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Subsidized Credit in U.S. Agriculture. Chapter 16 By: Chris Hampton Adam Tipton. Introduction. Many farmers have long argued that credit for agriculture has not been met by conventional financial institutions.
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Subsidized Credit in U.S. Agriculture Chapter 16 By: Chris Hampton Adam Tipton
Introduction • Many farmers have long argued that credit for agriculture has not been met by conventional financial institutions. • Private lending procedures, sources of funds, and loan terms are not beneficial to the needs of agriculture.
History • Government began to make direct loans to farmers for short term credit requirements in the 1920’s. • In the 1930’s FCS, FmHA, REA, and CCC were created. • All of these agencies continue to operate although the names and scope of work have changed over time.
Farm Credit System • Long Term FCS loans are made to farmers, corporations producing farm products, agribusinesses, and rural homeowners. • Loans can be used to acquire land, equipment, and livestock or to refinance existing debt. • The largest holders of farm real estate debt are the FCS and commercial banks.
Farm Credit System • Short and intermediate term FCS loans can be used for the production of farm products, aquatic products, and purchase or repair of rural homes. • FCS holds 20% of non real estate farm debt.
Government-Sponsored Enterprise • Farm Credit began as a government sponsored cooperative effort to provide a system through which farmers could provide their own credit. • FCS is now self-supporting. • As a GSE , FCS can borrow money from the US Treasury cheaper than commercial banks. • In turn, FCS can usually loan out money cheaper than commercial banks.
FCS Independence • FCS became wholly user owned when the last government loan was repaid in 1968. • In 1985 FCS lost $2.7 billion through mortgage and loan defaults. • Several of the FCS banks had become insolvent and Congress responded with a Federal bailout. • Now FCS is run by the Farm Credit Administration which is an agency of the U.S. Executive Branch.
USDA • USDA has a number of credit programs for ag and rural areas. • FSA is the direct lending arm in agriculture. • Rural Development is the direct lending agency for rural programs.
FmHA • Farmers Home Administration was created to implement all direct lending, loan insurance, and grant programs for low income farmers. • FmHA was abolished in 1994 and its farm credit programs were transferred to the newly created FSA.
Farm Service Agency • Lender of last resort to farmers. • Loans are for farmers who can not get credit with commercial banks or FCS. • FSA makes farm ownership loans, operating loans, and emergency loans.
Farm Service Agency • Emergency loans are made only to counties designated as a disaster area. • Interest rates on FSA loans are significantly lower than those of commercial banks. • FSA held 4.1% of total US farm business debt in 2000. • Because of their risky loans, many FSA loans result in default.
Rural Development • Rural Development includes the Rural Housing Service, Rural Business Cooperative Service, and Rural Utilities Service. • Direct loans, loan guarantees, and rental assistance are available to low income people in rural areas which include cities with populations up to 50,000.
Rural Development • The Rural Business-Cooperative Service administers the business assistance programs. • Grants are made to non profits and public bodies for business development. • Large loan guarantees are also available to businesses.
Rural Development • Rural Utilities Service provides large loans and grants for electricity, water, and sewer. • Assistance is available to public bodies and utility districts for expanded utility programs.
Commodity Credit Corporation • Farmers would pledge a quantity of a commodity as collateral and obtain a recourse loan from the CCC. • Farmers can either repay the loan with interest within a period of time or they must forfeit their commodity to the CCC.
Effects of Subsidized Credit • Immediate effects are to reduce interest rates and to increase the amount of credit used in agriculture. • This contributes to increased production and larger, more highly mechanized farms. • It is harmful to nonusers because it increases output and decreases product prices.
Problems with Subsidized Credit • Moral Hazards • Government restrictions reduced diversification in bank loan portfolios, thereby increasing risk and likelihood of bank failure. • These instances have made it difficult to make a case for subsidized credit to agriculture.
