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Agriculture AN EIGHTH DISTRICT PERSPECTIVE Spring 1984 The Farm Credit System: The Consequences Of Changing Its Agency Status The Farm Credit System has provided credit sub sidies to farmers and farm cooperatives for more than 50 years. Even though institutions within this System are borrower-owned private cooperatives, the System’s status as a federal agency enables it to extend credit to farmers and farm business cooperatives at reduced rates of interest. Since 1981, however, an Office of Management and Budget (OMB) proposal to remove agency status from the System has been under review. This article examines the consequences of changing the System’s agency status. and intermediate-term operating credit at a 15.1 per cent rate of interest. At the same time, long-term real estate credit was available from the System’s Federal Land Banks at an 11.4 percent rate. The highest rates charged by institutions in the Farm Credit System for production and real estate debt since 1976 have been 15.8 and 12.4 percent, respectively. The Farm Credit System and How It Operates The interest rate spreads depicted in the plot have contributed to substantial changes in the shares of farm debt held by different lending institutions. In 1976, for example, when Farm Credit System rates were comparable to commercial bank rates, the two groups held about 80 percent of total farm debt and split this amount in nearly equal shares. (See table on next page.) Between 1978 and 1982, however, Farm Credit System debt increased by about 80 percent while farm debt at commercial banks increased by slightly more than 20 percent. These sharply different rates of change over the four-year period in which in terest rate spreads were largest reduced the commer cial bank share of total farm debt from about 40 per cent to about 29 percent. During the same period, the share of total farm debt held by the Farm Credit System, the Farmer’s Home Administration and the Commodity Credit Corporation increased to 64 per cent. Interest Subsidies and Their Effects on Lending The Farm Credit System raises loanable funds by is suing securities of various maturities and denomina tions. Next to the U.S. Treasury, it is the largest federal borrower. Although securities issued by the System are not guaranteed by the federal government, a perception that the government would not let the System fail tends to reduce the risk associated with holding the System’s securities. This lower perceived risk associated with Farm Credit System securities reduces the interest rate at which the System can raise loanable funds. As borrower-owned cooperatives, lending institutions within the System pass on this cost saving to their farm customers in the form of lower interest rates on their real estate and production loans. This ability to extend credit to farmers at lower in terest rates is illustrated by the plotted data in the chart on the next page that show substantial spreads between the average bank rate on business loans and the rates charged to farmers for their THE FEDERAL operating and real estate loans. For exam RESERNE ple, when business loan rates peaked at 21 RANK of percent in the third quarter of 1981, the ST. LOLLS Production Credit Associations of the Farm Credit System were extending short Loss of Agency Status: Its Effects on Rates and Credit Practices Loss of agency status would likely eliminate these credit subsidies for several reasons. First, to the extent the System’s securities no longer had the image of federal backing, it would have to pay SPRING 1984 FEDERAL RESERVE BANK OF ST. LOUIS higher rates to raise loanable funds. Second, proposed changes in rules that allow commercial banks to use System securities as collateral for borrowings from the Federal Reserve would cause a reduction in demand for System issues. Demand would be reduced further by rules that would limit the percentage of commercial bank portfolios that could be held in Farm Credit System securities. In each case, the proposed operating rules for the System would reduce its com petitive advantage in credit markets and raise the costs of real estate and short-term operating credit to farmers. The interest rate subsidies of the Farm Credit System also have promoted the trend toward fewer, but larger, farms. By reducing the cost of capital relative to labor and other variable inputs, the System’s lending policies have encouraged farmers to increase the size of their capital stock. Since efficien cies from these capital additions usually are realized on larger farms, cheaper credit also has been an incentive to increase indebtedness in efforts to expand the size of farming operations. These credit practices may be partly responsible for the recent increase in farm bankruptcies and the continuing decline in small farm operations. —Michael T. Belongia Farm Debt Outstanding (millions of dollars) 1976 1977 1978 1979 1980 1981 1982 1983 Total 71,734 84,288 97,928 114,957 131,141 146,892 161,938 167,794 Insured Commercial Banks 28,585 32,730 35,406 38,516 39,665 41,129 43,960 47,205 Life Insurance Companies 7,082 8,251 9,862 11,594 12,717 13,049 12,912 12,678 Cooperative Farm Credit System 29,936 34,311 38,337 45,283 54,483 63,478 68,465 68,292 Farmers’ Home Administration 5,655 6,562 9,621 14,383 19,324 23,792 24,896 25,229 Source: Federal Reserve Board Note: Individual columns may not add due to rounding. A Comparison of Interest Rates on Farm and Non-farm Loans 1977 2 78 79 80 81 82 83 1984 Commodity Credit Corporation 478 2,434 4,703 5,182 4,952 5,445 11,706 14,391 FEDERAL RESERVE BANK OF ST. LOUIS SPRING 1984 EIGHTH DISTRICT AGRICULTURAL DATA Percent Change Prices and Costs1 C O N S U M E R P R IC E IN D E X (% c h a n g e ) N o n fo o d Food P R O D U C T IO N C O S T S F O R F A R M E R S (% c h a n g e ) A ll in p u ts F e rtiliz e r A g r ic u ltu r a l c h e m ic a ls F u e ls a n d e n e rg y D e c. 1 9 83 0.2 % 0.5 Jan. 1984 0 .4 % 2.4 Feb. 1984 0 .3 % 0.9 A v e ra g e fo r 1 9 8 3 0 .3 % 0.2 Y e a r -T o -D a te 2 1984 S a m e P e rio d Y ear Ago 0 .7 % 3.3 4 .5 % 4.7 6.1 1.2 0.0 -1 .0 -4 .3 0.0 0.0 0.5 0.3 0.0 0.0 0.7 0.8 -0 .2 0.3 -0 .3 -4 .0 0.0 0.0 1.2 4.1 -2 .4 4.2 0.7 4.1 5.9 2.3 3.1 4.8 0.8 -1 .5 -1 .1 -2 .3 0.9 0.3 1.6 1.6 3.6 - 1.5 7.4 1.6 15.0 FEEDER CATTLE W h o le s a le p ric e - K a n s a s C ity ($ /cw t.) $63.65 $65.06 $66.19 $ 63.72 4.0 - 1.7 F E E D E R PIG S W h o le s a le p ric e - S o. M is s o u ri ($/head) $27.65 $33.61 $43.49 $ 33.96 57.3 -2 1 .5 P R IC E S R E C E IV E D BY F A R M E R S (% c h a n g e ) A ll p ro d u c ts L iv e s to c k C ro p s B R O IL E R S W h o le s a le p ric e -1 2 -c ity (c/lb .) 57.13c 62.10C 6 1.22c 5 0 .3 9 c 7.2 27.6 TURKEYS W h o le s a le p ric e - N e w Y o rk , 8-16 lb. y o u n g h e n s (c/lb .) 75.22c 73.46C 64.50C 60.48C -1 4 .3 17.5 CORN W h o le s a le p ric e - S t. L o u is ($/bu.) $ 3.45 $ 3.41 $ 3.31 $ 3.27 -4 .1 18.6 SOYBEANS W h o le s a le p ric e - N .C . I llin o is ($/bu.) $ 7.93 $ 8.03 $ 7.09 $ 6.86 - 10.6 23.1 W HEAT W h o le s a le p ric e - N o. 1, h a rd w in te r K a n s a s C ity ($/bu.) $ 3.85 $ 3.81 $ 3.71 $ 3.95 -3 .6 -9 .1 L O N G -G R A IN R IC E W h o le s a le p ric e - A rk a n s a s ($ /c w t.) $19.00 $18.98 $18.60 $ 18.40 -2 .1 6.3 -4 .6 13.8 CO TTO N W h o le s a le p ric e - a ll m a rk e ts (c/lb .) 67.30c 63.90c 64.20C 62.30C Percent Change U .S . Exports C o rn (m il. bu.) S o y b e a n s (m il. bu.) W h e a t (m il. bu.) R ic e (ro u g h e q u iv a le n t, m il. c w t) C o tto n (th o u , b a le s ) O c t. Nov. D ec. A v e ra g e Y e a r-T o -D a te 1 9 83 1983 1983 fo r 1 9 8 2 1983 155.6 67.6 123.9 6.5 274.0 197.2 69.2 107.3 5.4 462.0 176.2 74.5 131.5 5.0 663.0 161.2 78.0 130.1 6.3 532.7 0.9 -1 7 .3 46.2 20.8 67.8 $5,263 1,091 $5,103 932 $5,362 1,048 $6,187 1,281 -2 9 .0 -3 2 .3 5,647 888 5,600 857 6,256 5,848 907 6.7 11.3 Receipts3 C R O P S (m illio n s o f d o lla rs ) U n ite d S ta te s D is t r ic t (s e v e n -s ta te to ta l) L IV E S T O C K ( m illio n s o f d o lla rs ) U n ite d S ta te s D is t r ic t (s e v e n -s ta te to ta l) 1,011 3 EIGHTH DISTRICT AGRICULTURAL DATA Marketing Year Crop Production4 1980/81 1981/82 1982/83 C O R N (O c to b e r 1 - S e p te m b e r 30) A c re s p la n te d (m il. a c re s ) P ro d u c tio n (b il. bu.) Y ie ld (b u . p e r a cre ) E n d in g s to c k s (b il. bu.) 84.0 6,644.8 91.0 2,774.2 84.2 8,201.6 109.9 3,904.1 81.8 8,359.4 114.5 4,962.3 S O Y B E A N S (S e p te m b e r 1 - A u g u s t 31) A c re s p la n te d (m il. a c re s ) P r o d u c tio n (b il. bu.) Y ie ld (bu. p e r a c re ) E n d in g s to c k s (b il. bu.) 70.0 1,792.1 26.4 679.4 67.8 2,000.2 30.1 652.2 71.5 2,229.5 31.9 857.0 W H E A T (J u n e 1 - M a y 31) A c re s p la n te d (m il. a c re s ) P ro d u c tio n (b il. bu.) Y ie ld (bu. p e r a cre ) E n d in g s to c k s (b il. b u.) 80.6 2,374.3 33.4 988.8 88.9 2,798.7 34.5 1,163.9 87.4 2,812.3 35.6 1,540.7 R IC E (A u g u s t 1 - J u ly 31) A c re s p la n te d (m il. a c re s ) P ro d u c tio n (m il. c w t.) Y ie ld (c w t. p e r a c re ) E n d in g s to c k s (m il. c w t.) 3.4 146.2 44.1 16.5 3.8 182.7 48.2 48.9 3.3 153.6 47.1 66.6 14.5 11.1 0.8 2.7 14.3 15.6 1.1 6.6 11.3 12.0 1.2 7.9 C O T T O N (A u g u s t 1 - J u ly 31) A c re s p la n te d (m il. a c re s ) P r o d u c tio n (m il. b a le s ) Y ie ld (n e t b a le s p e r a c re ) E n d in g s to c k s (m il. b a le s ) 1 The consumer price index and its components are seasonally adjusted. All other data are not seasonally adjusted. 2 Percent change from December 1983, based on the most recent month available. 3 Data for receipts are seasonally adjusted. 4 Annual data for crops are based on each crop’s marketing year. SOURCE: Crop Production, Statistical Reporting Service, Crop Reporting Board, USDA.
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