Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Federal Farm Credit System (FFCS)

What it is:

The Federal Farm Credit System (FFCS) is a group of lenders that provide loans and other credit services to farmers, ranchers, and producers or harvesters of aquatic products. 

How it works (Example):

People or businesses that process or market products from farmers, ranchers, or aquatic producers may also be eligible for FFCS loans, as are certain rural homeowners, utility cooperatives, and farm-related businesses.
 
Although President Roosevelt created the system in 1933, the FFCS received most of its power in 1971 with the passage of the Farm Credit Act. In 1987, the Agricultural Credit Act substantially revised the organization and powers of the FFCS.

The FFCS is a complex organization. First and foremost, it is composed of four regional Farm Credit Banks (FCBs) and one Agricultural Credit Bank (called CoBank).

  • The FCBs offer real-estate loans, operating loans, mortgage loans for rural homes, credit-based life insurance, crop insurance, and other services to rural homeowners, farmers, ranchers, and other agriculture-based businesses. Each FCB is owned either directly or indirectly by its member-borrowers. Each FCB also has its own board of directors, which are elected by the member-borrowers, and each of these boards in turn appoints at least one additional director from outside the FFCS.

  • CoBank lends money and provides financial services to cooperatives, rural utility companies, and rural infrastructure systems. It also lends money to U.S. agricultural exporters and provides international banking services to international cooperatives.

  • The FFCS is also composed of several dozen associations. These associations are the entities that actually make the loans to the borrowers. There are four kinds of associations: Federal Land Credit Associations, Production Credit Associations, Agricultural Credit Associations, and Federal Land Bank Associations.

  • Federal Land Credit Associations borrow money from an FCB and then loan it to farmers, ranchers, rural homeowners, and agriculture-based businesses. The loans are generally long-term.

  • Production Credit Associations are like Federal Land Credit Associations, but they provide short- and medium-term loans instead.

  • In some areas, these groups combine to create Agricultural Credit Associations so that they may provide a range of loans to a range of agricultural producers, homeowners, and businesses. These loans are also made with funds borrowed from an FCB.

  • Federal Land Bank Associations act as lending agents for FCBs. That is, it makes loans on behalf of the FCB with which it is affiliated. Note that this differs from the other three associations, which own their assets and are responsible for repaying their debts to the FCBs with which they have done business.

  • Here are some of the other entities that keep FFCS going.

  • Farm Credit Leasing Services offers equipment leasing services to borrowers. It is owned by CoBank.

  • The Farm Credit Administration regulates and examines the financial safety of all of the FFCS entities. It has three board members, each of which are nominated by the President of the United States and confirmed by the Senate. The FCA analyzes each entity's credit quality, capitalization, profitability, interest rate risk, management competency, and adherence to various laws and policies. It can issue cease and desist orders, remove officers or directors of a system institution, or impose fines on violators.

  • The Farm Credit Council represents the interests of the FFCS before Congress and the rest of the federal government. This is the entity through which the system entities and its shareholders voice their opinions to legislators.

One of the most important FFCS entities is the Federal Farm Credit Banks Funding Corporation. Much like mortgage-backed securities, the Funding Corporation packages the loans FCBs have made and sells them as bonds and notes (called Farm Credit Debt Securities) to investors in the capital markets. Private securities dealers and brokers handle the actual mechanics of the sales to investors.
 
Under this arrangement, when an FCB receives payments from borrowers, it takes a fee and passes the rest on to the investors. The money received from the sale of the loans not only makes money for the Funding Corporation and the rest of the FFCS, it promotes and sustains agricultural business by supplying FCBs with cash to provide more loans.
 
The Funding Corporation sells four kinds of notes:

  • Discount Notes -- notes maturing in one year or less

  • Designated Bonds -- bonds maturing in two to five years; large issues; callable and non-callable

  • Bonds -- bonds maturing in three months to thirty years; fixed and floating rate; callable and non-callable

  • Master Notes -- one year notes with a unique put/call feature

The Funding Corporation determines the amounts, maturities, coupon rates, and other terms of the securities, but the FCBs are responsible for the repayment of the notes and bonds. The Funding Corporation also prepares and discloses the FFCS's financial statements (these financial statements are audited annually by an independent accounting firm).
 
The Federal Agricultural Mortgage Corporation ("Farmer Mac") guarantees the Farm Credit Debt Securities in an effort to keep a liquid market. Farmer Mac also purchases qualified loans directly from lenders and resells them in the form of notes or bonds as well. Farmer Mac's board of directors has 15 members, five of whom are elected by FFCS entities. Although Farmer Mac is regulated by the FCA, its financial performance is not included in the FFCS's financial statements.
 
On top of the guarantee from Farmer Mac, the Farm Credit System Insurance Corporation insures the repayment of principal and interest on Farm Credit Debt Securities by collecting annual premiums from FCBs. The Insurance Corporation must keep at least 2% of the outstanding obligations of the FCBs on hand.
 
It is important to note that the FFCS is a government-sponsored entity. It was chartered by Congress but is owned by investors (in this case, the member borrowers). Unlike commercial banks, the system's FCBs do not take deposits -- they fund their operations through the sale of Farm Credit Debt Securities.

Why it Matters:

The Federal Farm Credit System provides a reliable source of credit to the American agriculture industry. Volatile commodity prices, weather, and a variety of market conditions make the agriculture business risky, which can incent commercial lenders to avoid the industry. The credit provided by the FFCS can therefore give crucial capital for the expansion, modernization, and improved competitiveness of the American agriculture industries. Its willingness to provide mortgages for farmers, ranchers, and other individuals who make their living in agriculture also supports this goal.