Rural Banks and Farm Credit Cousins Give Borrowers Options – DTN

By Danny Klinefelter, DTN Farm Business Adviser

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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.

Of the Farm Credit Associations I know personally, over 90% of their rural investment loan portfolios were originated by commercial banks.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.


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.


The biggest falsehood I frequently hear is that Farm Credit is a government lender and gets its money from the Treasury. The government’s agricultural lender is the USDA-Farm Service Agency, not the Farm Credit System. It is true that the Farm Credit System was started and capitalized by the federal government in 1916 and it does have GSE status; but all the federal capital was paid back years ago and the system is now privately owned by its members/borrowers. Its loan funds come from the issuance of bonds and debentures on the national money market. As opposed to commercial banks, it doesn’t have depository authority, but through its source of funding, it has the ability to match funds so it can offer long-term loans, often at fixed rates.

I recently listened to a talk show interviewing a commercial banker that really bothered me. It was just like listening to a negative political campaign ad. The statements were based on some truths/facts, some distorted truths and some were just flat untrue. I’ve always had an inherent bias toward advertising that says you should do business with us because we are good at what we do, you can trust us, and here is what we have to offer, versus slamming the competition.

One of the other comments was that the Farm Credit System was chartered just to make loans to small and beginning farmers. That’s not true. Under the law, they are allowed to make loans to all farmers and ranchers, and rural housing loans in communities of less than 2,500. That does include small and beginning farmers as specified in the system’s Young, Beginning and Small Farmers (YBS) regulatory mandate; but, a lot more including rural farm related businesses and cooperatives. CoBank also has the authority to make rural infrastructure loans.

The speaker stated that only 17% of Farm Credit loan volume was to small farms. That’s not surprising because 81% of the farm sales come from farms with over $500,000 annual gross sales. If you drop to over $250,000, it’s 89%.

Farm Credit rivals sometimes criticize the system’s tax status as unfair. While the Farm Credit System does have GSE status, it has impressive financial strength on its own. Without GSE status, it has been estimated it could still raise money through the nation’s markets at an estimated 50 basis points (0.5%) higher than it does now. While it is true the Farm Credit System does have tax-exempt status on profits from its long-term agricultural real estate loans, it is not tax exempt on what it makes on operating and intermediate-term loans. Therefore, it pays a very low effective tax rate.

On the other hand, banks have ways to minimize taxes as well, so their effective rate is lower than you might be led to believe. As just one example, more than half of all agricultural banks are subchapter S banks. An analysis of call report data shows that subchapter S banks pay an effective tax rate of 1.4%, which is less than that paid by the Farm Credit System. Both sides would be better served by just leaving well enough alone. It gets to be a lot like the pot calling the kettle black.

If rural American is going to survive and thrive, it is going to need additional funding for infrastructure, community facilities and rural businesses, with access to loan terms that fit the assets and purpose being financed. I just hope we don’t screw it up through politics.


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