"FARM CREDIT: VITAL PRODUCTION RESOURCE JEOPARDIZED"
"CREDIT SYSTEMS UNDERGO MAJOR CHANGE"
"NEW FARM BILL IS CREDIT DISASTER"
"GUARANTEED LOANS FUEL CONTRACT PRODUCTION SYSTEM"
"COMMERCIAL LENDERS' OPTIMISM UNMATCHED IN FIELDS"
"FLAG, NFFC PLAY VITAL ROLE HELPING FARMERS SECURE
FARM CREDIT: VITAL PRODUCTION RESOURCE JEOPARDIZED
Farm credit issues were at the heart of the farm crisis
that began more than a decade ago. Throughout the 1970s,
farm debt grew by an average of 12 percent per year,
according to the Federal Reserve Board. At the same
time, between the mid-1970s and 1980s, commodity prices
plummeted, interest rates soared and input costs rose.
As a result, hundreds of thousands of farmers were
unable to repay lenders and consequently lost their
farms despite federal intervention to help farmers
postpone their repayment dates, writedown loans and, in
many cases, write-off their federal debt under the
provisions of the 1987 Agricultural Credit Act.
Nearly a decade later, those farmers who survived the
financial crisis and the continuation of depressed crop
prices, now find themselves on the edge of another
potential credit disaster. Despite relatively low
interest rates and historically high crop prices,
dramatic changes passed under the Credit Title of the
1996 Farm Bill could result in disastrous consequences
for many family farmers over the next seven years.
The issue of credit availability, lending terms, and
credit rates are vital to farm families' ability to
remain on their land. Regardless of operation size and
location, most farmers require access to credit to
purchase machinery, buildings, livestock, seeds,
materials and other inputs every year.
CREDIT SYSTEMS UNDERGO MAJOR CHANGE
Farmers access credit through a variety of institutions
and businesses, such as local banks, insurance companies
and agribusiness corporations. But there are three
primary lending systems that provide the bulk of farm
credit: the Farm Credit System, commercial banks and
Farm Credit System. The Farm Credit System (FCS) is
made up of cooperatively owned financial institutions
that finance farm mortgages and operating loans. FCS
institutions specialize in each farm district in
different types of loans, such as farmland credit. FCS
held about 25 percent of all agricultural debt in 1993.
The St. Paul Bank of Cooperatives, which in the past
has helped to finance farmer-owned and operated
cooperative efforts across the Midwest, is one example
of an FCS institution. In recent years, FCS has
become one of the largest lenders to corporate farms and
contract livestock facilities.
Commercial Banks. Most commercial bank lending is done
through smaller agricultural banks. Commercial banks
provide loans for a variety of purposes, and account for
nearly 60 percent of all agricultural lending to farmers
and other members of the farming community. Interest
rates charged on operating, or non-real estate, loans
are typically higher for farm borrowers than the average
annual prime interest rate charged to non-agricultural
Federal Lending Agencies. Federal lending services date
back more than 70 years. The "Agricultural Credit Act
of 1923" established the first federal program to
provide farmers with increased, flexible credit. This
act eventually led to the federally-backed Farm Credit
System, which has since become privatized. Likewise,
amendments to the Act in 1935 created another important
institution still in existence today -- the Farmers Home
FmHA was set up to provide loans and grants to Great
Depression-stricken families and help them regain self-
sufficiency in their farming operations. In the late
1980s, under the 1987 Agricultural Credit Act, FmHA's
mission was reconfirmed with new provisions added.
Organizations representing family farmers ensured the
inclusion of new FmHA guidelines that would help highly-
indebted farmers remain solvent and keep their farms
amid the widespread financial crisis. The 1987
Agricultural Credit Act authorized debt forgiveness on
delinquent farm loans when it presented the least-cost
option to the federal government.
Prior to passage of the 1996 Credit Title of the Farm
Bill, FmHA , now called the Farm Services Agency (FSA),
was still considered a "lender of last resort." It
remains responsible for the following:
1. The provision of loans directly to borrowers for
farm operating and ownership needs. Direct loans are
made and serviced by an FSA official, who "provides
credit counseling and supervision to the agency's direct
borrowers by assessing and evaluating all aspects of the
2. The guarantee of loans made and serviced by
commercial banks. Guaranteed loans to farmers are
commercial loans backed, or guaranteed, by the federal
government for up to 90 percent of the loan.
Historically, federal credit programs have provided an
essential service to farmers. However, more recently
FSA's loans have not been very accessible to struggling
farmers because of administrative problems. Farmers and
family farm representatives say that there are three
fundamental problems that FSA must resolve in order to
continue adequately servicing farmers: poor USDA staff
training; long waiting periods for loan payment; and
excessive paperwork/red-tape discouraging commercial
banks from accepting guaranteed loans.
Instead of resolving these problems, the new credit
provisions of the farm bill makes it even more difficult
for farmers to access affordable credit.
NEW FARM BILL IS CREDIT DISASTER
Changes made to federal lending authority under the
Credit Title of the Farm Bill will have profound impact
on family farmers for the next seven years. Farmers and
family farm organizations say the following new credit
provisions will eliminate future prospects for many
*Elimination of the "lease-back, buy back" program.
This program was implemented during the 1987
Agricultural Credit Act to enable farmers, who either
lost their farm or were in the process of foreclosure,
to lease back their land from the federal government (to
whom the land had been forfeited) with the option to
buy. Pat Eddy of Iowa's PrairieFire Rural Action took
advantage of this program in 1987 when the government
had foreclosed on her farm. "The lease-back, buy-back
program allowed us to stay on our land, in our home
and in our community," Eddy says. "The elimination of
this program will create massive exodus from rural
communities as fewer farmers are able to remain on their
land." Any land currently unleased will be offered to
beginning farmers within the next two-weeks. After
that, unclaimed and new land that would have come into
the program will be up for auction to any buyer.
"Besides doing away with a good program, this provision
creates the potential for large livestock operations and
non-agricultural-related investors to acquire large
tracts of land," Eddy says.
*Redirection of loan money to beginning farmers. Family
farm groups have pushed for increased credit access for
beginning farmers in light of the increasing rate of
retiring farmers. In the new Farm Bill, however,
funding for beginning farm loans has been made available
through a reduction of funds for other borrowers.
Funds allocated for beginning farmers will not be
available for reallocation to all other loan applicants
until September. This gives FSA only one month before
the 1996 Fiscal Year ends to service all other
qualifying borrowers. "This is an indirect way of
gutting the lending program for all farmers," says
National Family Farm Coalition Director Kathy Ozer.
* Stricter eligibility rules. The most sweeping and
potentially disastrous loan program changes occur in the
form of limiting eligibility requirements. The new
credit law states: "A loan applicant who has had a
farm loan debt forgiven or reduced through any form of
debt settlement, a net recovery buy-out, bankruptcy, or
payment of a guaranteed loan loss claim ... (except for
a debt writedown) is not eligible for any direct or
Although an amendment was passed the last week in April
granting Agriculture Secretary Dan Glickman the
authority to make or guarantee operating loans to
farmers who have already applied for loans after April 5
this year, borrowers who utilized their rights during
the 1980s will be denied credit in the future. After
April 5, 1996, any farmer who has had federal farm loan
debt forgiven at any time by the government will not be
eligible for federal loan servicing or farm ownership
and some farm operating loans. Because FSA is the
"lender of last resort," the new farm credit law will
eliminate many farmers' only access to credit.
"When FSA loans become unavailable, farmers' only other
credit option will be to approach their local input
suppliers," says PrairieFire's Pat Eddy. Local seed and
chemical dealers will often provide limited credit to
farmers needing to purchase supplies. "But local
dealers can supply only a limited amount of credit. And
when they do, all it takes is one or two farmers who
can't pay their bill on time to place that dealer's
business in financial trouble," Eddy says. "Credit is
vital not only to farmers, but to the entire rural
Farmers Legal Action Group (FLAG) attorney Randi Roth
says, "All of these new credit provisions essentially
try to shift farmers' source of credit from direct
government loans to guaranteed loans."
GUARANTEED LOANS FUEL CONTRACT PRODUCTION SYSTEM
Increasingly, the federal government has been granting
loan guarantees to livestock producers who contract with
large processing facilities. Almost all contract
growers require enormous amounts of financial capital to
set up operations capable of fulfilling large-scale
"We are concerned about guaranteed loans being used to
promote vertical integration and corporate contracts,"
says NFFC's Kathy Ozer in testimony before Congress this
month. "In the many cases where contracts are shaky, a
guaranteed loan increases the risk to the farmer and the
taxpayer for all of the wrong reasons."
Some of the largest processors and animal producers who
supply contract farmers in Southern Minnesota, for
example, are very financially unstable, explains Mark
Schultz of the Land Stewardship Project. "If these
operations and the contractors dependent on them fail,
it will be the taxpayers who pick up the tab on
defaulted loans," Schultz says.
Similarly, Mary Clouse of Rural Advancement Foundation
International - U.S.A. in North Carolina says banks are
making guaranteed loans to contract farmers who
otherwise would not qualify for credit totaling up to
$500,000. "A powerful relationship exists between the
banks and the processing companies," Clouse says. As
more guaranteed loans are being made to contract growers
on behalf of the processing companies, less credit is
available to family farmers. "This is a big problem,"
says Schultz. "The processing companies and other
integrators have effectively restricted market access to
fair credit for non-contract farmers. If taxpayers and
farmers are going to take a risk, they should be doing
it for family farmers as was intended, not for a limited
pool of corporate producers."
COMMERCIAL LENDERS' OPTIMISM UNMATCHED IN THE FIELDS
Between 10 to 25 percent of farmers are still looking
for credit or additional financing this month, according
to an informal AG WEEK survey.
Most commercial banks are optimistic about lending
potential, citing increasing debt repayment and
favorable economic conditions for many farmers. They
also note that this year's high crop prices, relatively
low interest rates and rapidly rising land values
provide the right conditions for increased farm loan
But, many farmers who recall the favorable credit
conditions preceding the financial crisis that began in
the 1980s, remain cautious about borrowing
opportunities. The excessive borrowing, high crop
prices and inflated land values that followed the world
food shortage of the mid-1970s and precipitated the farm
financial disaster of the 1980s are beginning to take
shape again. Farmland prices, for example, have
skyrocketed over the past six months. "I do have some
concerns that land values are getting somewhat our of
line with income-earning potential," said Norwest Bank
Corporation economist Larry J. Wipf -- suggesting that
farmers' primary form of collateral is becoming
Likewise, long-time farmers, like Alicia Cohnen who
struggled through the farm crisis and is now past
retirement age, are not able to take on new, long-term
debt. "At our age we'll never borrow again," says dairy
farmer Cohnen who managed to buy back her farm after it
had been foreclosed on by the Federal Land Bank in 1989.
"You'd be crazy to take on more debt at our age --
especially without any kids at home to take over the
farm." More than half of America's farmers are aged 56
and older. "We've never seen as many farm sales as we've
seen this spring -- most livestock producers in our area
who can't cash flow with the high feed costs and low
cattle prices, don't want to take on more debt to try to
stay in business."
FLAG, NFFC PLAY VITAL ROLE HELPING FARMERS SECURE CREDIT
There are a number of organizations that play a crucial
role in securing fair federal credit policies for family
farmers and helping farmers take advantage of existing
Farmers Legal Action Group, located in St. Paul, MN, has
spent the last 10 years assisting farmers and providing
them with vital information about how to access and
qualify for federal credit assistance. FLAG continues
to assist farmers in understanding credit options and
operates a hotline to answer farmers legal questions.
For more information about FLAG and their work, call
Likewise, D.C.-based National Family Farm Coalition has
worked hard to win credit rights for family farmers in
Congress. NFFC 's Credit Task Force will hold a joint
training session with Minnesota Farm Advocates next
month to inform groups working with farmers about this
year's new credit provisions. For more information
about NFFC, it's work, and the new credit laws, call
"1996 FARM BILL FACT SHEET: LOAN PROGRAMS," USDA, April
1996. Contact, FSA Public Affairs, (202) 720-5237.
"SERVICES FOR FARMERS: FSA BACKGROUNDER NO. 1," USDA,
July 1995. Contact FSA Public Affairs Staff, (202) 720-
THE EFFECTS OF CREDIT POLICIES ON U.S. AGRICULTURE,
Peter J. Barry, AEI Press, 1995. 113 pages. $9.95.
May 11: "1996 Farm Bill Informational Meeting,"
Winterset, Iowa. State FSA Director Tom Grau will speak
about credit, conservation, and guaranteed payment
provisions under the new Farm Bill. For more
information contact Bob Simon, PrairieFire Rural Action,
Farm Aid News is produced by the Institute for
Agriculture and Trade Policy for Farm Aid. Editors:
Harry Smith and Gigi DiGiacomo.
We encourage the reproduction of Farm Aid News & Views.
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