Farm Credit System ‘Can’t Absorb Losses,’ Seeks Help

The Farm Credit System, a quasi-governmental banking network that holds more than a third of the nation’s farm loans, put out a rare call for federal support Wednesday as the directors of its regulatory agency met into the night to draw up a bail-out plan.

“We’ve come to realize that the deterioration in agriculture has grown beyond the ability of (the $74-billion Farm Credit System) to handle it,” said Donald Wilkinson, governor of the Farm Credit Administration, the federal agency that regulates the system. “We cannot absorb the losses we face.”

The statement, made in an interview with the Wall Street Journal published Wednesday, was a dramatic turnaround for Wilkinson, who had been insisting for months that the system’s problems were manageable.

However, agency spokesmen said the problems, which had been confined largely to regional banks in the system that make short-term operating loans to farmers, now have spread to the federal land banks, the system’s mortgage lenders.

Moreover, a recent forecast of bumper crops--which almost certainly will lead to lower commodity prices and therefore reduce farmers’ ability to repay loans--has darkened the outlook significantly, the spokesmen added.

The Farm Credit System makes mortgage loans through 12 regional federal land banks, operating loans through 37 regional intermediate credit banks and farm cooperative loans through a system of banks for cooperatives.

The system raises money mostly through the sale of bonds to institutional investors such as banks and insurance companies. It was created early in this century to help provide financing for farmers having difficulty obtaining loans through usual commercial channels.

The Farm Credit Administration’s board of directors went into a lengthy closed session to consider internal shifts of funds as well as requests for outside assistance.

After the meeting ended Wednesday night, one board member, William C. Wampler, said the board had authorized Wilkinson to look into several options for dealing with the system’s problems. However, Wampler said no action would be taken until the board studies the matter further.

One option is to ask for interim help from the Federal Reserve System, whose central bank is empowered to provide emergency funds. Another option is to ask Congress for bail-out money--a sum that probably would far exceed the record $4.5 billion provided last year to Continental Illinois Corp., a Chicago bank.

Another possible move would involve forming a new entity, either government-sponsored or private, that would buy up problem loans from the Farm Credit System and other farm lenders.

Agriculture Secretary John R. Block urged that the Farm Credit System, which has a $74-billion loan portfolio, take steps to help itself before looking to the government for aid.

Substantial Reserves

In comments to reporters, Block suggested that the system draw on its substantial reserves--nearly $14 billion--not only to cover losses but also to lower interest rates, which have soared to 15.5% at some production credit associations, the local lending outlets for regional “intermediate credit banks” in the Farm Credit System.

Block said also that the government needs more information on the extent of the system’s difficulties before moving to help it out.

“We don’t have all the options laid out,” he said. But, in a reference to the lax lending procedures that have plagued the system, Block said that it “needs to be prepared to accept more regulatory oversight . . . . They really don’t have very much.”

Several members of Congress who specialize in the farm credit issue said they will press for early action on bail-out legislation, although Senate and House leaders agreed earlier this year to await completion of a pending bill to reauthorize farm subsidy programs before moving on to farm credit measures.

A $5-Billion Problem

“We should have taken action on farm credit nine months ago, when it was a $5-billion problem,” Rep. Cooper Evans (R-Iowa) said. “At this point, it’s on the order of a $10-billion to $20-billion problem.”

Both Evans and Sen. John Melcher (D-Mont.) have introduced several bills, including one to create a central reserve fund on which the banks at various levels in the troubled system could draw.

Melcher said that, when he offered bail-out amendments to the farm bill in July, he received little support. Now, he said, he senses a change in mood.

“This farm credit situation is exactly like cancer,” he remarked. “If we don’t attack it now, it will just get worse.”

Earlier this summer, the Farm Credit Administration approved a $150-million plan to bail out the credit system’s Intermediate Credit Bank in Spokane and a $435-million package to help a similar bank in Omaha.