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By the Numbers
Friday, August 19, 2016 11:49AM CDT

By Danny Klinefelter
DTN Farm Business Adviser

Commercial bankers and Congress were all over the news a few months ago criticizing the Farm Credit System for making a $725 million loan to Verizon. In their view, FCS has strayed from its mission of serving farmers and ranchers. The Verizon loan symbolized that "mission creep."

At a particularly harsh House Agriculture Committee hearing last December, Rep. Austin Scott of Georgia said at the time, "While technically legal, it is certainly in my opinion and in the opinion of the majority of members of this committee who are your greatest advocates, that it [the Verizon loan] is outside the scope and intent of the Farm Credit System. I'll be honest with you, I don't think CoBank will stop until someone stops them."

This article is not intended to criticize anyone but rather to look at what occurred.

The joint lead originators on the loan were J.P. Morgan Securities, Morgan Stanley, Bank of America and Barclays. CoBank was the Farm Credit System lead and was only in the group because they were invited to participate by the commercial bank originators.

There were two loans, each for $6 billion. One was a three-year maturity and one was a five-year maturity for a total of $12 billion. In total, there were 48 lenders involved. The Farm Credit System held $725 million between the two loans ($362.5 million each), or about 6% of the total outstanding. By regulation, no Farm Credit entity can have more than 15% of their portfolio in similar entity loans, and most of those they do hold an interest in were either originated by or involve commercial bank participants.

Farm Credit made the loan under their similar entity authorities as a rural infrastructure loan. Unfortunately, Verizon's loan request did not spell out the percent of their business/service that is for rural infrastructure. As a result of the negative image resulting from the comments, the Farm Credit System has decided and is in the process of selling their remaining portion of the five-year loan. The three-year loan was paid in full on June 12, 2014.

In its defense, CoBank points out that commercial banks invited them to syndicate the loan and banks partner with them to share their risk, too. As DTN reported at the time, better broadband and wireless service is critical to rural communities. Giants like Verizon and Frontier Communications have the wherewithal to bring remote farm communities up to speed. Without better telecom connections, it will be hard to attract youngsters to rural areas or even master the data revolution already spewing from yield monitors, smartphones and in-field weather stations.

After stumbling in the 1980s, Farm Credit institutions now hold about 40% of the nation's credit to farmers and ranchers, including almost half of all the farmland mortgage debt. Banks are losing market share but also hold about 40% of total farm debt. Because of stricter Dodd-Frank regulations, small country lenders complain it is increasingly difficult to provide mortgage credit in rural areas. They want the Farm Credit System on equal footing tax-wise for real estate lending, or held to a much narrower customer base than what current regulations allow.

But rural America and particularly rebuilding the rural infrastructure are going to need both commercial bankers and the Farm Credit System. Hopefully, the political wrangling for competitive advantages doesn't prevent rural America from getting funds to the extent needed.

**

Editor's note: Danny Klinefelter is an agricultural finance professor and economist with Texas AgriLIFE Extension and Texas A&M University. He also is the founder of the mid-career Texas A&M management course for executive farmers called TEPAP. Access information TEPAP as well as DTN scholarships http://tepap.tamu.edu/….

To read all of Klinefelter's recent DTN columns go to https://www.dtnpf.com/….

For a recap how the gap in broadband service handicaps rural communities, see https://www.dtnpf.com/…

For DTN's original coverage on the Farm Credit Feud see https://www.dtnpf.com/…

(MZT/AG)


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