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ARM AND Q anch F I ULLETIN June 1970 Vol. 25, No. 6 T H E TIM E S — T H E Y A R E A -C H A N G IN ' There was a time when all a farmer needed to be successful was a small acreage, a moderate amount of business sense, a willingness to work, and a few hundred dollars of operating capital. Today’s farm operation requires substantially more of almost all these factors, especially cap ital. During the last several decades, the use of credit has become an increasingly important com ponent of successful farm and ranch operations. Through the Production Credit Associations, the Federal Land Banks, and the Banks for Coopera tives, the cooperative Farm Credit System has been helping serve the credit needs of farmers and farm cooperatives since the early part of this century. Originally established by Congress by Federal charter and with “seed” money, the Farm Credit System is now completely farmer-owned and provides more than 20 percent of the credit used by farmers and 60 percent of the credit used by farm cooperatives. Because the credit needs of our complex agri cultural system are changing so rapidly, the Fed eral Farm Credit Board last year named a panel of 27 farm leaders to study the credit needs of the nation’s agricultural sector and advise the board on how the Farm Credit System can help meet these needs effectively. Some of the panel’s recom mendations are presented below. They are taken from The Farm Credit System in the 70’s — The Report of the Commission on Agricultural Credit. Serving farmers To provide credit to farmers effectively, the Farm Credit System should limit financing to indi vidual farmers and other legal entities whose busi F E D E R A L R E S E R V E DALLAS, ness is predominantly farming or whose owners would be granted credit if they were individual applicants. The system should also serve the credit needs of the part-time farmer, but qualification as a farmer should not entitle such members to un limited financing for nonfarm purposes. Providing large sums of credit to individuals who engage in part-time farming only to obtain access to the system’s services is not in the best interests of farmers or the system. Within this framework, no restriction is recom mended concerning the purpose of the loan. How ever, the Farm Credit System is designed to be an agricultural lender, and administrative measures should be taken to assure that lending for other than agricultural purposes does not jeopardize the system’s ability to extend agricultural credit. Collateral alone should not be the determining factor in establishing the amount of credit which may be extended to a borrower. All factors in volved in lending decisions, especially the man agement ability and repayment capacity of the applicant, should be weighed. Collateral should be considered only as necessary to assure a sound loan. The statutory 65 percent of normal value limitation on Federal Land Bank loans is incon sistent with needs for lending in the 1970’s and should be removed, according to the recommen dations of the panel. Serving young farmers The various lending agencies, individually and collectively, should use their capabilities to meet the credit needs of young farmers (those under 35 years of age) that possess managerial and operat- B A N K TEXAS OF D A L L A S ' ing ability but that may lack adequate financial equity. As credit requirements for successful farm ing increase, it will become more and more diffi cult for a beginning farmer to accumulate ade quate capital to get started. To compensate for the lack of individual finan cial equity, a special lending program should be established to provide an organized and controlled approach to financing young farmers by develop ing and utilizing such methods as special reserves, guarantees, joint loans, and partnership ventures. Loan interest rates for young farmers should be the same as for regular borrowers. The system should provide guidance for such young farmers through counseling on key business decisions and should encourage them to become members of boards and advisory groups of the system to par ticipate in policy formation. Serving cooperatives The panel suggested that the following recom mendations be implemented in order to serve co operatives more effectively. e A broader group of farmer cooperatives should be eligible to obtain credit from the Banks for Co operatives. This can be done by lowering the membership requirements of cooperatives. Present rules require that a cooperative include at least 90 percent farmer-members in order to be eligible for a loan. The panel recommends reducing this requirement to 60 percent. ® Acceptable purposes for loans from the Banks for Cooperatives should be broadened in order to permit the financing of activities incidental to the ordinary business of a cooperative within the over all guideline of helping farmers. Furthermore, the Banks for Cooperatives have a responsibility to aid in the establishment of new cooperatives in rural communities which would serve both area and rural residents. • The Banks for Cooperatives should conduct a continuing educational program to make their services known and to cooperate with other or ganizations in encouraging cooperatives and de fining cooperative principles. Serving farm-related businesses According to the panel, steps should be taken to change legislation and administrative provisions in such a manner that the system can provide credit service to operators of selected farm-related businesses. Farmers are increasingly utilizing more of these specialized services. For example, the use of custom operators enables farmers to have ser vices accomplished with professional efficiency and to do so without tying up capital in machinery. Decisions to extend credit to farm-related busi nesses should be based on the furnishing of ser vices directly to farmers and not on the basis of the purchase and sale of materials. Credit should not be extended to a company when its major business activity or that of its parent corporation is an activity other than providing services directly to farmers. Serving rural America The panel members generally concluded that the system should take a broader view of serving credit needs than in the past. Meeting the projected credit needs of farmers, their cooperatives, and farm-related businesses will require consideration of the development needs of rural communities, as well as the direct credit needs of farm busi nesses. The commission hopes that the Farm Credit System might assist, for example, in financ ing nonfarm rural homes, rural community needs, and rural cooperative utility systems. Although the commission’s report does not include specific recommendations on how to achieve such services, it does urge that the system consider both how and when such services might be initiated. Credit standards Decisions concerning credit standards should be made on the basis of a comprehensive analysis of all credit factors. The most important of these factors are: (1) the borrower — his management abil ity, responsibility, financial position and progress, earnings potential, and re payment capacity; (2) the collateral taken or available as security; (3) the purpose of the loan and the basis of approval. Fixed limits on the amount or terms of a loan should not be determined solely by specific credit factors, such as collateral or the purpose of the loan. Loans made should be in line with the bor rower’s total resources. The system should use comprehensive credit analysis and loan supervi sory procedures to provide the borrower with a financing package for his total credit needs. Credit-related services In considering credit-related services, the com mission expressed the following recommendations. © Services such as record keeping, credit life in surance, and estate planning should be undertaken only when a substantial number of members have a need for such services. • The primary consideration in offering any ser vice should be the benefit it provides both the members and the lenders in using and extending credit and not the remuneration which may accrue to the banks or associations. e The availability of competent services through other normal business channels should be recog nized; and, where they are provided at reasonable cost, the system should not develop competing services but should assist members in the profit able use of such services. • Consideration should be given to developing a research and educational program and a guidance service which would direct members to competent professional help in estate planning, including bet ter methods of transferring assets from one gen eration to another. • A study should be made of credit life insurance programs presently offered to Federal Land Bank and Production Credit Association borrowers to examine the premium rate of the present insur ance programs and consider the possibility of sav ings to member-borrowers if a Farm Credit Sys tem credit life insurance program were offered instead of the present program. Financing the system A study to determine the alternative ways of financing the system to get the best use of funds and the most advantageous maturity pattern should be made. The system should make fewer entries into the market and strive to lengthen the maturity pattern of securities. In addition, it should explore new sources of funds to supplement present sources. Some areas of suggested investi gation are: (1) the sale of securities through syndi cated bids, (2) commercial paper, (3) capital notes, and (4) sales to individual investors, particu larly system members. Presently the system’s loan funds are obtained al most exclusively from the sale of Farm Credit System securities through a group of dealers in the agency market. The commission sees two dis advantages in the arrangement. First, it means the system is rather inflexibly tied to a single means of gathering funds. Second, individuals (including member-borrowers) do not have ready access to these securities as opportunities for investment. The feasibility of a single Farm Credit System security to replace separate bonds and debentures for the three principal groups of lenders should be studied. It seems probable that the system could handle its security sales more effectively and cheaper if a single security for the Farm Credit System were used. Organization and functions The commission made the following recom mendations concerning the organization and func tions of the Farm Credit System. • There should be close cooperation and coordi nation of the system at all levels. Federal Land Banks and Production Credit Associations should have coordinated, efficient-sized territories and joint housing. • The commission advised against a merger within the system at the present time. It did note that in order to provide a farmer with a one-stop comprehensive credit package, a close coordina tion between the Federal Land Banks and the Pro duction Credit Associations is required. It sug gested that a common management for these two groups should be encouraged when possible. External relations The Farm Credit System’s external relation ships include those with members of Congress and other Government officials, other lenders, farm groups, educational institutions, and the public. The commission urges that the banks and associa tions cooperate with such organizations in activi ties that will benefit all of the agricultural sector. This should include participation in credit re search, coordinated services to farmers and co operatives, and, when appropriate, joint partici pation in loans with other lenders. The system should work with both educational institutions and business groups to use their services and to make services available to them. An example would be cooperative efforts in the field of farm credit research. Effectiveness of the USDA-Texas cooperative boll weevil control program in the Texas High Plains has created a problem in sampling lowlevel infestations. Accurate estimates of the infes tation level become difficult when the count of adult boll weevils drops below 25 per acre. Yet accuracy is important both in gauging the effec tiveness of control measures and in projecting expected weevil populations. All the recommendations of the commission’s report will not be enacted. But the number and breadth of the recommendations are indicative of how fast the production techniques and resource requirements in agriculture are changing both within and outside the Farm Credit System. The implementation of these recommendations will mean substantial changes in both the Farm Credit System and the banking industry, which helps fi nance agriculture. Many small rural banks have experienced difficulty adjusting to the changing needs of agriculture during the last decade. The recommendations of the study suggest that the changes in the 1970’s will be greater than those of the past decade. Trying to eliminate the costly, time-consuming practice of inspecting large areas of cotton plant by plant, researchers with the Agricultural Re search Service are developing a machine expected to yield quick, reliable estimates without great expense. I. W. Kirk, Agricultural Research Ser vice Engineer, is working with D. G. Bottrell, ento mologist with the Texas Agricultural Experiment Station at Lubbock, on a machine using the same principle as one sold as an insect control device in the 1940’s. The machine blows a stream of air across a row of plants, driving insects into a col lection bag. Tests at College Station show the mechanical sampler getting 63 to 92 percent of the weevils. A ir Blasts Bag Boll Weevils Prepared by A r t h u r L. W r ig h t E L E V E N TH F E D E R A L R E S E R V E D IS TR IC T
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