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How does the current turmoil in the financial markets affect Farm Credit? Is Farm Credit still lending money? Can Farm Credit still borrow money itself? Will interest rates go up?
Yes, we are still lending money and Farm Credit is still able to borrow money itself.
A good source of information is the Federal Farm Credit Banks Funding Corporation, which issues debt for the System. The Funding Corporation recently posted a "Questions and Answers" document that addresses some of these questions. In brief, the System is financially strong. I encourage you to read the Q&A document yourself. You can find it under Press Releases on the Funding Corporation's web site. Look for the press release dated 9/24/08.
The Funding Corporation's web site also includes regular press releases every time the System issues term debt. At the above link you can find press releases for the two most recent issuances of term debt, called Designated Bonds. On 7/10/08—before the crisis, the System issued $2 billion of 3-year Designated Bonds at a yield of 3.6%. Last Friday (9/26/08) the System issued $1.55 billion of 5-year Designated Bonds at a yield of 4.0%.
Finally, the Funding Corporation's web site includes annual and quarterly information statements for the System which describe the financial condition of the Farm Credit System in considerable detail.
I am not aware that any part of the Farm Credit System is in financial distress at present. Farmer Mac has had negative press recently, but they are not part of the System. Farmer Mac does not obtain its funds through the Funding Corporation and the System is not liable for Farmer Mac's debt. Farmer Mac and the Farm Credit System do share a common federal regulator, the Farm Credit Administration. If you want to follow Farmer Mac, their SEC filings are here. Farmer Mac has exposure to the Fannie Mae takeover (1 million shares of preferred stock) and the Lehman Brothers bankruptcy ($60 million of Lehman debt).
Employees of Yankee Farm Credit are naturally concerned about what is happening with Merrill Lynch, because Merrill Lynch manages our retirement accounts. The purchase of Merrill Lynch by Bank of America is reassuring. Indications are that it will be business as usual with our retirement accounts, except of course that anyone invested in the stock market is suffering declines along with everyone else.
Customers of Yankee Farm Credit may be concerned about what is happening with Wachovia, because we use Wachovia to disburse funds. The purchase of Wachovia by Citigroup is reassuring, and indications are that it is business as usual with our cash disbursement operations. See, for example, this FDIC press release.
Are interest rates going up? Many market interest rates are indeed increasing, as lenders and creditors perceive more risk in the world. LIBOR rates, for example, are increasing. (If you aren't familiar with LIBOR, there is a primer here.) LIBOR rates are important to many financial institutions, including Farm Credit.
Our cost of funds at Yankee has increased as a result of increases in LIBOR. It is likely that we will need to increase interest rates to borrowers at some point, but we are not increasing rates at present. I am aware that First Pioneer Farm Credit is increasing rates by 0.25% effective Oct. 1 and Farm Credit of Maine is increasing rates by 0.25% effective Oct. 8. If we increase rates it will be Nov. 1 at the earliest.
One should certainly not expect Yankee's interest rates to decrease. Historically we have followed changes in the prime interest rate, which in turn has historically followed interest rate changes by the Federal Reserve. We don't expect any immediate change in interest rates by the Fed. But it is possible that the Fed would decrease interest rates in response to current financial conditions. If the Fed does decrease interest rates, we will break with our historical practice and not follow.
What will happen next? I can only note that today is quarter-end for most institutions, and it is likely that there will be more surprises. Stay tuned.
UPDATE 10/01/08: Developments at Farmer Mac: the five banks in the Farm Credit System plus Zions Bancorporation invested $65 million in preferred stock; and Farmer Mac's board of directors appointed Michael Gerber, president and CEO of Farm Credit of Western New York, as acting president and CEO, replacing Henry Edelman, effective immediately. Farmer Mac news releases here. Funding Corporation news releases (including a "Questions and Answers" document about these events) here.
