Farm Credit lenders and the banking industry have vastly different interpretations of a rule change that would give the Farm Credit System more authority to lend to processing firms, such as those that press apples into apple juice or turn corn into ethanol.
The government-sponsored Farm Credit lenders' take is that the change, approved by their regulator Thursday, merely will give more flexibility to a "rigid" rule that has prevented them from retaining processors as customers as their ownership structures have changed. But banking industry officials say that it will be a massive departure from the system's core mission of lending to farmers, and that it could cut banks out of the business of lending to the ethanol plants sprouting up across rural America.
The new rule is slated to take effect next month, and even though banks are in no position to block it, their trade groups intend to ask Congress to look into whether it goes beyond Farm Credit lenders' mission.
Mark K. Scanlan, the Independent Community Bankers of America's director of agricultural and rural policy, said the language is so vague it could mean that even large agribusinesses, such as Archer-Daniels-Midland Co., might qualify for Farm Credit System loans.
"It might be intended for farmers and their sons, but could be used by corporations what their subsidiaries," Mr. Scanlan said Friday. "Because of the wording, it can be taken much broader than its stated intent."
The new rule also will apply to agricultural marketing firms, such as those that market farm products to grocery chains.
Under the current rule, a farm processing or marketing company can receive Farm Credit System financing only if it as at least 50% farmer-owned.
The new rule, proposed in October 2006 by the Farm Credit Administration, will add three criteria for determining eligibility for a Farm Credit System loan.
The first says that a processing or marketing company can get a loan if eligible borrowers — farmers — supply it with some product and have majority voting control over it. The second drops the farmer ownership minimum to 25% if a farmer supplies the company with at least 20% of its raw product and serves on its board. The third allows a company to get loans if its marketing or production is a direct extension of a farm, but with separate ownership.
According to the regulator, the change will help Farm Credit lenders serve their customers through the vertical integration of their raw material to value-added products.
The change also is designed to address lending to farmer families as the next generation takes the reins, said Ken Auer, the president of the Farm Credit Council, a trade group that represents the nation's roughly 100 Farm Credit lenders. For instance, if a farmer owns an apple orchard and the pressing plant but splits the two companies among his children, the new rule will give the pressing plant access to Farm Credit loans, because it is a direct extension of the family business.
"It modernizes the process," Mr. Auer said. "But it doesn't do a whole lot and would only matter in some very narrow circumstances."
In the 76-page detail of the ruling, the regulator said that even though the change could expand the pool of eligibility, the criteria "properly ensure that there is a sufficiently strong economic link" between farmers and the processing and marketing firms.
But John Blanchfield, director of the American Bankers Association's Center for Agriculture and Rural Banking, said that there is no clear language that defines "sufficiently strong" in the new rule.
"The rule becomes totally subjective and obtuse," he said.
The banking industry has long argued that the Farm Credit lenders use their federal tax exemption to undercut banks on rates, and it opposes any effort to broaden their lending authority.
As Mr. Blanchfield sees it, an investor-owned ethanol plant that buys corn from particular farmers could be eligible for Farm Credit financing, even if the farmers have no ownership stake.
"I see it as a way to allow Farm Credit to lend money to any business that processes or markets agricultural products, regardless of the ownership," he said. Bankers are in danger of being "cut out of the equation."
