The Farm Credit Service of America is putting a lot of pressure on ag banks with competitive interest rates that ag bankers say are unfair.
I do business with both and the FCSA dividend check was enough to make farmers rethink their loyalty. The dividend has averaged .6 percent on outstanding loan balances, and this year’s dividend was higher than average.
The FCSA is a government-sponsored enterprise owned by its patron borrowers with profits shared. It is, therefore, exempt from corporate taxes and state and local taxes on interest paid on FCSA obligations. It has the privilege of borrowing at attractive rates as a government chartered entity. It reduces its income by distributing cash patronage dividends to its members.
Bankers’ enmity against FCSA is emotional. The Nebraska Banker’s Association lamented, “FCSA ads make a big deal about the dividends they are paying customers who borrow from them. In the ad, one of the things they say is, I think I have this right, that they are the only lender that shares its success with the borrowers. We take exception to that because our banks are very generous to their communities in many, many ways.”
It is true that in most communities the bankers are first in line to get hit up for funding for every social project built in the community. The first thought of community organizers is, “Let’s go ask the bankers for money,” and they almost always get it. Bankers are generous to the point that they have to build this into their bottom line as a cost of doing business.
Banks also use these donations as competitive advertising leverage against one another.
The FCSA is not the only lender that supports the community. Bankers do that often and well. The FCSA is essentially a flow-through financial entity. By returning profits to its patron owners, the FCSA gives the owners the resources to be benevolent. The bottom line is that the bankers are making these donations with our money, and the FCSA gives it back to us so that we can decide what charity is deserving.
From personal experience, the difference in the effective farm operating loan interest cost between the bank and the FCSA rate, including the dividend, can be 30 percent. The net borrowing cost with the local bank is 30 percent higher. We subsidize the bank with every loan that we give them.
That difference will vary individually determined by to what degree the bank wants to compete. The FCSA is the only lender that shares its profits with borrowers because the borrowers own it.
If the FCSA had sold out to Rabobank as once proposed, all its farmer borrowers would have gotten a check.
The issue that galls bankers the most is that according to the Nebraska Bankers Association, the FCSA pays just 2 percent of its pre-tax income in state and federal taxes. I and other FCSA patrons own the cooperative and the tax obligation flows through to me, not that dissimilar than with an LLC.
The FCSA doesn’t pay taxes on the patronage income because the patrons do. The farm credit system profits flow through to the patron owners who pay the taxes.
CommStock Investments LLC itself doesn’t pay taxes. Does that give me some advantage over another investment firm? No, of course not, because the income flows through to my tax return and I pay the taxes individually.
There is tax paid on FCSA revenue. I pay it on my share of the profits at the nominal tax rate which can be up to 35 percent. There is no reduced capital gains rate on patronage dividends. In my opinion, the tax argument against the FCSA conveniently omits the total picture and is not supported.
There is no sign that the competition from the FCSA is putting financial stress on the banks. If they gave me the same deal that they give Mitt Romney on tax treatment of dividend gains on my patronage dividends, I suppose that the FCSA could pay more tax.
The FCSA galls bankers over more than just taxes. The farm credit system primarily loans on farmland assets filling a need to provide long-term credit to farmers that was not being met. It must have worked making farmers successful, because now the bankers are also complaining that the FCSA is making loans to rich farmers. With the price of land today, only rich farmers have the financial means to buy it.
If the FCSA was mandated to discriminate against doing business with rich farmers that would certainly curtail their lending portfolio, but it would have no impact on their competition with local banks. I never thought that I would hear the day when bankers actually complained about farmers being rich or subsidized when the Fed loans the banks money at what rate?…0 percent isn’t it?
At the end of 2011, the FCS had 3,044 outstanding loans between $5 million and $100 million. Maybe these “farmers” should be borrowing from JP Morgan, but in 2011 the FCSA had 165,605 loans and commitments to tens of thousands of patrons who are not all that rich. The FCSA is the most effective competitor that banks have and without them farmers would be paying far higher interest costs. Some banks are starting to compete by lowering rates; some don’t have to and most are angry.
One of my companies, Agrivantage, competes with the farm credit system in the crop insurance business.
Agrivantage is the third largest Farmers Mutual Hail Insurance Co. office in Iowa. Bankers need to figure out how to compete with the FCSA more and complain about it less.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.