annual contributions from System banks; and
- The Federal Farm Credit Banks Funding Corp., which manages the sale of Systemwide securities, was formally established by statute as a System entity;
In addition, a major consolidation of System institutions was undertaken. In the early 1980s, the Farm Credit System was comprised of 37 banks and more than 1,000 local lending associations. Today, there are only 6 Farm Credit System banks and a little more than 200 local lending associations.
As the 1980s drew to a close, and agricultural producers began their recovery from the recession, Farm Credit began its return to financial health a trend that continued and strengthened into the '90s.
In 1990-1991, Congress asked Farm Credit to play a greater role in financing agricultural marketing and processing operations, as well as water and sewer loans in rural communities.
In 1992, Farm Credit petitioned the Congress to enact legislation allowing Farm Credit to repay in advance, the financial assistance provided in 1987. As a result, the Congress enacted the FCS Safety and Soundness Act. The 1992 law clarifies the Farm Credit System's obligation and makes provision for full repayment of all the assistance borrowed, including interest. These developments ensure the System will have repaid all its financial assistance, without any cost to the government.
That same year, all System banks met or exceeded the new 7 percent risk-weighted permanent capital standard mandated by FCA -- an achievement that came nearly a year ahead of schedule.
The System continued to show strong profits throughout the early 1990s. As a result, the last of the four Farm Credit Banks that received financial assistance due to the 1980s recession redeemed its assistance -- almost 10 years before the 15-year assistance bonds are due.
The 1990s also have seen a continuation of trend toward consolidation in Farm Credit, as the first Agricultural Credit Bank was formed by the merger of a Farm Credit Bank and two Banks for Cooperatives. Consolidation is expected to continue.
Taken from the Farm Credit Council website