When the federal government created a national group of lenders in 1916 to help U.S. farmers, there was no Cracker Barrel restaurant, no Verizon Communications, no Kluge Estate Winery and nary a car wash in sight. U.S. Cellular was not a blip on the horizon.
A century later, those are just a few of the recipients of cash from the Farm Credit System, a network of banks that was designed to help rural America. Critics charge the cooperative is making some loans that have almost nothing to do with farming.
“They are giving a loan to Cracker Barrel,” said Steve Daggett, chief executive of a small community bank in Minnesota that competes with Farm Credit. “Does anybody really think when Congress set up Farm Credit, it was to make loans to Cracker Barrel?”
Farm Credit has blossomed into a nationwide network of banks with $303 billion in assets and 14,000 employees. Its loans include farmland mortgages, harvest equipment and telephone systems.
Farm Credit and the tax break it receives on its mortgage loan interest has become the target of the private banking industry, whose members say the government-sanctioned rival has crept outside its scope by providing loans for vacation homes, restaurants, car washes and even casinos.
It is also squeezing community banks, the once-lucrative institutions that have seen profits pressured by regulations since the 2008 financial crisis. Community banks want Farm Credit reined in.
Farm Credit’s defenders say it should be judged on its wider accomplishments and not on a few loans cited by critics.
“The mission of the Farm Credit System is much broader than financing production agriculture, just as the future of our rural communities depends on more than agriculture,” said Bob Engel, chief executive of CoBank, one of the biggest banks in the system. “Farmers and ranchers across the country rely heavily on Farm Credit in their business operations, but so do many other businesses that deliver vital services to rural communities.”
As of the end of last year, Farm Credit banks had a loan portfolio of $236 billion, two thirds of which — $157 billion — was money loaned directly to farmers. The rest was various loans to finance rural infrastructure such as power and water, real estate, exports and others loans.
If it were a single bank, it would be the ninth largest financial institution — measured by assets — in the United States.
Armed with a 24-page research paper, the American Bankers Association is calling on the federal government to reduce or eliminate Farm Credit banks’ tax exemption and to narrow the definition of its loans to hew closer to agriculture.
“Farm Credit needs to focus on farmers, and its regulators need to make sure Farm Credit is doing its job,” said Ed Elfmann, vice president at the American Bankers Association.
Congress established the Farm Credit System as a government-sponsored enterprise when it enacted the Federal Farm Loan Act of 1916. In the years since, Congress gradually expanded the system’s portfolio to include businesses related to agriculture, including vehicles, grain elevators and processing plants, and rural infrastructure such as power generators, water systems and telecommunications.
Many of the foods on dinner tables across the United States have benefited from Farm Credit. Land O’Lakes butter, Sunkist oranges, Blue Diamond almonds, even Welch’s grape juice are all food co-operatives financed by Farm Credit.
Farm Credit doesn’t dispute that some of its recipients are not directly related to the farm. But the institution argues that farmers benefit from its loans directly and indirectly.
One of those credits, a $725 million loan to Verizon from a variety of banks, is often cited as being beyond the scope of Farm Credit.
“Does anybody in their right mind think Verizon is a rural co-op,” asked Daggett, the Minnesota banker.
Proponents of Farm Credit point out that communications firms large and small, including Verizon and Frontier, provide land-line voice service, Internet, wireless and other services to rural areas. CoBank said it was actually invited into the deal by the commercial banking industry, with more than 20 U.S. and international banks participating in the loan.
“It is unfortunate that trade associations for the banking industry often ignore the extremely positive and long-standing working relationship that Farm Credit has with commercial banks when they are lobbying Congress or communicating with their members,” said CoBank’s Engel.
To spur loans for farmers who could not get bank credit, the federal government gave Farm Credit banks an exemption on the interest they earn on mortgage loans. Community banks said that puts them at a disadvantage: The interest on other loans is taxed at the federal corporate rate of 28.5 percent.
“We pay a 38.5 percent tax rate in Kansas,” said Leonard Wolfe, president and largest shareholder of United Bank & Trust of Marysville, Kan., a $600 million community bank that goes head-to-head with Farm Credit. “That’s federal and state. They pay neither of those taxes. We work through the first week of July just to pay our tax bill. That is a huge advantage for them. It’s not fair that our third largest expense at a bank is something they really don’t have.”
In 2012, according to the ABA research paper, Farm Credit banks saved about $600 million in taxes out of the $4 billion in earnings as a result of the exemption.
The income earned by the 80 or so Farm Credit banks goes a couple of places. It is either plowed back into the institution or paid to loan customers in the form of a dividend, just like any other cooperative.
Wolfe said his bank will make loans as small as $20,000, while Farm Credit competitors will not make loans less than $1 million.
“They only compete on the big end,” he said.
As a rancher and a banker, John Gross of Wyoming sees both sides of the Farm Credit controversy.
In his role as a fifth-generation cattle rancher, Gross borrows from Farm Credit banks “all the time” because of their favorable interest rates. As chairman of Farmers State Bank in Pine Bluffs, he competes with Farm Credit, which he said he finds discouraging because “those guys don’t pay the taxes the bankers do.”
Farm Credit said the bankers’ gripes are nothing new.
“For 100 years bankers have been trying to put us out of business so they can have the market to themselves,” said Todd Van Hoose, chief executive of the Farm Credit Council, the organization’s lobbying arm.
And for 100 years, the bankers have not succeeded.
But a new assault has started. At a December House Agriculture hearing, Rep. Scott DesJarlais (R-Tenn.) expressed concern “about expansion beyond the charter like a loan for a car wash, a vacation home on the Gulf Coast for a farmer, a loan to acquire an exotic hobby farm, and even one for a local restaurant chain.”
One example, according to the ABA, is a Farm Credit bank’s financing in 2012 of a 6,500-square-foot home, situated on 55 acres in the Black Hills of South Dakota. The home, which was purchased by a television producer in California, had a copper fireplace, gourmet kitchen, guest house and equestrian center.
Unfortunately for the lender, the house ended up in foreclosure.