The Farm Credit Administration is quietly promoting a policy change that will let its lenders compete in the same geographic markets. Community bankers oppose the measure, arguing it will put them at a disadvantage when competing for agriculture loans.

The Farm Credit Administration regulates the nation's 205 Farm Credit System lenders. Those lenders, which use government-backed funds to make loans to farmers and agribusinesses, are limited to operating in specific areas.

Under the change, system lenders may apply for permission to enter one another's markets.

The Farm Credit Administration's board changed its policy in July but has not previously discussed its new position publicly or with its members. Spokeswoman Christine Quinn said the board's goal is to encourage consolidation and competition among Farm Credit lenders.

Unrestricted internal competition "is beneficial for the customer and the long-term relevancy of the Farm Credit System," she said.

Agricultural bankers disagree. They say they face enough competition from Farm Credit lenders, which generally pay less for funds and can offer lower interest rates than commercial banks.

"They're in a predatory pricing mode," complained Jess G. Foster, president and chief executive officer of $190 million-asset Inland Empire Bank, Hermiston, Ore. "The Farm Credit System goes beyond what is fair when they undercut on price."

Mark Scanlan, the Independent Bankers Association of America's agricultural lobbyist, described the Farm Credit Administration's proposal as "radical."

"There is potential for more competition from big Farm Credit System associations that want to skim off the best loans," Mr. Scanlan said. "That brings up serious safety-and-soundness questions and may lead to interest rate wars."

Bert Ely, principal of Ely & Co. of Arlington, Va., is a noted critic of the Farm Credit System. He predicts the new policy will lead to consolidation among the system's lenders, leaving only a handful of big associations competing for borrowers.

"It will unleash on rural America a few large, aggressive, taxpayer- subsidized rural lenders," he wrote in a recent newsletter sponsored by the American Bankers Association.

Until members submit expansion applications, Ms. Quinn said, any discussions about the impact on commercial banks are "purely hypothetical."

Marsha Pyle Martin, the Farm Credit Association's chairman and chief executive, is set to address members at a forum in Fargo, N.D., this month.

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