Kansas wheat grower Larry Kepley doesn't see anything wrong with a little competition between commercial banks and the cooperatives of the government-sponsored Farm Credit System.

"We need both the cooperatives and private enterprise," he said. "If either one had all the business, it wouldn't be good for rural America."

Mr. Kepley's banker doesn't see it that way. "It's not competition," said Sam Forrer, president of Grant County Bank of Ulysses, Kan. "We don't play by the same rules. They don't have to pay taxes, they have fewer regulations."

This is not a new debate. Bankers have complained for years that the cooperative associations that belong to the 80-year-old Farm Credit System have an unfair edge in farm lending because they borrow on the federal government's credit rating.

But now the American Bankers Association and the Independent Bankers Association of America have adopted a new tactic: If you can't beat 'em, join 'em.

The two banking groups proposed to Congress this month that agriculture- oriented commercial banks be allowed to become members of the regional Farm Credit banks. This would give rural banks access to bond markets - and thus long-term capital - along the lines of the Federal Home Loan Bank System. Most farm-country banks can't join the Home Loan Bank System now because they don't make enough mortgage loans.

The problem is, the current members of the Farm Credit System don't want the banks to join. "Credit in rural America will not be enhanced by wrenching control of the Farm Credit System away from farmers and increasing the competitive advantage of commercial bankers," said Bill Weber, president of the Farm Credit Council, the credit system's trade association.

Bankers claim to be surprised by the negative reaction. "We think it's win-win for everybody concerned," said William McQuillan, president and chief executive officer of City National Bank in Greeley, Neb., and chairman of the IBAA's Agriculture-Rural America Committee. "The Farm Credit banks get to put out more credit, so this benefits them ... The commercial banks benefit because we get to pass on lower credit costs to our customers."

Peter Morrow, a former bank president whose Phoenix, Ariz., consulting firm advises agricultural borrowers, said farmers would benefit from the new arrangement. Why the opposition from the Farm Credit System, which is made up of farmers? "I look at this as a giant turf battle," he said.

With that in mind, members of the House and Senate agriculture committees who heard the presentations from the bankers' organizations have so far avoided jumping into the fray. "Several people said they were intrigued by it," said IBAA agriculture lobbyist Mark Scanlan. "People aren't to the point where they're willing to make commitments."

On the local level, commercial banks and the associations that belong to the Farm Credit banks often get along perfectly well. Mr. Kepley, the farmer, who is a director of the Garden City Federal Land Bank Association, said that when a farmer needs a long-term loan, the people at Grant County Bank "are in the habit of sending them to the Federal Land Bank and sometimes even calling up the loan officer there."

Grant County Bank also has set up an "other financial institution" that can borrow on a limited basis from the Farm Credit Bank of Wichita, but hasn't used it much in recent years. Other bankers say the OFIs usually have to pay higher interest rates and jump through more hoops than the association members of the Farm Credit banks.

Jerold Harris, president and chief executive officer of the Farm Credit Bank of Wichita, which serves Colorado, Kansas, Oklahoma, and New Mexico, said there is another way to help commercial banks make long-term loans short of letting them join the Farm Credit System - allow Farm Credit banks to buy whole loans from them. But Darcy Myers, vice president of Norwest Bank in Denver, said few bankers would take advantage of this. "Most banks wouldn't sell a whole loan, because they're selling their relationship to a customer," he said.

Mr. Harris said he doesn't think the Farm Credit System now holds any unfair advantages over commercial banks. The "dirt bonds" it issues may be implicitly guaranteed by the government - and in 1987 the system had to be bailed out by Congress - but banks have the explicit guarantee of the Federal Deposit Insurance Corp, he argued.

In any event, the tide appears to be with banks for the moment. As of Dec. 31, 1994, commercial banks held 40% of farm debt, according to estimates by the Department of Agriculture. The Farm Credit System held 24.5%. In 1984, commercial banks held 24.4% of farm debt and the Farm Credit System 33.4%.

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