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Subsidized Credit in U.S. Agriculture. Chapter 16 By: Chris Hampton Adam Tipton. Introduction. Many farmers have long argued that credit for agriculture has not been met by conventional financial institutions.

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Subsidized Credit in U.S. Agriculture

Chapter 16

By: Chris Hampton

Adam Tipton


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Introduction

  • Many farmers have long argued that credit for agriculture has not been met by conventional financial institutions.

  • Private lending procedures, sources of funds, and loan terms are not beneficial to the needs of agriculture.


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History

  • Government began to make direct loans to farmers for short term credit requirements in the 1920’s.

  • In the 1930’s FCS, FmHA, REA, and CCC were created.

  • All of these agencies continue to operate although the names and scope of work have changed over time.


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Farm Credit System

  • Long Term FCS loans are made to farmers, corporations producing farm products, agribusinesses, and rural homeowners.

  • Loans can be used to acquire land, equipment, and livestock or to refinance existing debt.

  • The largest holders of farm real estate debt are the FCS and commercial banks.


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Farm Credit System

  • Short and intermediate term FCS loans can be used for the production of farm products, aquatic products, and purchase or repair of rural homes.

  • FCS holds 20% of non real estate farm debt.


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Government-Sponsored Enterprise

  • Farm Credit began as a government sponsored cooperative effort to provide a system through which farmers could provide their own credit.

  • FCS is now self-supporting.

  • As a GSE , FCS can borrow money from the US Treasury cheaper than commercial banks.

  • In turn, FCS can usually loan out money cheaper than commercial banks.


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FCS Independence

  • FCS became wholly user owned when the last government loan was repaid in 1968.

  • In 1985 FCS lost $2.7 billion through mortgage and loan defaults.

  • Several of the FCS banks had become insolvent and Congress responded with a Federal bailout.

  • Now FCS is run by the Farm Credit Administration which is an agency of the U.S. Executive Branch.


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USDA

  • USDA has a number of credit programs for ag and rural areas.

  • FSA is the direct lending arm in agriculture.

  • Rural Development is the direct lending agency for rural programs.


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FmHA

  • Farmers Home Administration was created to implement all direct lending, loan insurance, and grant programs for low income farmers.

  • FmHA was abolished in 1994 and its farm credit programs were transferred to the newly created FSA.


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Farm Service Agency

  • Lender of last resort to farmers.

  • Loans are for farmers who can not get credit with commercial banks or FCS.

  • FSA makes farm ownership loans, operating loans, and emergency loans.


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Farm Service Agency

  • Emergency loans are made only to counties designated as a disaster area.

  • Interest rates on FSA loans are significantly lower than those of commercial banks.

  • FSA held 4.1% of total US farm business debt in 2000.

  • Because of their risky loans, many FSA loans result in default.


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Rural Development

  • Rural Development includes the Rural Housing Service, Rural Business Cooperative Service, and Rural Utilities Service.

  • Direct loans, loan guarantees, and rental assistance are available to low income people in rural areas which include cities with populations up to 50,000.


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Rural Development

  • The Rural Business-Cooperative Service administers the business assistance programs.

  • Grants are made to non profits and public bodies for business development.

  • Large loan guarantees are also available to businesses.


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Rural Development

  • Rural Utilities Service provides large loans and grants for electricity, water, and sewer.

  • Assistance is available to public bodies and utility districts for expanded utility programs.


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Commodity Credit Corporation

  • Farmers would pledge a quantity of a commodity as collateral and obtain a recourse loan from the CCC.

  • Farmers can either repay the loan with interest within a period of time or they must forfeit their commodity to the CCC.


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Effects of Subsidized Credit

  • Immediate effects are to reduce interest rates and to increase the amount of credit used in agriculture.

  • This contributes to increased production and larger, more highly mechanized farms.

  • It is harmful to nonusers because it increases output and decreases product prices.


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Problems with Subsidized Credit

  • Moral Hazards

  • Government restrictions reduced diversification in bank loan portfolios, thereby increasing risk and likelihood of bank failure.

  • These instances have made it difficult to make a case for subsidized credit to agriculture.