The Farm Credit System

This is the part that explains everything else, and it is the part almost nobody knows. A Farm Credit association takes no deposits. There is no savings account, no checking, no teller line. It raises money by selling debt securities in the national capital markets through the System's funding corporation, and lends the proceeds out to its members.

Two consequences follow directly, and both of them show up on your term sheet. First, a lender funded with long-dated bonds can hold a long fixed-rate loan on land without a mismatch, which is why fifteen-, twenty- and thirty-year money on raw timberland is ordinary business there and an exception at a deposit-funded bank. Second, the association's own cost of money moves with the bond market rather than with what the bank down the street is paying on certificates of deposit.

When you close a loan with a Farm Credit association you become a stockholder in it. A small portion of the loan buys the stock, and it comes back at payoff. That is not ceremonial: it is the legal fact that makes the association a cooperative, and it has two practical effects.

Patronage

A cooperative's earnings belong to its member-borrowers. Most associations distribute a share of earnings back to them each year in proportion to the interest they paid. Whether a distribution is declared, and how large it is, is a board decision made annually on that year's results - it is neither a rate cut nor a promise, and it is why comparing a Farm Credit quote to a bank quote purely on the note rate misses part of the picture.

Governance

Member-borrowers elect the board from among themselves. The people setting the association's credit appetite are farmers, ranchers and timberland owners in the same territory, which is a large part of why timberland is not treated as an odd asset there.

The Farm Credit Administration is an independent agency of the United States government, and it regulates and examines every institution in the System, along with Farmer Mac. Its stated mission is to ensure that those institutions remain safe, sound and dependable sources of credit and related services for all creditworthy and eligible persons in agriculture and rural America.

For a borrower, the FCA matters in exactly two ways. It writes the regulations that define who a System institution may lend to - the eligibility question below is answered there, not by the loan officer's preference - and it is the examiner standing behind the association's credit administration. It is not a lender, it will not take your application, and it is not where a complaint about a rate goes.

Territory is chartered, not marketed. Which association serves you is a function of which county the land is in, and in Alabama more than one association's territory reaches into the state. The names an Alabama timberland owner is most likely to meet are Alabama Farm Credit, First South Farm Credit and AgSouth Farm Credit; their cards are below, with the association's own site as the authority on territory and products.

Do not assume from a name. Territories were drawn by charter and redrawn by merger, they cross state lines, and the association that serves the county where you live may not be the one that serves the county where the tract sits. One phone call settles it.

Eligibility is set by statute and by FCA regulation, which define the classes of borrower a System institution may serve. The broad shape is agricultural: farmers, ranchers, producers and harvesters of aquatic products, and owners of rural land, along with certain rural residents, farm-related businesses and cooperatives.

For timberland the practical questions a loan officer works through are whether the land qualifies as agricultural or rural under those rules, whether the purpose of the loan is an eligible one, and then - entirely separately - whether the credit stands up. Eligibility gets you in the door. It does not approve the loan, and a System association declines files on ordinary credit grounds like anyone else.

Neither is better. They are built differently, and the difference is legible on the term sheet.

Long fixed-rate land money

Structurally easier for a Farm Credit association or a lender selling into the secondary market than for a bank funding itself with deposits.

Understanding the collateral

Timberland is core business for a Farm Credit association. At a commercial bank it depends entirely on whether that bank has someone who reads cruises.

The whole banking relationship

A bank can hold the operating account, the deposit relationship, the treasury services and the equipment paper in one place. A Farm Credit association cannot take your deposits.

Cost, net of patronage

A cooperative's effective cost can differ from its note rate once a patronage distribution is declared. A bank's does not.

Speed and local discretion

A community bank with a local credit committee can sometimes move faster on a file that fits it. Neither structure has a monopoly on responsiveness.

The sensible course is to take the same complete file to both, and to compare the whole structure - rate, term, fixed period, payment schedule, cutting and release clauses, prepayment - rather than one number.