As farmers' need for loans has grown, the Farm Credit System has also expanded

ON THE FARM

October 01, 2006|By TED SHELSBY

Having endured rough economic times and substantial transformations of the agricultural industry, the Farm Credit System -- the farmer-owned banking system created by Congress to serve farmers -- marks its 90th anniversary this year.

President Woodrow Wilson signed the Federal Farm Loan Act in 1916 that created a system of 12 national Federal Land Banks, including one in Baltimore.

The Baltimore bank, in a six-story structure at St. Paul and 24th streets, welcomed its first customer in 1924. At the time, it served five states -- Maryland, Delaware, Pennsylvania, Virginia, West Virginia -- and Puerto Rico.

The location was selected because it was close to farmers. Milk was being delivered in horse-drawn wagons from nearby dairy farms.

Agriculture has changed significantly over the years, and the Farm Credit System has worked to follow suit. Where 25 percent of the nation's population lived on farms when the system was beginning, less than 2 percent live on farms today. The percentage of farmers with off-farm work or income has risen from 30 percent to 93 percent in the same period.

In 1930, 13 percent of farms had electricity. In 1940, one-quarter had a telephone, and farmers who did usually shared a party line with neighbors; the phone number was usually something like "7R."

One thing has not changed. MidAtlantic Farm Credit, the Westminster-based cooperative institution that traces its roots to the original bank on St. Paul Street, remains Maryland's largest agriculture lender. It serves customers in Maryland, Pennsylvania and Delaware.

"We have in excess of 10,000 customers, and we continue to grow," said J. Robert Frazee, president and chief executive officer of MidAtlantic Farm Credit. "We have been growing an average of 600 customers a year since 2000."

One measure of growth is loans outstanding, which have risen from $1 billion in 2000 to more than $1.7 billion.

Phil Johnson, 68, a fruit and vegetable farmer near Elkton in Cecil County, credits MidAtlantic's success to its familiarity with the customers.

"They understand and know how to talk to farmers," he said. "Other banks are not agriculture-oriented."

Johnson said he has been a MidAtlantic customer since 1980.

"Farming is becoming more sophisticated," he said. "When you need to buy a piece of sophisticated equipment, you need to talk to someone who understands what you are talking about."

Unlike commercial banks, MidAtlantic does not take deposits. It raises money needed for loans by selling bonds in securities markets.

Another way that Farm Credit differs from other banks is that it shares profits with its borrowers, who also own the bank.

Frazee said the bank returned $28 million of its $36 million earnings to customers last year. The average payment was $2,000. Farmers with bigger loans received more.

Frazee said the average loan is about $170,000, but some agri-businesses, such as a food processor, will borrow millions of dollars to finance their production.

Congress established the Farm Credit System when it saw that conventional banks were not meeting the needs of farmers for long-term loans to purchase land.

"Back then, farmers could go to a bank and get three- to five-year loans, but this made it difficult to purchase property," Frazee said.

Lawmakers made it a cooperative bank to give farmers more of a say in its operation.

In its attempt to keep up with a changing industry, MidAtlantic has partnered with the Maryland Department of Business and Economic Development to help young people who want to get into agriculture. Under the arrangement, the state may guarantee the repayment of a loan the bank might otherwise consider too risky to approve.

MidAtlantic offers a leasing service to supply equipment, such as trucks or tractors, to farmers wanting to purchase the items.

It also sells crop insurance, including plans subsidized by the federal government.

Like just about everyone else, farmers use credit cards, so MidAtlantic is exploring the possibility of offering them.

"Credit cards would allow customers quicker access to their lines of credit," Frazee said.

Frazee agreed that the 1980s were a struggle for farmers and agriculture lenders. High interest rates and a worldwide surplus of grain resulted in more farm foreclosures than at any time since the Great Depression.

In response, the Farm Credit System changed its loan procedures. Loans are no longer based on the value of farm assets, Frazee said. Instead, they are based on the bank's assessment of the farmer's ability to repay.

In 1995, the Farm Credit Bank of Baltimore, as it was called, merged with the Farm Credit Bank of Columbia in South Carolina to form AgFirst Farm Credit Bank. The merger resulted in a cooperative institution serving 14 states from Pennsylvania to Louisiana and west to Ohio, Kentucky and Tennessee.

MidAtlantic is the largest bank in the AgFirst network, and the 10th largest in the country, Frazee said. But there remains plenty of work to do.

"We can't sit still. We need to be doing a better job of improving our efficiencies and a better job of serving our customers," he said.

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