Financing and Credit Laws in Agriculture
To support an agricultural operation, producers often need infusions of capital. They can pursue funds through banks or insurance companies, like other businesses, or they can get assistance from the Farm Service Agency or the Farm Credit System. These federal programs are designed to support farmers and cooperatives.
The Farm Service Agency, which is part of the US Department of Agriculture, manages federal loan programs for agricultural producers who cannot get loans from banks or insurers at reasonable rates. Farmers who are just starting their operations may need these loans. The Farm Service Agency provides direct loans as well as a guaranteed loan program. Types of direct loans include:
- Farm ownership loans: these are used for purposes such as buying land or constructing or repairing buildings
- Operating loans: these are used for purposes such as buying livestock, seeds, equipment, fertilizers, pesticides, and insurance
- Emergency loans: these are used to repair damage caused by natural disasters
A guaranteed loan builds on a commercial loan, guaranteeing up to 95 percent of the losses on that loan. These may be available for either farm ownership or operating loans, which cover largely similar purposes to the farm ownership and operating loans available directly from the Farm Service Agency.
How the Farm Credit System Works
Agricultural activities involve a certain level of risk, which can make lenders reluctant to work with farmers. Through the federal Farm Loan Act of 1916, Congress created the Farm Credit System. This is a government-sponsored enterprise that is managed by the Farm Credit Administration (FCA). Within the Farm Credit System, federally chartered banks and associations issue loans to producers and cooperatives. Among these institutions are Farm Credit Banks and an Agricultural Credit Bank, which supply funds for loans to Agricultural Credit Associations and independent Federal Land Credit Associations. The Agricultural Credit Bank also serves functions formerly served by obsolete Banks for Cooperatives. These include providing loans to farmer-owned cooperatives and financing agricultural exports.
Agricultural Credit Associations distribute funds from a Farm Credit Bank or Agricultural Credit Bank as short-term, intermediate-term, and long-term credit for agricultural producers. These institutions also provide loans to producers to finance their processing and marketing activities. Within ACAs are Production Credit Associations and Federal Land Credit Associations. Production Credit Associations initially were independent associations handling short-term and intermediate-term loans, but they eventually turned into wholly owned ACA subsidiaries for tax reasons. Meanwhile, Federal Land Credit Associations handle long-term mortgage loans for farmers and ranchers. While most FLCAs are now wholly owned ACA subsidiaries, a few FLCAs remain independent. They are descended from institutions known as Federal Land Bank Associations, but they differ from those institutions in owning their loan assets.
Two other financial institutions complement the banks and associations in the Farm Credit System. These are the Federal Agricultural Mortgage Corporation and the Federal Farm Credit Banks Funding Corporation. Often known as Farmer Mac, the Federal Agricultural Mortgage Corporation creates a secondary market for agricultural loans. Meanwhile, the Federal Farm Credit Banks Funding Corporation issues Farm Credit Debt Securities (bonds and notes) on behalf of the Farm Credit Banks and the Agricultural Credit Bank.
