What farm credit mergers mean to family farmers​

The latest in a series of mergers that are remaking the business of farm credit in America will, in early July, bring together three lenders in the upper Midwest – AgStar Financial Services, Badgerland Financial, and 1st Farm Credit Services. The new Wisconsin-based institution, to be called Compeer Financial, will hold over $18 billion in assets and will be the country’s third-largest farm credit association.

The merger has amplified concern among rural advocates who say that continued consolidation among farm credit associations makes it harder for farmers to access credit, especially farmers with small- or medium-sized operations or who run diversified crop farms.

Bert Ely, an independent banking consultant, says that as farm credit associations consolidate and get bigger, they move “increasingly far afield from what they were designed to do,” which was to provide “credit to those who couldn’t get credit elsewhere.” Instead of supplying family farms, he says, they increasingly serve giant agribusiness.

The Farm Credit System was developed in 1916 as a reliable source of credit for independent farmers. The FCS provides about 40 percent of all credit to rural America. In 2015, nearly 70 percent of FCS’s lending was in agriculture, and FCS served about 500,000 borrowers.

Until the mid-1980s, the FCS was highly decentralized, with 37 different bank districts in 1988. But mergers and acquisitions have shrunk the system down to four districts today, with two of those districts accounting for over 60 percent of the FCS’s assets in 2010. And where there were once hundreds of regional associations, today there are just 73.

The Compeer deal is the third major merger just this year. In late April, AgCountry Farm Credit Services and United FCS announced plans for a July 1 merger that will join their operations in Minnesota, Wisconsin, and North Dakota. Effective in January, Farm Credit of Southwest Kansas and American AgCredit also merged, creating an institution that serves counties across California, Colorado, New Mexico, Nevada, Kansas and Oklahoma.

In 2012, a major merger brought together U.S. AgBank and CoBank, which today provides loans to over 70,000 farmers and ranchers across 23 states.

According to Scott Marlow, executive director of the Rural Advancement Foundation International, one of the risks of consolidation among farm credit banks is that those banks will be less willing to provide tailored services to farmers. “A community bank is going to serve the community,” he says. And given that farming is an inherently risky investment, he says, bigger banks are likely to opt to serve a smaller number of large-scale farmers.

Alicia Harvie, the Advocacy and Issues Director for Farm Aid, says the mergers especially threaten smaller-scale farmers and farmers working with diverse crops. Bigger banks, she says, are more risk-averse and rely heavily on data, and there is less data on direct-to-consumer markets.

Even within the Farm Credit Administration, which has to sign off on farm credit association mergers, there is concern about consolidation in the sector. In a speech in February, Dallas Tonsager, the chairman of the FCA, called for the FCA to “reflect more closely” on the “reasons and ramifications for mergers.” He asked member associations to consider whether the FCA was “creating institutions that are ‘too big to fail’ or leaving behind institutions that are ‘too small to prevail.’”

The FCA’s own handbook also warns about the potential dangers of mergers in the farm credit network, including concentrating power in just a few institutions and creating “larger, more complex, and difficult-to-manage institution[s].”

Rural advocates are also worried about the state of farm credit because access to farm credit is intimately tied to federal crop insurance, which would be significantly cut if President Trump’s proposed budget is passed. The budget would cut the crop insurance program by 36 percent, or nearly $30 billion over ten years.

A recent paper from the agriculture policy think-tank AGree found that having crop insurance “can be critical [for farmers] from a lending perspective since it guarantees a minimum revenue or yield, which affects the farmer’s ability to repay the loan.” Some farm credit associations require crop insurance policies in order for farmers to secure loans. At last week’s Senate Agriculture Committee hearing on the farm economy, several witnesses from the Department of Agriculture and from farm credit associations argued that cuts to crop insurance would make it significantly more difficult for farmers to get credit.

Leah Douglas, a contributor to FERN’s Ag Insider, is a reporter and policy analyst with the Open Markets Program at New America. She writes and publishes Food & Power, where this piece first appeared.