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Frank Keating: Farm Credit System poses serious threat to taxpayers

Frank Keating

WASHINGTON—Problems are temporary, but government solutions are forever.

Look no further than the Farm Credit System. The very first government-sponsored enterprise — a forerunner of entities such as Fannie Mae and Freddie Mac — the FCS was founded to address a shortage of credit for farmers and ranchers. FCS institutions get special tax subsidies and Treasury backing in exchange for focusing on this mission.

The lack of credit was a real problem—a century ago. But times change.

Taxpaying banks, many of them small community banks, are doing their part to meet rural America's credit needs. Banks make nearly half of all U.S. farm loans — a total of $161 billion as of last year — a total that grew by more than 8 percent in 2014, according to recently released figures.

The Farm Credit System has changed, too. The FCS today is a $282 billion behemoth; if it were it a bank, it would be the nation's 13th largest bank holding company and would be subject to special regulation for the risk it could pose to the financial system.

And here's the worst part: Instead of focusing on America's young, beginning and small ag producers as it is required to do by law, the FCS is bulking up its profits with loans to massive companies and wealthy homeowners. In 2014, just 11 percent of FCS loans went to small farmers.

And instead of focusing on, well, the farm, the Farm Credit System has steadily expanded its portfolio to encompass lending far afield. One FCS lender has financed $1.5 billion in loans for big telecom companies such as Verizon and AT&T — including helping Verizon buy out a European cellular company for more than $725 million.

FCS institutions also lend heavily for luxury properties, such as wineries, golf courses and beach houses — often with little or no agricultural connection. For example, an FCS institution recently offered "financing for your place in the country" in an ad in "Garden & Gun," a luxury lifestyle publication targeting the wealthy.

And yet, while the FCS has changed, its special privileges haven't. Unlike Herald readers' hometown bank, FCS institutions pay no federal taxes on profits from agricultural real estate lending — resulting in an effective tax rate of just 3.9 percent, or less than $200 million, in 2014.

If the Farm Credit System had paid the same share of taxes banks did, its institutions would have contributed an additional $1.46 billion to the U.S. Treasury.

Meanwhile, in 2013, the FCS sought — and received — a $10 billion line of credit from the U.S. Treasury. This federal backstop calls to mind what happened to other government-sponsored enterprises such as Fannie Mae and Freddie Mac, which needed to be rescued by taxpayers after they overextended themselves and exceeded their core missions.

It wouldn't be the first time for the FCS. In 1987, after it helped inflate an agricultural boom-and-bust, the FCS required a $4 billion bailout.

Some may ask: Why should farmers and ranchers care? If they can get a lower rate on a taxpayer-subsidized loan from a Farm Credit System institution, why not?

The answer is clear from the 2008 financial crisis: government incentives and subsidized credit distort the marketplace. Thanks to the federal guarantee for Fannie and Freddie, home prices lost touch with reality. Millions of Americans were devastated by the loss in value when the home mortgage bubble burst.

Could the Farm Credit System's loans — made artificially cheap by taxpayers — be distorting prices in the farm sector?

The FCS is a century-old solution to a century-ago problem. To let it continue unreformed would be dangerous for taxpayers.

It's time to rein in a Farm Credit System not truly focused on America's farms or farmers.