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Agricultural and USDA Lending

The Farm Credit Administration (FCA) is an independent Federal agency that regulates and examines the banks, associations, and related entities of the Farm Credit System (FCS), a national network of borrower-owned lending institutions that includes the Federal Agricultural Mortgage Corporation (Farmer Mac).

The FCS is the largest agricultural lender in the United States. It is a nationwide network of lending institutions that are owned by their borrowers. It serves all 50 States and Puerto Rico.

Today, the FCS is structured into three Farm Credit Banks (FCBs); 76 Agricultural Credit Associations (ACAs) and 2 FLCAs, each of which receives loan funds from the Farm Credit bank with which it is affiliated; and one Agricultural Credit Bank (CoBank), which has the authority of an FCB (in that it provides loan funds to 26 ACAs and one FLCA) and the authority of a BC (in that it lends to agricultural and aquatic cooperatives and rural utilities; finances U.S. agricultural exports and imports; and provides international banking services for farmer-owned cooperatives).

Today, most of the associations have adopted the ACA parent structure with wholly owned PCA and FLCA subsidiaries to disburse short-, intermediate-, and long-term loans. This structure enables an integrated, full-service lending business. The three associations agree to guarantee each other’s debts and obligations, pledge their assets as security for their direct loans from the FCB, and combine their capital and assets to absorb any losses. They share the same board of directors, management, and staff. The objective is to meet the credit and financial service needs of customers in the most cost-effective manner possible.

Farm Credit institutions are chartered by the federal government and must operate within limits established by the Farm Credit Act. The Farm Credit System is regulated by an independent federal agency, the Farm Credit Administration, which has all of the enforcement, regulatory and oversight authority as other federal financial regulators. Farm Credit is a government-sponsored enterprise, or “GSE” – a privately owned set of institutions established by Congress to address the needs of a specific sector of the economy.

USDA Grant and Lending Programs

United States Department of Agriculture (USDA), established by Congress and signed into Law by Abraham Lincoln in 1862, is the leading advocate for rural America. The USDA has a number of programs, but of particular note for the Banking Industry is the B&I loan guaranty program.

Business Opportunities

USDA works with private sector and community-based organizations to provide financial assistance and business planning in rural areas to create or preserve quality jobs and promote a clean rural environment in under-served areas. Recipients include individuals, corporations, partnerships, cooperatives, public bodies, nonprofit corporations, Indian tribes, and private companies.

USDA provides funding opportunities for rural small businesses through loans, loan guarantees, and grants.

USDA provides loans and grants to develop essential public community facilities such as schools, libraries, childcare, hospitals, medical clinics, assisted living facilities, fire and rescue stations, police stations, community centers, public buildings and transportation in rural areas.

Community Development Opportunities

Rural Business-Cooperatives Service

Rural Housing Service - Community Facilities

Rural Housing Service - Multi-Family Housing

Rural Housing Service - Single-Family Housing

Rural Utilities Service - Electric Programs

Rural Utilities Service - Telecommunications Programs

Rural Utilities Service - Water & Environmental Programs

Service Corporations

AgVantis, Inc., provides technology- related and other support services to associations in the CoBank, ACB, district. AgVantis, which was chartered by FCA on August 3, 2001, is owned by the bank and 17 of its affiliated associations.

Farm Credit Leasing is a wholly owned subsidiary of CoBank, a national cooperative bank serving vital industries across rural America

Farm Credit Financial Partners, Inc., provides support services to CoBank, ACB; five associations affiliated with CoBank; one association affiliated with AgriBank, FCB; the Farm Credit Leasing Services Corporation; and two FCS-related entities.

FCS Building Association (FCSBA) acquires, manages, and maintains facilities to house FCA’s headquarters and field office staff. The FCSBA was formed in 1981 and is owned by the FCS banks. The FCA Board oversees FCSBA’s activities on behalf of its owners.

Farm Credit Foundations is a collaboration of Farm Credit employers who have come together over the past decade to create centralized HR shared services focused on meeting the their own human capital needs, including payroll processing, benefits administration, centralized vendor management, workforce management and operations, corporate tax and financial reporting services, and retirement workshops. It is owned by AgriBank, FCB, and each of its 17 affiliated associations, as well as 24 associations and 1 service corporation (AgVantis, Inc.) affiliated with CoBank, ACB.

Federal Agricultural Mortgage Corporation (Farmer Mac)

The Federal Agricultural Mortgage Corporation, commonly known as Farmer Mac, is a stockholder-owned, government sponsored enterprise or "GSE" created by Congress to improve the availability of long-term credit for America's farmers, ranchers, rural homeowners, businesses and communities. Farmer Mac accomplishes this public policy mission by providing a secondary market for qualified agricultural mortgage loans, rural housing mortgage loans, rural utilities loans (to cooperative borrowers made by cooperative lenders) and the guaranteed portions of agricultural and rural development loans guaranteed by the U.S. Department of Agriculture.

The Farmer Mac secondary market provides liquidity and lending capacity to lenders by:

purchasing newly originated and existing eligible loans directly from lenders;
exchanging loan-backed securities guaranteed by Farmer Mac ("Farmer Mac Guaranteed Securities") for eligible loans that back those securities in "swap" transactions;
issuing long-term standby purchase commitments ("LTSPCs") for eligible loans; and
purchasing and guaranteeing loan backed securities secured by eligible loans, which are referred to as AgVantage® bonds.

Farmer Mac conducts these activities through the following programs-Farmer Mac I, Farmer Mac II, and Rural Utilities Loans:

Under the Farmer Mac I program, Farmer Mac purchases or commits to purchase eligible agricultural mortgage loans or securities backed by eligible agricultural mortgage loans. To be eligible for the Farmer Mac I program, loans must meet Farmer Mac's credit underwriting, collateral valuation, documentation and other specified standards. Eligible collateral includes: (1) agricultural real estate that is used for the production of one or more agricultural commodities or products (may be improved by permanently affixed structures such as facilities) and (2) rural residences with excess acreage where the production of agricultural commodities or products is underway or planned on the property.

Under the Farmer Mac II program, Farmer Mac purchases the guaranteed portions of loans guaranteed by the United States Department of Agriculture ("USDA-guaranteed portions"). Eligible USDA-guaranteed portions include Farm Service Agency Guaranteed Farm Ownership and Operating (Term) loans and Rural Development Business and Industry and Community Facility Guaranteed loans.

Under the Rural Utilities Loans program, Farmer Mac purchases, or commits to purchase, qualified rural utilities loans, or guarantees the timely payment of interest and principal of securities representing interests in or obligations backed by pools of such loans.
The securities Farmer Mac guarantees are either sold to investors in capital markets, retained on the books of the holder or purchased by Farmer Mac and retained in its portfolio.

Farmer Mac's programs provide participants with an efficient and competitive secondary market that enhances the participants' ability to offer eligible loans to farmers, ranchers, rural homeowners, rural communities and businesses.

Source: Federal Agricultural Mortgage Corporation website at http://www.farmermac.com/

Lender Review

The Perishable Agricultural Commodities Act (PACA)

The Perishable Agricultural Commodities Act (PACA) was enacted at the request of the fruit and vegetable industry to promote fair trade in the industry. The PACA protects businesses dealing in fresh and frozen fruits and vegetables by establishing and enforcing a code of fair business practices and by helping companies resolve business disputes.. A major objective of the PACA program is to help ensure that dealers of fresh and frozen fruits and vegetables get what they pay for and get paid for what they sell, including when their customers go out of business, declare bankruptcy, or simply refuse to pay for the fruits and vegetables received.

IB Comment: It is extremely important that any lender who deals with growers, wholesalers and distributors of fruits and vegetables to understand PACA. A PACA claim will prime (jump ahead of) a lender's lien position on inventory and the proceeds of that inventory (i.e. accounts receivable).

Further information can be obtained from USDA.gov; search on PACA.

PACA provides that fruits and vegetables are sold subject to statutory trust authorized by section 5(c) of the Perishable Agricultural Commodities Act, 1930 (7 U.S.C. 499e(c)). The seller of these commodities retains a trust claim over these commodities, all inventories of food or other products derived from these commodities, and any receivables or proceeds from the sale of these commodities until full payment is received.

For further legal background on PACA:

The PACA is found in 7 U.S.C. §499 et seq. The trust provisions of the PACA are set out in 7 U.S.C. §499e(c). The related regulations are found in 7 C.F.R. § 46.46. You may also request pamphlet copies from any of the PACA Branch field offices or by calling toll free 877-622-4716.

The following is a basic list of PACA trust related cases that may be useful to review:

Greg Orchards & Produce, Inc. v. Roncone, 180 F.3rd 888, 890-91 (7th Cir.1999).
C.H. Robinson Co. v. Trust Bank NA., 952 F.2d 1311,1315 (11th Cir. 1992).
Golman-Hayden Co. v. Fresh Source Produce, Inc. 217 F.3d 348,351 (5th Cir. 2000).
In re Magic Rests., Inc., 205 F 3d 108,111 (3d Cir. 2000).
In re Lombardo Fruit & Produce Co., 12 F. 3d 806,809 (8th Cir. 1993).
Idahoan Fresh v. Advantage Produce, Inc., 157 F.3d 197,205 (3d Cir. 1998).
Hull Co. v. Hauser's Foods, Inc. 924 F.2d 777,781-82 (8th Cir. 1991).
Stowe Potato Sales, Inc. v. Terry's Inc., 224 B.R. 329,333 (W.D. Va. 1998). A&J Produce Corp. v. CITGroup/ Factoring, Inc., 829 F. Supp.651, 655 (S.D.N.Y.1993).
Israel v. Merrill, 812 So. 2d 347,352 (Ala. Civ. App. 2001).
In re Richmond Produce Co., 112 B.R. 364,373 (Bankr. N.D. Cal. 1990).

Packers and Stockyards Act (PASA)

An unpaid seller of livestock may be entitled to assert a secured claim based upon the Packers and Stockyards Act (PASA). PASA creates a statutory trust for the benefit of unpaid cash sellers. Under the provisions of PASA, an unpaid cash seller is entitled to have its claim satisfied from the assets of the defaulting packer, including livestock, meat, accounts receivable and their proceeds. Only unpaid cash sellers of livestock have standing to exert a claim. For purposes of the trust provisions of PASA, a cash sale is any sale which the seller does not "expressly" provide credit to the buyer. See USDA.gov for further information on PASA.

IB Comment: Like PACA, PASA creates a statutory lien on the proceeds of livestock, which can prime a lender's UCC lien.

Packers and Stockyards Act, 1921, enacted August 15, 1921 (42 Stat. 159) and amended and supplemented by the following acts of Congress:

May 5, 1926 (44 Stat. 397)
June 7, 1934 (48 Stat. 926)
August 14, 1935 (49 Stat. 648)
August 10, 1939 (53 Stat. 1351)
June 19, 1942 (56 Stat. 372)
July 12, 1943 (57 Stat. 422)
June 25, 1948 (62 Stat. 909 and 991)
May 24, 1949 (63 Stat. 107)
August 28, 1958 (72 Stat. 944, Pub. L. 85-791)
September 2, 1958 (72 Stat. 1749, Pub. L. 85-909)
July 8, 1963 (77 Stat. 79)
July 31, 1968 (82 Stat. 474, Pub. L. 90-446)
September 13, 1976 (90 Stat. 1249, Pub. L. 94-410)
October 2, 1978 (92 Stat. 886, Pub. L. 95-409)
November 23, 1987 (101 Stat. 917, Pub. L. 100-173)
October 13, 1994 (108 Stat. 3178, Pub. L. 103-354)
October 22, 1999 (113 Stat. 1210, Pub. L. 106-78)
November 9, 2000 (114 Stat. 2077, Pub. L. 106-472)
May 13, 2002 (116 Stat. 134, Pub. L. 107-171)
November 2, 2002 (116 Stat. 1921, Pub. L. 107-273)
December 3, 2004 (118 Stat. 2635, Pub. L. 108-444)
October 5, 2006 (120 Stat. 1464, Pub. L. 109-296)
June 18, 2008 (122 Stat 1651, Pub. L. 110-246)

UCC Rules Regarding Agricultural Products

Goods Other Than Inventory or Livestock - Article 9 of the Uniform Commercial Code gives a perfected purchase money security interest in goods other than inventory or livestock that are farm products priority over conflicting security interests in goods that are identifiable cash proceeds, if the purchase money security interest is perfected within 20 days after the debtor receives possession.

Inventory and Livestock. - File a UCC-1 in the county where the farm product is produced or to be produced. In the case of stored grain or livestock, it is the county where the product is located.

IB Comment: See NationalAGLawCenter for detailed UCC filing information

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