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March 17, 2018

WGCIT SPONSOR: Farm Credit: Ag-Specific Lending for a Century

For the past 100 years, in one iteration or another, the federally-established Farm Credit System has been serving the nation’s farmers and ranchers. There have been changes to the program over the years but the basic concept has remained.

Leili Ghazi, who is the western regional president for CoBank, recently explained the evolution of the system to Western Grower & Shipper and also discussed the group’s involvement as a sponsor in the Western Growers Center for Innovation & Technology (WGCIT). The Farm Credit System was established in 1916 specifically to create a nationwide lending system for rural America. There were 12 districts scattered throughout the country and hundreds of associations operating independently. A big change occurred in 1971 when the system banks became cooperatives with each association being owned by its customers.

The Agricultural Credit Act of 1987 was designed to shore up the system amid a farm financial crisis. A new funding mechanism utilizing bonds was established under the direction of the Farm Credit System Financial Assistance Corporation. There were also structural changes mandated, which included district Farm Credit Banks and the establishment of the Agricultural Credit Association, which was the precursor to CoBank. At the time there were 12 Farm Credit Banks, which began to consolidate for efficiency sake. Today CoBank is a national cooperative bank in the Farm Credit System serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. It operates three regional centers with Ghazi stationed in Sacramento and serving the western region as president, which includes 10 of the CoBank Districts 22 Farm Credit Associations.

She noted that while the bank operates much like any other banking institutions, it is not a deposit-taking group. Its funding continues to be provided by the issuance of bonds through the Farm Credit Bank Funding Corporation. CoBank then distributes these funds as loans to rural America through the Farm Credit Associations, which still operate independently, each run by its own board.

The Farm Credit Association system competes with commercial banks but Ghazi said it also works with these banks to supply funding for producers across the country. The loan calculations with regard to the ability to qualify for a loan are similar regardless of the banking institution that you use, but Ghazi said the Farm Credit System is “mission-based to specifically serve farmers and ranchers through good times and bad times.”  She added that like any other financial service, the loan determination is guided by sound financial principles, but underwriters at Farm Credit have a depth of knowledge of the ups and downs of agriculture that a commercial lender might not have. “When things go sideways, you (the borrower) are working with people that understand your business.”

For example, she said the dairy industry is an agricultural sector currently going through very difficult times, “but we are still working with that group. We look at it differently. We definitely take a long term view.”

Analyzing the current lending situation for their rural customers, Ghazi said the western region, because of its crop diversity, is in much better shape than the middle of the country, where commodity prices are low. “California is a very diverse environment. We are not under the same pain and pressure points that are being experienced elsewhere. On-farm income has dropped 50 percent for most of the country,” she said, noting that is not the case in California.

Consequently, Ghazi said the borrowing situation in the West is very good. She did add, however, that interest rates do appear as if they will continue to rise. “Folks have been so used to these historically low interest rates and that is changing. We think there may be three more increases this year.”

Ghazi said it is still an opportune time to lock in good rates. She said loan lengths vary for as long as 30 years on the mortgage on a house on a ranch to single season operating loans. But she said one to five year loans are the average.

While the farming sector nationwide is in an economic downturn, Ghazi said CoBank and the Farm Credit System is in excellent financial shape. “Have we (the agricultural sector) hit the bottom? We hope so. Commodity pricing has been soft. Unless something changes such as a new use for corn, we don’t see a big uptick coming. Specialty crops, on the other hand, are doing okay. California is doing well,” she reiterated.

Speaking of the involvement with WGCIT, Ghazi said the association’s technology effort is right in step with CoBank and the Farm Credit System’s mission. “We were established for the betterment of rural communities, which includes all types of rural infrastructure. This was a perfect match for us. We want to be a catalyst for rural development and a partner with the rural community.”

She added that the sponsorship was not judged by its potential return on investment (ROI). “We didn’t look at it as an ROI. It was just the right thing to do. At the end of the day, we want a strong rural economy and we do everything we can to support rural America.”