The banking industry's biggest trade groups are preparing independent assaults on the Farm Credit System.
The American Bankers Association and the Independent Community Bankers of America have created task forces to push for reforming the national network of borrower-owned lending organizations. Ongoing talks in Washington about changing the tax code and overhauling Fannie Mae and Freddie Mac have given the groups hope that the time is right for change.
"As a lender, you get tired of competing against Farm Credit knowing they have a big tax advantage," says Kreg Denton, a senior vice president at First Community Bank of Western Kentucky in Clinton. "I don't think Farm Credit is evil. I just think it's time to sit down and see what we can do to make it fair."
Bankers have long complained about the Farm Credit System but they are getting more vocal. Low interest rates have tightened margins, making it more difficult for banks to make money. Bankers are also concerned about the government-sponsored enterprise's growing size. Farm Credit lenders' assets have increased roughly 77% since 2005, to $248 billion, according to the American Bankers Association.
Many bankers compare concerns about Farm Credit to their ongoing fight with credit unions, which are exempt from federal taxes. Farm Credit paid less than 6% in taxes on about $4 billion of profit last year, says John Blanchfield, senior vice president of agricultural and rural banking at the ABA. As a GSE, Farm Credit is also able to borrow funds at low rates.
"Farm Credit has emerged as a very healthy, complex profitable financial institution," Blanchfield says. "When is the government's obligation to the Farm Credit System over?"
The ABA began thinking about ramping up pressure on Farm Credit after the Senate finance committee said it would review rewriting tax laws, Blanchfield says. Congress is also considering how to reform Fannie and Freddie. The ABA figured that making changes to Farm Credit should be a part of those conversations.
Last month, the ABA said it would form an agricultural credit task force that includes representatives from seven banks and three state associations. Though the task force tackles policies that affect agricultural banks, its first meeting focused on Farm Credit.
Denton says he joined the task force because he thought the general public should be made more aware about Farm Credit's unfair advantages. First Community, a unit of First Trust Financial, lends to farmers of grain crops, tobacco, livestock and poultry. The $120 million-asset bank competes with Farm Credit often on deals with borrowers who aren't already customers.
Denton says bankers have paid more attention to Farm Credit since it increased its client base. As a result, more bankers are running into Farm Credit, he says.
In 2008, the Farm Credit Administration, the GSE's regulator, launched a pilot program that let these institutions invest in businesses such as rural hospitals and fairgrounds, which they can't legally lend to. The investments are often issued as privately held bonds. Traditionally, Farm Credit has provided credit to farmers, ranchers and rural utilities.
"Normally community banks understand they can't get all of the loans out there so they're fine as long as everyone stays in their separate corners," says Philip Smith, president of Gerrish McCreary Smith Consultants. "If other institutions want to continue to expand their powers... then there will begin to be a groundswell of more community banks realizing their territory is being impeded upon."
The ICBA, which formed its task force in August, is working to draw attention to $725 million in financing that CoBank, a $93 billion-asset Farm Credit lender, provided to Verizon Communications so it could buy out Vodafone's 45% stake of Verizon Wireless.
In a letter to the Farm Credit Administration, Camden Fine, the ICBA's president and CEO, claimed that Farm Credit institutions are unauthorized to provide "credit to large, multinational, non-agricultural corporations."
"Ultimately, our goal is to make Farm Credit stick to their farm loans," says Mark Scanlan, the ICBA's senior vice president of agriculture and rural policy. "That's the reason why they were created."
CoBank, which declined to comment on an individual transaction, said all of its borrowers are eligible for financing. It works with a variety of rural communication companies, the institution said in a statement. "The communications landscape continues to evolve rapidly, and there is a great deal of interdependence among companies to deliver modern communications services to rural communities," CoBank said.
The Farm Credit Administration did not comment.
Congress has expanded Farm Credit's authority over the years to meet additional needs for credit in rural America, says Ken Auer, president and CEO of the Farm Credit Council. CoBank's actions fall within that authority, he says.
Community banks have "far more backing than Farm Credit" through deposit insurance, an ability to "borrow at the Fed window" and implementation of the Troubled Asset Relief Program, Auer says. Banks are also thriving in this area, he adds.
Bank financing to the farming sector rose 17% last year, compared to 2009. Banks accounting for about 40% of all farm financing last year, according to the Department of Agriculture. In comparison, about 41% of 2012 farm financing came from Farm Credit. Total farm finance tied to the GSE rose 13% in 2012 compared to 2009.
"If we formed a task force to improve agricultural lending, our focus would be on how to improve the experience and availability of credit to farmers," Auer says. Banking trade groups "seem to be focused on improving the profitability of commercial banks."
Scanlan says such criticism is a misrepresentation, noting that the Farm Credit Council has formed its own internal working group to find ways to expand the GSEs lending capabilities.
The ABA and the ICBA face challenges achieving their goals. Congress is likely to prioritize reforming Fannie and Freddie over addressing Farm Credit, says Alex Pollock, a resident fellow at the American Enterprise Institute.
"It is a good time for reform but my guess it would be rather difficult," Pollock says. "It usually takes a crisis to get changes done and they don't have a crisis yet."
Still, a crisis could be brewing. Some industry experts have warned about a possible ag bubble given a spike in the price of farmland. Even if a bubble bursts, there are no guarantees for reform, Pollock says.
Removing government intervention could make the sector more stable, says Daniel Sumner, director of the Agricultural Issues Center at the University of California-Davis. "It seems clear from the evidence that, in 21st century American agriculture, there is no longer any economic rationale for government support for one agricultural lender over the others," Sumner says.
"It is past time for the Farm Credit System to become fully privatized and sever all ties to any special responsibilities, constraints or governmental support," Sumner says. "The result will be an agricultural lending system more connected to the economic realities of agriculture and less tied to political pressure."