Why Bankers Should Care About the Farm Bill

WASHINGTON — Lawmakers in both chambers are working to pass a major farm bill that will determine agricultural policy for the next five years and have significant

implications for rural lenders as well.

Dueling bills are now expected to move to the Senate and House floors soon. The Senate Agriculture Committee voted in favor of its bill on Tuesday, while its House counterpart was expected to approve its own measure by late Wednesday. Both bills are massive and would cost almost $100 billion annually.

Banking industry representatives say the legislation is necessary to help farmers make long-term business plans, an issue that affects banks that provide them credit.

If legislation is passed, "banks can extend loans knowing the details of farm policy, and farming customers can do some long-term planning," said Mark Scanlan, senior vice president of agriculture and rural policy for the Independent Community Bankers of America.

Lawmakers had been expected to pass a five-year farm bill last year, but efforts fell apart after House leaders refused to bring the bill to a floor vote. Congress temporarily extended many provisions from the 2008 farm bill as part of a larger fiscal cliff deal, but those will expire soon.

Most analysts think Congress will be able to finalize a bill this year, but major fights are looming.

One of the biggest to watch will be how Democrats and Republicans resolve disagreements over cuts to the nation's food stamps program, which serves poor families. While that debate is less central to the financial services industry, it could prove one of the biggest hurdles to successful passage of any farm bill.

"The big fight, the mother of all fights, is going to be on the nutrition title," said John Blanchfield, senior vice president of agricultural and rural banking at the American Bankers Association. "That will be the overriding, heavy-duty dark cloud that has to be resolved."

But there are other key provisions that bankers are watching which could have a large impact on agricultural lending. Below are the critical measures to watch:

Crop Insurance Expansion

One of the most important provisions in the bill for farmers and bankers alike remains the federally subsidized crop insurance program. The House and Senate bills both phase out a $5 billion direct payment system for farmers in lieu of an expanded insurance program that protects farmers, and by extension their lenders, from losses in the event of bad weather and other unforeseen circumstances. The insurance premiums farmers pay are partially subsidized under the program.

"Banks finance crop input costs" such as fertilizer and seeds "and in many cases that can be a very big number," said Blanchfield. "Crop insurance ensures the farmer and the banker that if something happens, the crop is insured and there's a payment to cover those loses. It's an important part of a farmer's risk management, and it helps the banker understand what will happen if it doesn't rain, like last summer."

That makes the provisions for crop insurance "one of the most important elements of the whole bill" to the farm lobby and community, said analyst Mark McMinimy of Guggenheim Securities, which could help safeguard against cuts to the program as the legislative process grinds forward. "That's where they and their champions will stand and fight the longest and hardest."

Still, the provisions are likely to face some opposition, analysts said. The Environmental Working Group and others have long been critical of the crop insurance subsidies, especially this year when other programs like food stamps are facing very steep reductions.

Sen. Kirsten Gillibrand, D-N.Y., a member of the Senate Agriculture panel, offered but then withdrew an amendment during the committee's markup on Tuesday that would have offset the food stamp program cuts with limits on crop insurance reimbursements. She plans to bring the amendment up again on the floor, a spokeswoman said.

"There's going to be some uncertainty about [crop insurance], in the sense that some of this will be challenged on the floor of the House, and maybe in the Senate as well," McMinimy said. "But ultimately I think the final bill will end up looking a lot more like what the agriculture committees pass out than some alternative."

Loan Guarantee Term Limits in Limbo

The Senate farm bill includes a provision to remove term limits on Farm Service Agency guaranteed operating loans, a move strongly supported by bankers.

The loans, which are made by banks and largely guaranteed by FSA, are designed to help struggling farmers who can't otherwise obtain a loan. Participants are not allowed to take out one of these loans more than 15 times over the course of their career, which some argue could last many decades.

Scanlan notes that 2,200 farmers have so far become ineligible for another loan after the last waiver on term limits expired several years ago, and predicts another 1,500 farmers could become ineligible by the end of next year if the limits are not eliminated.

"Our view is that farmers and local bankers are in the best position to determine whether a producer should take out a guaranteed loan," he said. "It's a very efficient program. With less than $20 million, you leverage $1.5 billion of operating loans. The subsidy is pennies on the dollar."

Still, the House bill does not contain any provision to remove or amend the term limits, meaning the issue will most likely have to be worked out in conference if both chambers pass a bill, observers said.

Status Quo for the Farm Credit System

Neither the House nor the Senate bill contains language granting any additional authority to the Farm Credit System, a government-sponsored enterprise that competes with banks on rural lending. But banking industry representatives said they plan to keep a close eye on the bills to ensure no provisions are added as legislation moves forward.

Blanchfield called the Farm Credit System lenders "fierce competitors" to some banks, arguing that "they are advantaged in that they have GSE status, which allows them to borrow more cheaply than banks, and they also pay a marginal amount of taxes."

The ABA and ICBA wrote a joint letter to lawmakers last week reiterating their concerns about the Federal Credit System being granted any additional authority. The GSE has pushed in prior years to expand into new areas, including business lending.

"The FCS currently has the authority to make loans to farm-related service businesses that serve farmers and ranchers' on-farm operating needs. We would oppose, for example, any effort to allow FCS to extend credit not only to farmers, but also for the credit and related needs of 'businesses they rely on' or similarly worded amendments," the trade groups' May 8 letter warned. "Allowing FCS to extend credit to 'businesses' opens up a vast, new and undefined lending category. Any business only tangentially-related to agriculture would be eligible for FCS credit with this type of language."