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The Farm Credit System is the nation's largest agricultural lender. Unless federal assistance is forthcoming, it will face a serious financial crisis in the near future. In response to a request by the Senate Budget Committee, this paper analyzes the effects of bills to assist the Farm Credit System passed by the House of Representatives and the Senate Committee on Agriculture. In keeping with the mandate of the Congressional Budget Office (CBO) to provide objective analysis, this report makes no recommendations.

This paper was written by David D. Trechter of CBO's Natural Resources and Commerce Division, under the supervision of Everett M. Ehrlich. Valuable comments were provided by Peter H. Fontaine, Roger E. Hitchner, and Christine M. Ross of the CBO, William Jeffrey Shipp of the Farm Credit Council, David Freshwater of the Joint Economic Committee, and Kris Allen of Resources for the Future. The manuscript was edited by Francis Pierce, typed by Gwen Coleman, and prepared for publication by Kathryn Quattrone.
 

Edward M. Gramlich
Acting Director
December 1987
 
 

SUMMARY

I - INTRODUCTION

• An Update of the FCS's Financial Condition
• Major Legislative Issues
• Current Legislative Efforts
• Organization of the Report

II - CHANGES IN THE ORGANIZATION OF THE FARM CREDIT SYSTEM

• System Restructuring
• Changes in Borrower Stock

III - LONGER-TERM FINANCIAL ISSUES

• Secondary Mortgage Markets
• Minimum Capital Requirements and Insurance Programs

IV - BORROWERS' RIGHTS

• FCS Behavior Relative to Its Stressed Borrowers
• Equity Issues Associated with Borrowers' Rights
• Borrowers' Rights in Current Legislation
• Implications of Additional Borrowers' Rights

V - FEDERAL ASSISTANCE FOR THE FARM CREDIT SYSTEM

• The Public Interest
• The Amount of Assistance
• The Form of Federal Assistance
• The Timing of Assistance
• Managing Assistance
• Federal Assistance in Currently Proposed Legislation

VI - A COMPARISON OF THE HOUSE AND SENATE BILLS

• Federal Assistance in the House and Senate Bills
• Changes in Policy Under the Proposed Legislation
• Conclusion

APPENDIX - DESCRIPTION OF THE MODEL
 

TABLES
1.	Selected Measures of FCS Performance
2.	Comparative Data on Major Agricultural Lenders
3.	Commercial Bank Failures
4.	Differences in Assumptions Used in Model Projections
5.	Selected Measures of Projected Farm Credit System Financial Performance, Assuming No Legislative Changes
6.	Summary of Estimated Costs of Assisting the Farm Credit System via H.R. 3030
7.	Summary of Estimated Costs of Assisting the Farm Credit System via S. 1665
8.	A Comparison of the Projected Financial Condition of the FCS under H.R. 3030, and under S. 1665
A-1.	Projected Financial Statements: Most Likely Assumptions
A-2.	Projected Financial Statements: Optimistic Assumptions
A-3.	Projected Financial Statements: Pessimistic Assumptions
A-4.	Projected Financial Statements: Base Case, Most Likely Assumptions
FIGURES
S-1.	Two Measures of the Impact of H.R. 3030 and S. 1665
1.	Organization of the Farm Credit System

 

The Farm Credit System (FCS), the nation's largest institutional lender to the agricultural sector, is in severe financial trouble. Federal assistance will be required if a crisis induced by the failure of some portions of the system is to be avoided. Such a crisis would adversely affect the agricultural sector and could spill over into other capital markets, particularly those served by other government-sponsored lenders such as those in the housing sector.
 

THE GENESIS OF THE PROBLEM

The problems of the FCS have arisen from a number of sources, among the most important of which are:

• Falling agricultural land values that have necessitated a dramatic increase in loan loss reserves, leading to an equally dramatic fall in the system's income;
  
  
• An unfortunate timing of bond sales in the late 1970s and early 1980s that left the system with a high cost of funds;
  
  
• A rapid expansion in the system's loan portfolio caused in part by more liberal lending practices; and
  
  
• An increase in the volume of nonaccrual loans resulting from a very weak farm economy.

In short, both internal mistakes and the impact of general economic factors have left the FCS at the brink of insolvency.

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