AGRICULTURAL CREDIT - THE UNITED STATES The past hundred years have seen a continuously increasing need in the United States for credit to finance farm operations, in cluding the purchase and improvement of farm land and the pro duction and marketing of crops and livestock. The increased cost of farm land, the use of commercial fertilizer, power machinery, and many other factors have contributed to increased credit needs. As a result a large percentage of farmers use credit. Farmers fre quently have to go in debt to get in the farming business, either to buy equipment or land. To become landowners, most farmers have to supplement their savings with borrowed capital. The majority of farmers do not have sufficient working capital to supply their needs at all seasons of the year.
Rural credit, during the years in which farmers' credit needs were expanding, did not keep pace with the demand. Interest rates in some sections were abnormally high. At the turn of the century farm organizations and others interested themselves in the problem. Commissions were sent to Europe to study the farm mortgage systems in operation there. Finally, the Congress of the United States passed the Federal Farm Loan Act of 1916, which provided for the establishment of a farm mortgage credit system. In 1923 provision was made for a system of Federal inter mediate credit banks which are wholesale credit agencies discount ing agricultural paper. Ten years later, the Farm Credit Adminis tration was organized bringing together these and other Federally sponsored credit services under one supervising Federal agency. The Farm Credit Act of 1933 provided for a system of production credit, supervised by the Farm Credit Administration, with local associations making loans directly to farmers and obtaining loan funds through the Federal intermediate credit banks. This act also authorized the establishment of 13 banks for co-operatives under the Farm Credit Administration to make loans to farmers' marketing, purchasing, and business service associations. The Farm Security Administration, the Rural Electrification Admin istration, and the Commodity Credit Corporation also are sources of credit for farmers and farmers' co-operatives. Three States have operated rural credit systems but these were (194o) in liquidation. A number of States invest school and other funds in farm mortgages. The rural credit system thus includes commercial and private agencies, such as commercial and savings banks, insur ance companies, and individuals, supplemented with Government owned institutions and Government-supervised co-operative insti tutions.
State and national banks have always been primary sources of both long- and short-term agricultural credit. In some agricul tural States rural loans account for a large percentage of all bank loans. Farm mortgages held by open State and national banks stood at $945,17 2,00o in 193 i, fell to in 1937, but in creased to $519,276,00o by Jan. i, 1939. Life insurance compa nies, an important source of farm mortgage credit for the past 6o years, increased their holdings to a peak of $2,172,863,00o in 1928. These declined to $936,454,00o by 1937 and $887,336,000 on Jan. i, 1939. Individuals, former landowners, private in vestors, joint stock land banks, and farm mortgage companies have all at times been important sources of farm mortgage credit.
An outstanding change in farm mortgage credit in the io-year period, 1928-38, was the shift in sources of credit. The refinancing activities of the Federal Land Banks and Land Bank Commissioner resulted in large increases in outstanding loans of these agencies. On June these two sources accounted for 37.4% of the farm mortgage debt of the country. Investment of life insurance companies in farm mortgages dropped from 2 2.9 % of the total farm mortgage debt to 12.4% over the io-year period, 1928-38. Joint stock land banks in 1928 holding 7% of the farm mortgage debt had liquidated their holdings to 1.1 % on June 3o, The Federal Land Bank System.—Funds for farm mortgage loans were formerly brought into farming areas largely through banks. Selling farm mortgage notes in their original form became the usual practice. It was generally necessary to find a borrower who wanted a mortgage of a given amount, covering a certain period, and with definite terms. A system was needed which could standardize farm mortgages and hold them as collateral against which bonds could be marketed. The Federal Land Bank system was established by the Federal Farm Loan Act of 1916 to meet these needs. The joint stock land banks, also established by this act and in 1928 holding a peak of $667,000,00o in farm mortgage loans, were placed in liquidation by the Emergency Farm Mortgage Act of 1933. The 12 Federal Land Banks operated under the su pervision of the Federal Farm Loan Board until 1933, when the board was abolished and the banks placed under the super vision of the newly organized Farm Credit Administration. The 12 Federal Land Banks make long-term farm mortgage loans largely through national farm loan associations, local co-opera tives, organized in the first instance by io or more farmers desir ing loans totalling at least $2o,000. In 1928 there were 4,500 to 5,00o national farm loan associations in the United States. Consolidation of associations has resulted in a decrease in num ber to about 3,800 on June 3o, 1939. Each borrower subscribes to stock in the national farm loan association equal to 5% of his loan. The association subscribes to Federal Land Bank stock. The 12 banks had a paid-in capital of $237,407,123, June 3o, 1939. Of this amount, national farm loan associations owned $108,772,683, or 45-8 %, and the U.S. Government $124,95 2,3 20, or 52.6%. The remainder was owned by direct borrowers.
Federal Land Bank loans can be made only to farmers or pros pective farmers. No land bank loan may exceed 5o% of the ap praised normal value of the land plus 2o% of the appraised value of the permanent insured improvements on the land. The maxi mum amount loanable is $5o,000. The term may extend up to 3o odd years. All loans are made on an amortized basis. Prepayment privileges are allowed after 5 years. Borrowers may deposit money in good years to meet instalments in bad years. Funds for making loans are obtained by the sale of tax-exempt bonds. The 12 banks are jointly and severally liable for the payment of princi pal and interest on all bonds issued. The bonds are not guaran teed by the U.S. Government. The interest rate on new loans may not exceed by more than i % the rate borne by the last bonds is sued. The contract rate on loans through national farm loan asso ciations on Sept. i, 1939, was 4%. This rate has been in effect since 1935. From 1917 through June 3o, 1939, the Federal Land Banks made loans totalling $3,108,2 21,919. Federal Land Bank_ loans outstanding on June 3o, 1939, totalled $1,940,586,076.
The trend in interest rates on farm mortgage loans was upward from 1917 to 1921, and then gradually downward since the early 192os, except for a short period around 193o. Farmers in most sections were (194o) obtaining farm mortgage credit at the lowest rates ever available in the United States. Federal Land Banks were making loans at a contract interest rate of 4%. The interest on instalments coming due prior to July 1, 194o, was payable at 3-1-Vo• Land Bank Commissioner loans were made at 5%, with all inter est instalments occurring before July 1, 194o, payable at 4%. The United Stat:es Government reimburses the banks and the Federal Farm Mortgage Corporation for the difference between the con tract rate and the temporarily reduced rate. Interest rates of some commercial banks and insurance companies compare favourably with these rates in territories where they make most of their loans.
Each farmer-borrower owns class "B" stock in the production credit association equal to 5% of his loan. The capital stock of the production credit associations on June 3o, 1939, was $89,035, 154, of which $14,946,895, or 16.8%, represented class "B," vot ing, stock owned by 260,043 farmer-members of the associations and $74,088,259, or 83.2%, was class "A," non-voting, stock held by the corporations, farmers, and other private investors.
The rate of interest charged on production credit association loans was 4i% on Sept. 1, 1939. From May 1934 to Feb. 24, 1939, the rate was 5%, but a reduction in the Federal intermedi ate credit bank discount rate on the latter date enabled the asso ciations to lower their rate.
Most loans are made on a budget basis. That is, a farmer ar ranges for his credit for a season and the money is advanced as he needs it. He repays the loan when the crops and livestock financed are sold. Interest is charged only for the time a farmer has the money.
In making production credit association loans careful considera tion is given to farming plans and the ability of a farmer to repay a loan from the sale of farm products, rather than basing the loan entirely on the value of the collateral.
Another source of agricultural credit in a few localities is credit unions.
At times many farmers are unable to qualify for loans from banks and production credit associations. To meet the needs of this group, the United States Government has provided emergency loans from appropriated funds. Emergency crop and feed loan offices supervised by the Farm Credit Administration have made loans to needy farmers for crop production and for feed for live stock. In 1934-35 additional funds were made available to the Governor of the Farm Credit Administration for loans to farmers in drought-stricken areas.
Another source of funds for low-income farmers is the Farm Se curity Administration's rehabilitation loans. Farm families ob taining these loans are encouraged to raise their own food supplies and livestock feed rather than depend entirely upon cash crops.
These banks under the law are authorized to discount paper of any production credit association, bank for co-operatives, national bank, State bank, trust company, agricultural credit corporation, incorporated livestock loan company, savings institution, co-oper ative bank, credit union, or farmers' co-operative. Production credit associations accounted for about 75% of the loans and discounts of the intermediate credit banks in 1939. Loans to farmers' co-operatives through the Farm Credit system are handled largely by the 12 banks for co-operatives which use the facilities of the Federal intermediate credit banks in obtaining part of their loan funds.
To supply additional capital, farmers' co:operatives have a, num ber of sources of credit. Commercial banks furnish a consider able portion of their credit needs. Beginning in 1923 the Fed eral intermediate credit banks made loans to farmers' marketing and purchasing co-operatives on the security of commodities in storage. Since 1933 loans to co-operatives through the Farm Credit system have been handled largely by the banks for co-oper atives which obtain part of their loan funds from the Federal intermediate credit banks. The Agricultural Marketing Act Re volving Fund, administered by the Federal Farm Board from 1929 to 1933, provided funds for effective merchandising, facility, and commodity loans to farmers' marketing associations. Loans from this fund were curtailed when the banks for co-operatives were established in The 13 banks for co-operatives, one in each of the 12 Farm Credit districts and a central bank in Washington, D.C., make facility, operating capital, and commodity loans to farmers' mar keting and purchasing associations and to mutual companies. About 3o% of the borrowings of marketing and purchasing asso ciations outstanding at the peak period in 1936, according to the national survey, came from the banks for co-operatives.
The Commodity Credit Corporation, organized Oct. by Executive Order, provides funds for producers and farmers' co-operatives to finance the carrying and orderly marketing of certain agricultural commodities recommended by the Secretary of Agriculture and approved by the President. Loans authorized at a fixed rate per unit on basic commodities, such as cotton, corn, wheat, or wool, may be obtained by producers through banks or other lending agencies on forms provided by the Commodity Credit Corporation. The corporation also makes direct loans. Loans of the corporation outstanding on April 1, 1939, excluding loans held by banks and other financing institutions, totalled The Rural Electrification Administration provides funds for financing the construction and operation of rural electric systems.
On April 1, 1939, loans aggregating $202,802,00o were out standing by the Rural Electrification Administration.
BIBLIOGRAPHY.-M. T. Herrick and R. Ingalls, Rural Credits, Land Bibliography.-M. T. Herrick and R. Ingalls, Rural Credits, Land and Cooperative (1914) ; E. S. Sparks, History and Theory of Agri cultural Credit in the United States (1932) ; Frieda Baird and C. L. Benner, Ten Years of Federal Intermediate Credits (1933) ; American Institute of Banking, Farm Credit Administration (1934)_; Norman J. Wall, Outstanding Farm-Mortgage Loans of Leading Lending Agencies (1937) ; Farm Credit Administration, Annual Reports (1933-38), Farm Credit Quarterly (1936-39) ; U.S. Department of Agriculture, Agri cultural Finance Review • B. RD.)