Farm Credit System – A Tool That Needs Sharpening

Last week American Banker newspaper published an op-ed piece, “Keep Farm Credit System Focused on the Farm,” authored by U.S. Rep. Marlin Stutzman, who represents the Third Congressional District of Indiana in Washington, D.C. Coincidentally Congressman Stutzman also is featured as the cover story of the July issue of Hoosier Banker magazine, the first elected official so featured. One of Stutzman’s many impressive traits is that he combines his power-position service on the U.S. House Committee on Financial Services – the House banking committee – with the common-sense insight of a fourth-generation Hoosier farmer. This mix gives Stutzman ideal perspective for weighing in on the topic of overreach by the Farm Credit System (FCS). The FCS is a government-sponsored enterprise that was created in 1916 to finance farmers with limited options. Since its inception, it has stretched into a $247 billion operation that “is now directly competing with the private sector for nonagricultural business,” as Stutzman observes in his American Banker op-ed.

In the op-ed, Stutzman goes on to cite frustrations from constituent Indiana bankers, who cannot compete when undercut by lending rates offered by the tax-advantaged FCS. One banker gave the example of losing a mobile home park financing opportunity to FCS; clearly, there is no connection between mobile home parks and the FCS mission of serving farmers of limited options. Similar examples of overreach abound, most notoriously last year, when the FCS provided financing to global powerhouse Verizon Wireless. The thin rationale was that agricultural communities were included in Verizon service ranges.

The original intent of FCS is not in dispute. As Marlin Stutzman acknowledges in his Hoosier Banker interview, the FCS “has been a wonderful tool for agriculture.” But this tool needs sharpening. It has been nearly 10 years since FCS has been examined closely by its committees of jurisdiction. Lacking oversight, it has grown so unwieldy that, if FCS were a bank, it would be the ninth largest in the nation. FCS overreach is harmful in several regards:

  1. The tax-advantaged status of FCS deprives the U.S. Department of the Treasury of substantial funding. For example, in 2012 FCS paid only $222 million in combined federal, state and local taxes on its profits of $4.34 billion – a rate of only about 5.12 percent. Had FCS paid at the same rate as banks – approximately 29 percent – it would have paid $1.285 billion in taxes, helping to pay down the U.S. national debt.
  2. Last fall the Federal Financing Bank, an agency within the Treasury Department, offered a free line of credit of $10 billion to the Farm Credit System Insurance Corp. (FCSIC). Given that this line of credit is more than double the current FCSIC asset size of $3.5 billion, a red flag is raised about the funding adequacy of the Farm Credit System Insurance Corp. If funding is inadequate, is there a future takeover of FCS on the horizon, paid for by U.S. taxpayers?
  3. The tax-advantaged status of FCS permits it to provide pricing and terms that are unrealistic for tax-paying banks to compete against. While the tax break is understandable when FCS remains within its mandate, it is unjustified when FCS lends to prosperous farmers and ranchers, or to businesses that have no connection to agriculture. Each time FCS lends beyond its mandate, it is competing against the private sector, a blatant violation of its mission.

Marlin Stutzman indicates that he intends to leverage his position on the House Committee on Financial Services to push for a much-needed investigation of the Farm Credit System. As he summarizes in the Hoosier Banker article: “FCS is expanding beyond its original mission to compete against the private sector in a way that was never intended. The result is that the banking world is now competing against its own government. That’s unhealthy.” Thank you, Rep. Stutzman! The Indiana banking community and the full banking community nationwide appreciate the common-sense wisdom you bring to your position on the House banking committee.

– S. Joe DeHaven

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