Overgrown farm credit giant

The recipients of a subsidy seldom complain about it, and so Farm Credit Canada, the government farm lender, remains, as it has for years, well liked and patronized by farmers and uncriticized in political circles. FCC has about a third of the farm lending market, which happens to be the most desirable third. Its entire operation is subsidized by the government by means of virtually free capital. Hardly anyone is aware of the size of this subsidy, or its impact on private-sector, taxpaying financial institutions in the agricultural segment.

The FCC issued its 2013-14 annual report last month, a 52-pager in which self-congratulation and self-promotion approached anything ever put out by the old Canadian Wheat Board. Simultaneously it issued a press release chronicling its achievements, such as the $1-million it contributed to rural community causes, its Drive Away Hunger campaign for country food banks, the 126 learning events it sponsored for farmers and, believe it or not, its “financial strength.”

The FCC has only a nominal cost of loanable funds and no requirement to maintain asset-lending ratios. It “borrows” $22.8-billion from the federal treasury, for which it incurred an interest expense of $259-million last year, or about 1.1%. It uses the money to make loans which at March 31 stood at $25.8-billion. It realized “net income” of $642-million during the year, paying a “dividend” to its “shareholder” (the federal government) of $50-million. The average cost of federal government borrowings is currently just under 5% for long and short-term debt. The $22.8-billion of federal government assets tied up in the FCC therefore costs Canadian taxpayers almost $1-billion a year to finance, and approximately equals the annual federal budget deficit of recent times.

Private institutions, including credit unions, face very unfair competition from this crown entity. They must raise funds from depositors and other sources at market rates. The interest expense of the eight largest banks is about 34% of interest income; the FCC’s is 22%. Financial institutions must observe stringent guidelines, to be further tightened starting in 2015, to assure their stability under any economic circumstances. Banks, like all shareholderowned entities, must produce competitive earnings, growth and dividends.

The FCC’s share of the Canadian farm

In Canada, the government entity serves the most credit-worthy

credit market was 29% in 2013-14, compared to chartered banks’ at 36% and credit unions’ 16%. At the end of its last fiscal year it had 160,000 loans to 100,000 clients, about three times the number of professional, viable-scale farms in Canada. (Fewer than 20% of farms account for over 80% of agricultural production). The average interest rate it charged borrowers during the year was 4.64% on fixed-rate loans and 3.98% on variable-rate loans. The prime rate is 3.0%. Commercial loans of any kind at as little as 1% to 1.5% above prime are rare and require lead-pipe security and a realistic default risk of zero. The FCC can do it only because it freely accesses public funds. The FCC skims off the top layer of borrowers, leaving the private sector with the more risky, less straightforward end. To get their business it low-balls interest rates and is the first to make concessions to borrowers if obstacles to timely repayment appear. Its bad-loan write-offs last year were just $42-million or 0.2% of loans receivable. For the same reason its operating costs relative to assets and loan activity are low, just $366-million last year. Management challenges and talent needs are modest because operating from the FCC’s subsidized, competition-proof position borders on a no-brainer.

In 1992 the FCC’s legislation was extensively amended to allow it to lend to non-farmer clients, engage in leasing and also in venture capital financing. The annual report conveniently omits all information that could be used to assess its experience as an agribusiness lender, except that impaired loans to agribusiness and agri-food borrowers were $47.5-million as of last March compared to $18.8-million to grain and oilseed farmers.

Government involvement in agricultural credit exists in other countries. Normally it is limited to borrowers who do not qualify for or cannot afford commercial credit. In Canada this is reversed: The government entity serves the most credit-worthy.

Anything that improves the profitability and viability of primary producers helps the whole agricultural economy, even if it is a billion-dollar public subsidy, and more power to FCC customers. However, the size and nature of the FCC’s burden on the national treasury, and on tax-paying privatesector financial institutions, should be acknowledged.