The Farm Credit System (FCS), a Government Sponsored Enterprise, is sometimes called the “mini-Fed” because like the Federal Reserve Bank system the FCS is obligated to ensure the “safety and soundness” of its operations, which account for about 42% of all U.S. annual agricultural lending. According to a Farm Credit presentation to investors in December, the FCS loan portfolio in the third quarter of 2021 amounted to about $326 billion, about half of which was agricultural loans collateralized by land values.
The Fed’s Chair frequently testifies to the Senate and House of Representative banking and finance committees. However, the FCS and its regulator, the Farm Credit Administration (FCA), very seldom are called to testify before the House and Senate agricultural committees. Indeed, according to an Alan Guebert column, the heads of the FCA and FCS had not testified for 19 years prior to a February 2017 House agricultural appropriation subcommittee hearing — i.e., 19 years after Congress had rescued the FCS from bankruptcy and revised the Farm Credit Act to prevent the need for another taxpayer bailout.
The hearing served to congratulate FCS for fattening its balance sheet, including with non-agricultural loans, even as many of its farmer borrowers relied on Farm Bill and ad hoc taxpayer subsidies to enable borrowers to keep FCS loans “performing,” i.e., to pay interest on the amount borrowed. Those subsidies would climb to 39% of U.S. net farm income by the end of the Trump administration. The hearing also allowed FCA and FCS to rebut the criticisms about FCS non-agricultural lending by the American Banking Association, which was not invited to the hearing.
Notwithstanding the lack of inquisitiveness of the congressional agricultural committees about the FCA and FCS (e.g., regarding the impact of two decades of Farm Credit mergers on farmer, rancher and rural community access to credit) the FCS, like the Fed, faces a systemic challenge to its “safety and soundness” — climate change. And like the Fed, Farm Credit has been a laggard, rather than a leader, on how to make its system resilient to the financial shocks of climate change to its borrowers and to the FCS’ ability to sell the bonds that finance its operations to climate-disrupted financial markets.
IATP letters to Farm Credit
IATP sent two letters to the FCA in late November, one to advocate for a climate-resilient bank liquidity rule and the other on the FCA’s Fiscal Year 2022-2026 Strategic Plan. (“Liquidity” refers to the ability of an organization to pay its debts with cash on hand and/or with other assets that can be readily converted into cash.) For the Strategic Plan, the FCA asked for input about how “weather and the environment” might affect its borrowers. We also urged the FCA to outline in the Strategic Plan how it finally would implement Section 623 of the Farm Credit Act of 1987, regarding “socially disadvantaged individuals,” a legal term for BIPOC (Black, Indigenous and People of Color) farmers, ranchers and rural communities.
Farm Credit lending to BIPOC and beginning farmers and ranchers
Farm Credit proudly reports its loans and services to Young Beginning and Small (YBS) farmers and ranchers. But there is no reporting of lending and services to socially disadvantaged (SD) farmers, ranchers and rural communities. Although USDA aggregates data about SD farmers and ranchers, FCA maintains that lending association rules prohibit it from asking questions about the SD demographics of its borrowers. IATP wrote that FCA would not be able to contribute the Biden administration’s policy goal of “advancing equity” if it did not provide credit and services for SD farmers and ranchers.
The National Sustainable Agriculture Coalition (NSAC) (IATP is one of 130 NSAC member organizations) provided input for the Strategic Plan. NSAC wrote, “despite the history of racial discrimination and dispossession that is deeply integrated into the current structure of agricultural credit access, serving socially disadvantaged (SDA) producers, namely farmers of color, are not even incorporated into Farm Credit’s mission or online plan to fulfill said mission.” Among many suggestions to enable FCS to serve SD farmers, ranchers and rural communities, NSAC proposed that FCS set aside 10% of its annual profits for a fund to serve SD and YBS farmers and ranchers.
NSAC noted that FCS, as a GSE, receives “tax and funding advantages” that contribute to its profit margin. “However,” NSAC wrote, “unlike other similar GSEs, such as the Federal Home Loan Bank System (FHL Bank), FCS is not required to invest any of their net income in grants or other forms of community reinvestment in exchange for its status as a GSE.” One of Farm Credit’s seven principles of “The Cooperative Way” concerns service to the community, beyond serving FCS lending association stockholders. FCS could form an annual fund for SD and YBS farmers, ranchers and rural communities, without congressional authorization, by returning to its foundational principles.
A climate-resilient bank liquidity reserve rule
The FCA’s Advance Notice of Proposed Rulemaking (ANPR) for a bank liquidity reserve rule did not mention climate change as a systemic financial risk. In our comments, we contended that FCA could not achieve its objective for the bank liquidity rule unless it includes climate change as a Farm Credit system wide risk to its loan portfolio and to Farm Credit’s ability to market bonds to finance its operations when the markets are under severe stress from financial shocks related to climate change.
In July, FCA Board member Jeffrey Hall announced the formation of a climate change task force. However, he warned that climate change is a “politically charged” issue, indicating that FCA would be very cautious about responding, however indirectly, to President Joe Biden’s May executive order on climate change risks to finance. IATP urged FCA to publish a request for information to advise the work of the task force, which is to “regularly report back to the board.” The names of task force members have not been announced nor is it clear that their reporting will be made public. The board is currently comprised of Hall, the FCA board chair and CEO Glen Smith, so task force reporting could be very closely held. (FCA is the only federal financial regulator with an authorized three-person board. The Biden administration has yet to nominate two board members, one to succeed Hall, a holdover whose term has expired.)
The FCA’s reticence about regulating or even providing voluntary guidance to FCS on managing climate financial risk likely has to do with the peculiar governance structure of the FCS. FCS is a cooperative in which the four large system banks provide liquidity to 65 regionally distributed lending associations. As the result of a 2010 FCA board policy statement (the link to the statement is broken on the FCA website), the core principles of FCS are “user ownership, user control, user benefits,” which is a radical departure from the seven principles of “The Cooperative Way.” The stockholder farmer and rancher owners of the lending associations have a de facto veto over changes in FCA policy and FCS practices, including those that would protect the lending associations against climate-related financial risk.
Although the lending associations have long ceased to be self-financing, lending association members who are climate “skeptics” can block effective climate financial risk management by FCA and FCS management, in part thorough the congressional lobbying of the Farm Credit Council. The Council advocates for “climate smart agriculture,” which its critics, including IATP, characterize as a rebranding of agri-business as usual (albeit with additional technologies), rather than a set of agroecological practices, definitions, metrics and financing mechanisms to make agriculture climate resilient.
The FCA does not receive a congressional appropriation. Its budget depends on fees from bank examinations of FCS banks and lending associations. Because of this budgetary dependence, FCA is not in a strong position to write a climate-resilient bank liquidity rule and other rules to manage climate financial risk, if the FCS opposes a strong rule. Nevertheless, FCA’s Strategic Plan must propose how to ensure FCS “safety and soundness,” i.e., the financial sustainability of Farm Credit in both its loan portfolio and its ability to sell Farm Credit bonds in climate shocked financial markets. FCA will be doing its climate skeptical lending association members an indispensable service by writing a climate-resilient bank liquidity rule, and subsequently, a rule to enable FCS to offer climate-resilient terms of credit.