The troubled Farm Credit System, which holds about a third of the nation's agricultural debt, will need "billions of dollars" of federal aid within the next two years because of the slumping farm economy, its chief government overseer said yesterday.
Donald E. Wilkinson, governor of the Farm Credit Administration, the federal regulator of the farmer-owned system, said that his agency will seek new enforcement powers and has already begun discussions on how federal aid might best be provided to keep the FCS solvent.
Wilkinson estimated that any package "will require multibillions of dollars." Any more specific figure would depend on the extent of the deterioration of the farm economy in the following months and the form of the aid package, which Wilkinson said could be anything from federal guarantees to direct subsidies.
The system, which makes loans for farming and for rural housing, was formed as the Federal Land Bank after World War I, and was expanded into its current form during the administration of Franklin D. Roosevelt.
Except for its initial federal seed money, it required no federal help until now, even during the Great Depression. But the deteriorating farm economy and falling land values have led to an increasing number of bad loans and a growing crisis among many of the system's 37 banks.
Although the Reagan administration has insisted that the FCS must exhaust its own resources before seeking government help, federal officials for weeks have been reviewing possible approaches to helping the system.
And farm-state legislators have warned for months that some kind of aid to the huge borrower-owned farm lending system might be required as the farm economy continued to falter and the farm credit crisis intensified. A House Agriculture subcommittee has scheduled hearings for next week.
Until his public statement yesterday, Wilkinson and other FCS officials had maintained that the system, with $74 billion in outstanding debt, was strong enough to deal with its problems -- as long as the farm economy did not worsen.
Wilkinson said yesterday that the system remains "very solvent" but that new forecasts of bumper crops, lower prices and fewer exports, along with new FCS losses and continuing land deflation, have dramatically changed the picture. Unless there is a major turnaround, he said, "we expect assistance will be needed in 18 to 24 months."
"Our concern is with the safety and soundness of the institutions we regulate, the protection of those who invest in the securities sold to raise loan funds and with the credit-worthy borrowers who depend on the system as a source of reliable credit," Wilkinson said.
Many of the bonds sold by the FCS to finance its operations are held by banks and institutional investors. Until recent weeks, the FCS bonds, despite growing public awareness of the system's problems, have been marketed without difficulty.
Wilkinson said that if federal contingency aid is not forthcoming, the system would face the possibility of liquidating portions of the FCS, including some of its regional banks that provide land and farm-operating loan money to banks.
Farm Credit has 37 banks in a dozen districts, which obtain funds from the bond sales and then lend the money to the local land banks and production credit associations. The system's most troubled banks tend to be in the export-dependent grain belt of the Midwest and Plains, where land deflation and low prices have put thousands of farmers in economic trouble.
An estimated 15 percent of the FCS' debt is considered uncollectable, with the prospect of that figure rising because of low prices and declining farm sales.
The FCS' troubles have spilled into other farm-lending circles. As the FCS has refused to refinance many of its customers, new pressures have been placed on commercial banks and the Farmers Home Administration (FmHA), the other major agricultural lenders, for operating money.
The decision to seek federal help was made this week by the FCA's policy-making Federal Farm Credit Board, which directed Wilkinson to open talks with Congress and the administration on obtaining new regulatory powers and federal assistance. Possible approaches listed by Wilkinson included government guarantees on securities or individual farm loans, creation of a new organization to take over nonperforming loans and assets to stabilize collateral values, direct federal grants to the FCS or federal subsidization of lower interest rates.
The Farm Credit Board also approved emergency regulations that will allow the FCA to require sharing of losses among the FCS' member institutions, a step that would eliminate time-consuming negotiations now required to effect voluntary loss-sharing.
Within the last year, after considerable controversy, intermediate credit banks in Spokane, Wash., and Omaha have received infusions of capital from the system to cover losses.