Ag Acts: The Farm Loan Act
Farming requires a lot of capital to operate. Inputs rose steadily for most of the 20th century, but have really taken off in the last 5o years with the introduction and wide spread adoption of synthetic fertilizers. This use has raised prices for the goods produced, but also significantly raised the capital needed. As farms grew with the widespread adoption and use of machinery expanded, there was a need for a new market; financial tools for the purchase of farm land and agricultural development.
In the late 1800s, if you needed capital to purchase land or fund a crop, you had to go to a bank and pay large interest rates to offset the risk, find a partner with financial means, or take on a predatory loan with low probability of success. In 1908, Theodore Roosevelt ordered a study on the problems facing rural families and communities. While it isn’t the case today, at that particular point in history rural families made up the largest demographic in the United States.
The commission found that the largest problem facing rural farmers was access to credit. Without government safety nets like crop insurance, farming was incredibly risky. Today, we use a variety of risk mitigation tools to grow a consistent crop. We use genetics to protect against disease and drought, chemicals to control weeds and fungicide to control disease. What all of this comes to provide is the highest level of food security the world has ever seen and a high floor for farmers operations. We have access to multiple markets to ship our crop, and the infrastructure to allow us to transport grain efficiently. Little to none of this existed for farmers in Theodore Roosevelt’s time. They were limited by distance to markets, lack of seed, chemical, or disease treating technology and nothing to withstand bad weather patterns. Almost every farmer was a bad crop away from losing the farm and their home.
The solution to this issue was the proposal of a cooperative credit system. One of the things we still have in common with our predecessors as farmers is watching good ideas get sidelined because of political change. It took four years for this commission’s recommendation to gain traction, as Woodrow Wilson sent a group to Europe to study the cooperative credit systems that were being implemented across the pond. The staples of the European institutions were cooperative land mortgage naks and rural credit unions working hand in hand to provide coverage across the countryside. The key for farmers was the access to short term credit to cover regular business costs and long term for land mortgage needs. This would allow for farm expansion and stability to extend the financial runway of a farm from the one bad season experience.
In 1916, Wilson signed into effect the Federal Farm Loan Act. Farmers were able to borrow up to 50% of the value of their land and 20% of their improvements and the loans were amortized between 5 and 40 years. In order to qualify for this program, borrowers had to buy shares in the National Farm Loan Association. This meant that the cooperative agency lent money from farmer to farmer in the model of the successful German program of Landschaft. (Be on the lookout for this in a future blog, this is a very interesting system with a neat history.) Another funding source for this cooperative program was mortgage-backed bonds that were capped on the amount of interest it paid so that it did not yield a significant profit. It was a risk management tool that paid out based on the fluctuation of the market.
The act lacked one significant piece; short term credit that could be tied into a nationalized credit system. This meant that it failed to meet the need for short term credit that was desperately needed due to increased competition for land the increased cost of agriculture machinery. This issue was corrected almost 7 years later in the Agricultural Credits Act of 1923. Wilson had built a reputation as a strong force against trusts and big business, and this cooperative credit system played into this image.
Having learned from previous financial crashes, this act implemented the Federal Farm Loan Board to oversee and regulate federal land banks and cooperatives. This board had the power to intervene in specific banks that it believed were trading in irresponsible loan strategies. Banks were required to keep at least $750,000 in capital and ownership of the banks were held by National Farm Loan Associations. These associations were made up of 10 or more mortgage holding farmers who as a group owned 5% or more of a federal land bank. This put the farmers in a position to be both borrowers and lenders in the cooperative system.
While this capital was sorely needed in rural America, it also created an issue. It put a lot of risk into one industry as opposed to having a diversified portfolio. This would rear its ugly head when the Great Depression hit, as land values tanked and the cooperative system bared the brunt of the financial loss. An average bank of this time would apply a high interest rate to an agricultural loan to offset the risk. When times were good and bad, these institutions had a better opportunity to manage this risk because of consumer accounts and loans. This diversified the bank’s portfolio in a way that cooperative couldn’t at the time. When the Great Depression hit, land values took a huge hit, and a banking institution based on lending against land values was nearly killed. Farmers resilience and belief in this cooperative financing system ultimately allowed for it to survive a time when other banks failed. Loyalty is a trait that has been synonymous with farmers throughout history, and it showed during the toughest economic period in our history.
While this act didn’t achieve the final form of the cooperative model, it was revolutionary for its time and allowed farms to survive and be passed down through generations. Thousands of farms are still in existence today because of this cooperative model, which means thousands of families have been able to build a legacy as a result.
