DIRECT AND GUARANTEED FARM LOANS FROM FEDERAL AND STATE SOURCES
Cooperative Extension Service
Department of Agricultural and Applied Economics
University of Georgia
DIRECT AND GUARANTEED FARM LOANS FROM
FEDERAL AND STATE SOURCES IN GEORGIA
Prepared by Cesar L. Escalante, Assistant Professor
Agricultural lending has been generally associated with the more popular lending institutions such as commercial banks and the Farm Credit System (FCS). Unknown to many farm borrowers are a number of federal and state programs that either lend directly to farmers or could offer loan guarantees that will increase the likelihood of the approval of farm loan proposals made to most of the traditional loan-servicing institutions such as the banks and the FCS branches.
This primer is designed to provide prospective farm borrowers with a snapshot of available agricultural credit facilities from various public fund sources that engage in both direct and guaranteed lending programs to supplement the farm loan supply available from the FCS and the commercial banking sector. The important general features of the programs of these public institutions are summarized in this primer for easy reference for farmers contemplating on utilizing the services of these lenders to finance the requirements of their farm businesses.
The Farm Lending Scenario
Over the last decade, the Farm Credit System (FCS) and the commercial banking system have provided the greater bulk of agricultural loans extended to farm borrowers in the State (Figure 1). These two lenders alone already account for about 70% to 75% of total farm loans granted since 1990 (USDA-ERS).
Other institutional sources of farm credit in the state include the Farm Service Agency (FSA) and life insurance companies. In recent years the collective share of agricultural loans extended by private individuals, input suppliers and other sources is increasing and surpassing the combined proportions of loans originating from the FSA and life insurance companies. Historically, these private sources of farm credit, extending both farm real and non-real estate credit, have accounted for about 15% to 18% of total farm loans during the last decade.
The Farm Loan Guarantee Scheme
In absolute levels, farm debt in the state has generally increased steadily in the nineties (Figure 2). Notably, these sustained increases in loan levels were realized under volatile farm conditions, especially during the latter half of the decade.
Greater income risk in the farm sector usually translates to deteriorating credit risk ratings for the farm borrowers. In spite of such disadvantages, total farm loan levels continued to grow, thus, suggesting that farm credit supply remains accessible to most farmers. The farmers' continued access to most farm credit sources could have been
enhanced by the availability of credit risk guarantees from federal and state government agencies.
The farm loan guarantee scheme introduces a third party in the usual lender-borrower relationship. The third party is usually a government agency that assures the (commercial) lender that a high percentage (around 90%) of the borrower's credit obligations will be repaid in the event the borrower defaults in his loan obligation. This assurance given by the third party entails a minimal fee (usually a small percentage based on the loan amount) to be paid by the farm borrower to the guarantor. It can be argued that this fee actually raises the borrower's effective (overall) loan cost. However, commercial lenders' decisions to grant loans to riskier farm borrowers usually hinge on the availability of such guarantees. Thus, a farm loan guarantee scheme enables farmers to avail of farm loans that otherwise (without the guarantee) would have been highly improbable to obtain.
Figure 1: Farm Real Estate Loans, Breakdown By Sources