Don't get Dennis Utter started about the difficulties of competing against Farm Credit System lenders. The Nebraska banker has lost three of his best customers to Farm Credit in the past two years after lenders from the quasi-government agency allegedly underpriced his bank on loans to farmers.

"They want the really good customers, and they use predatory pricing to get them," says Mr. Utter, president of the $50 million-asset Adams County Bank.

Mr. Utter is one of a growing number of bankers complaining about what they view as unfair competition from the system of banks created the federal goverment in 1933 to ensure that farmers would have more than one source for a loan.

Bankers say the system is able to offer lower interest rates on loans because it does not pay income taxes and has cheaper access to funds than commercial banks.

Now bankers and industry experts are calling for Congress to intervene and prohibit Farm Credit lenders from underpricing banks or at least give bankers access to the same low-cost funding sources.

Still, some bankers are not waiting for lawmakers to help them. They are coming up with creative business solutions, some of which other banks might do well to consider.

For example, many banks find that emphasizing their full line of products and services can sometimes keep a customer from jumping to Farm Credit for a lower interest rate.

Citizens State Bank in Loyal, Wis., stresses that it offers estate planning, farm expansion planning, and brokerage services to its customers while the Farm Credit System can only offer loans.

"We're trying to bring more to the table than a low interest rate," says Gary Weirauch, president of the $68 million-asset bank.

Citizens also offers risk management classes to its farm borrowers, almost all of whom are dairy farmers, as well as a conference on trends in the dairy industry.

"They are things we do to keep our name in the forefront," Mr. Weirauch says.

About 25 other banks have decided that if they cannot beat the Farm Credit System on price, they may as well join it.

The banks, including Bank of Whitman in Colfax, Wash., have formed "other financial institution" subsidiaries - known as OFIs - allowing them to borrow less-expensive funds directly from the Farm Credit System.

James H. Tribbett, chief executive officer of $105 million-asset Bank of Whitman, says the OFI gives the bank another source of funding for loans besides deposits and advances from the Federal Home Loan Bank of Seattle.

Mr. Tribbett says he was pleased with his two-year-old partnership with the Farm Credit System, but there is room for improvement. He would like Farm Credit to be structured like the Federal Home Loan banks, giving agricultural banks indirect access to the capital markets.

"This could become a best practice for rural development," he says.

For the Farm Credit System, it is a far cry since 1987, when U.S. taxpayers saved it from failure at a cost of $1.26 billion. During the first three quarters of 1998, the system's assets grew by 5% to $81.9 billion. Its combined loan portfolio grew by 8.1% between yearend 1996 and Sept. 30, 1998, reaching $64.2 billion.

"We're seeing some loan growth that's pretty aggressive," says Bert Ely, a consultant and critic of the Farm Credit System. Many of Farm Credit's new loans have come from the Midwest and West, where bankers complain most about unfair competition, said Mr. Ely.

But the system's top regulator points out that it is doing what it was designed to do: drive down the price of credit for rural borrowers.

"Competition is healthy and it's needed," says Marsha Pyle Martin, chief executive officer of the Farm Credit Administration. "Farmers and ranchers need a choice."

Ms. Martin is also a proponent of a rule adopted last year that allows the Farm Credit System to lend to businesses that serve agriculture - not just to individual farmers.

That rule was challenged in court by the American Bankers Association and the Independent Bankers Association of America. The bank trade groups argued that commercial loans were not within the Farm Credit System's original mandate, but a federal appeals court ruled in January that the system can lend to related businesses.

To say bankers are frustrated with Farm Credit's expansion is an understatement. The Farm Credit Administration received 25 letters complaining about unfair competition from bankers in 1998 - more letters than it received in the previous eight years combined.

In an October letter, Michael D. Edelman, chief executive officer of First National Bank, a $119 million-asset bank in Ogallala, Neb., cited specific examples of unfair competition. A Farm Credit lender was offering 15-year fixed-rate loans at 75 to 100 basis points below the lowest rates at First National, says Mr. Edelman. Those low loan rates have cost Mr. Edelman several customers, including one that took a loan from Farm Credit to expand its feedlot operation.

"We as taxpayers don't need to be subsidizing loans at 6.35%," he says. "It's hard enough for us to compete."

The administration did investigate the lending practices at the office Mr. Edelman complained about, according to a letter he received from Ms. Martin in December. The agency's study, however, found no evidence of wrongdoing.

In an interview, Ms. Martin said the Farm Credit Administration has disciplined only one lender since 1987 for pricing its loans too low. In that case, she said, regulators were concerned that the bank was not earning enough income on its loans to keep its capital at an acceptable level.

Ms. Martin also noted that many of the 25 letters received in 1998 were form letters completed by bankers. Still, the Farm Credit Administration investigates all complaints, she said.

Mr. Tribbett's suggestion for restructuring the Farm Credit System is one of several scenarios that bankers have been advocating to make competition between banks and Farm Credit lenders more equitable.

Many bankers want Congress simply to privatize the Farm Credit System so those lenders are subject to the same taxes and have the same funding sources as commercial banks.

Mr. Ely, the Farm Credit critic, said Congress should establish a system under which individual Farm Credit banks would choose whether to privatize, similar to the way a mutually owned thrift elects to convert to a stock company.

But Ms. Martin warned bankers that they should be careful what they ask for. A privatized Farm Credit System bank would go beyond competing just for loans.

"I'm not sure the banking industry wants someone to compete with for deposits and fee income," she says.

Bankers say they would not mind competing with a privatized Farm Credit System, however.

With more credit card companies and seed and equipment manufacturers offering credit to bank customers each week, adding another private lender to the mix would not matter, they said.

"We have all of the players in the financial services industry in our market already," says Mr. Utter of Adams County Bank, "I do not fear competition, I fear unfair competition." n

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