outlook for Farmer Mac, The

Northwestern Financial Review, Jul 1-Jul 14, 2004 by Bengtson, Tom

I remember covering banking in the 1980s. The agricultural crisis was at its peak and the savings and loans were falling apart. S&Ls got into trouble because they were making long-term loans with short-term deposits and ag banks got into trouble because so many farmers were having trouble making ends meet. So with all the horror stories about lending to farmers and all the horror stories about lending long term on real estate, the last thing anyone wanted to do was make a long-term real estate loan to a farmer. Yet, farmers still needed long-term financing to buy agricultural real estate. People looked at Fannie Mae and Freddie Mac and said we need something similar for farm real estate loans. A secondary market would give banks the opportunity to offer farm customers financing for new land.

Congress authorized the Federal Agricultural Mortgage Corp., or Farmer Mac, in 1987. A year later it was up and running - or make that limping along. The early years of the program were so dismal that Congress revised its charter in 1996. Since then, Farmer Mac can report some success. Banks today can, in fact, offer their farm customers long-term financing on agricultural real estate. Farmer Mac has financed more than 33,500 loans totaling $10.7 billion. Charge-offs have been minimal.

But somehow the program doesn't seem as exciting as many ag bankers envisioned it would be in the mid-1980s. Although some banks use Farmer Mac, the participation rate is lower than expected when it was created.

The U.S. Treasury Department, which has yet to meet a government sponsored enterprise that it likes, notes other problems with Farmer Mac. Speaking before the House Agriculture Committee on June 2, Deputy Assistant secretary Greg Zerzan noted the creation of Farmer Mac has not resulted in the emergence of a liquid market for agricultural mortgage-backed securities. Farmer Mac holds so much of its own guaranteed securities as investment, no active secondary market has developed. "Absent a more aggressive effort by Farmer Mac to sell its AMBS to outside investors, it is difficult to perceive of an active secondary market for AMBS developing," he testified.

Zerzan also noted the high level of non-mission assets held by Farmer Mac - apparently the highest of any of the GSEs. The agency's investment portfolio, Zerzan said, accounts for 25 percent of the agency's assets, raising a question about the extent to which arbitrage contributes to Farmer Mac's earnings.

As we enter a rising interest rate environment, conditions affecting the success of the secondary market will change. It will be a kind of test for Farmer Mac and it will be interesting to watch the agency's response.

By Tom Bengtson, Publisher