Question

How do income tax obligations of the FCS Banks and associations affect farmers cost of borrowing?

Answer 1

The FCS is authorized by statute to lend to farmers, ranchers, and harvesters of aquatic products. Loans may also be made to finance the processing and marketing activities of these borrowers; for homeownership in rural areas; certain farm- or ranch-related businesses; and agricultural, aquatic, and public utility cooperatives.

FCS is a commercial for-profit lender and is not a lender of last resort. Borrowers must meet creditworthiness requirements similar to those of a commercial lender. FCS has "young, beginning, and small" (YBS) farmer lending programs, but they do not have statutory targets or mandates.

FCS associations are owned by the borrowers who purchase stock, which is required as part of their loans (the smaller of $1,000 or 2% of the loan amount). FCS stockholders elect the boards of directors for banks and associations. Each has one vote, regardless of the loan size. Most directors are members, but federal law requires at least one from outside.

If an association is profitable, the directors may choose to retain the profits or distribute some of it through dividends or patronage refunds that are proportional to the size of the loan. Patronage refunds can effectively reduce the cost of borrowing.

With the exception of seed money that was repaid by the 1950s and a temporary U.S. Treasury line of credit in the 1980s, FCS operates without any direct federal appropriations. FCS banks and associations do not take deposits like commercial banks.

Instead, the Federal Farm Credit Banks Funding Corporation uses capital markets to sell FCS bonds and notes. These debts become the joint and several liabilities of all FCS banks. The funding corporation allocates funding to the banks, which provide funds to associations, which lend to borrowers. Profits from loans repay bondholders .

FCS also raises capital through two other methods. Borrowers are required to buy stock (the lesser of $1,000 or 2% of the loan amount) and become cooperative members. FCS also retains profits that are not returned as patronage to borrowers.