Via Capital Press

Mergers in the Farm Credit System have shrunk the number of ag lenders within the network by 25 percent in the past decade.

Regulators say the mergers aim to decrease costs and risks, but critics claim consolidation favors large agribusiness and dilutes local control over lenders.

"Efficiency is the most predominant reason for mergers," said Gary Van Meter, director of the office of regulatory policy for the Farm Credit Administration, which oversees the network.

The government-sponsored system now consists of 87 banks and associations, down from 117 in 2002, with another merger proposal currently under review by the FCA.

Lenders who merge with each other often pare down the number of paid directors and cut other overlapping functions, Van Meter said.

They're also able to diversify their credit portfolios, mitigating their financial exposure to downturns in certain farm sectors, he said. "In almost all mergers, we see a reduction in the concentration of risk."

By combining their capital, lenders are also able to provide bigger loans to borrowers, said Van Meter.

Those larger loans are part of the reason banking consultant Bert Ely is troubled by mergers in the Farm Credit System.

In his view, consolidation is leading the system to abandon its mission of serving smaller farmers and ranchers to focus instead on more profitable loans to big operations.

"These big loans were made only because they're made by large associations," he said.

Much of the system's loan volume consists of huge loans to big institutions, Bly said. In 2011, for example, the top 2.5 percent of borrowers accounted for roughly half the system's total loan volume of about $175 billion.

"The system will talk about lending to young, beginning and small farmers, but it's very quiet about lending to big farms," he said.

Bly argues the Farm Credit System should be privatized because it's very well capitalized and could survive without the government's support.

In 2011, the system paid a very low collective tax rate of about 6.4 percent, compared to more than 30 percent for Wells Fargo, a major private agricultural lender, he said.

The implicit backing of the federal government also gives the system an advantage over commercial banks when selling bonds to provide funding for its banks, Bly said.

"It's not a level playing field," he said.

Trade groups like the Independent Community Bankers of America and the American Bankers Association have also been critical of the system's consolidation and tax advantages.

Van Meter of the FCA said the system is obligated by law to lend money to all creditworthy borrowers in agriculture, regardless of size.

Though large loans comprise a substantial portion of the system's loan volume, a majority of loans are relatively small, he said. Nearly 90 percent of the system's loans were less than $250,000 in 2011.

"The volume may not be great, but the numbers are quite substantial," Van Meter said. "Smaller farmers don't demand as much credit."

He said that major consolidation in the Farm Credit System was prompted by Congress in 1987, when it passed restructuring legislation in response to the 1980s farm crisis.

The logistical need for numerous ag lenders is also much lower than during the system's inception in 1916, when telephones and other methods of long distance communication weren't available, said Christine Quinn, an FCA spokesperson.

"Transportation wasn't what it is today," she said.