- - AGRICULTURE CORE CURRICULUM - - (CLF1000) Advanced Core Cluster: AGRICULTURAL BUSINESS MANAGEMENT (CLF1400) Unit Title: FINANCE AND CREDIT ____________________________________________________________________________ (CLF1402) Topic: PUBLIC SOURCES OF CREDIT Time Taught in Year(s) 2 hours 3/4 ____________________________________________________________________________ Topic Objectives: Upon completion of this lesson the student will be able to: Learning Outcome #: (F-3) - List factors to consider in selecting a source of credit. (F-4) - Match sources of credit to a list of advantages and disadvantages. Special Materials and Equipment: Supplemental Worksheet #1; guest speaker from a local PCA or FLB; and CLF1405 - Glossary. References: Luening, R. A., Klemme, R. M., & Mortenson, W. P. (1991). THE FARM MANAGEMENT HANDBOOK (7th ed.). Danville, IL: Interstate Publishers. Osburn D. D., & Schneeberger, K. C. (1983). MODERN AGRICULTURAL MANAGEMENT: A SYSTEMS APPROACH TO FARMING (2nd ed.). Reston, VA: Reston Publishing. Evaluation: Topic Test (attached) TOPIC PRESENTATION: PUBLIC SOURCES OF CREDIT A. Public credit for agriculturalists is available from four main sources: 1. Federal Land Bank (FLB) associations 2. Production Credit Associations 3. Banks for Cooperatives 4. Farmer's Home Administration (FmHA) B. Federal Land Banks (FLB) and Production Credit Association (PCA) are not directly funded by the federal government but are under the supervision of the Farm Credit Association, which is an independent federal agency; they raise their loan funds through the Federal Farm Credit Banks. 1. The Farm Credit System provides one-third of the nation's agricultural credit. 2. The system's dedication to agriculture began 70 years ago when the federal government created Federal Land Banks to provide long-term and real estate loans to agriculturalists and ranchers. 3. Today the system also includes PCAs, which provide short- and intermediate-term loans to agriculturalists. 4. In addition, the Banks for Cooperatives lend to co-ops. 5. The system is owned and directed by the agriculturalists and co-ops it serves. a. For most loans, borrowers must invest in Farm Credit borrower stock at a percent of the loan amount. 1) This makes the borrowers "owners" and contributes money to the system that can be loaned to other agriculturalists or invested in other enterprises. a) Usually 5% of the total loan is required as the minimum stock purchase. 2) Owning stock allows borrowers to take an active part in the cooperative, including: a) Voting on the application a fellow borrower b) Serving on a Farm Credit board of directors c) Voting in Farm Credit business affairs 6. The advantages for borrowers are many: a. The system is dependable; it does't abandon agriculture during tough times. b. It is flexible, basing repayment on seasonal agricultural income. c. It knows agriculture. System loan officers have both financial expertise and a background in agriculture; they understand agriculturalists' needs. d. The system has a reliable, competitive source of funds. Unlike some government and commercial loan programs, farm credit funding sources are not short of funds to lend toward the end of the year. C. The Federal Land Bank is a nationwide cooperative designed to meet long-term farm credit needs. 1. Money from the FLB can be used for: a. Buying farms and rural homes b. Land improvements c. Refinancing existing loans d. Erecting new buildings e. Farm-related businesses f. Basic processing and marketing operations g. Commercial fishing operations 2. The Federal Land Bank (FLB) provides three basic types of loans for long-term investments in real estate: a. With variable-rate loans, the interest rate goes up or down depending on how much the average cost of bonds issued by the FLB goes up or down. 1) The FLB's interest rate is not tied to the prime rate but rather to the amount it costs the FLB to obtain the funds it lends. 2) There is no prepayment penalty so if the loan is paid off early the borrower saves on interest cost; this is an important consideration. b. With fixed-rate loans, the borrower pays the same interest rate for a period of five years. 1) The benefit here is that payments are stable for a set period of time. 2) Fixed-rate loans can be used for the same purposes as the variable-rate loans. c. The third type of credit the FLB offers is the Rural Home Loan Program. 1) Money from this program can be used to buy, build, or remodel a single-family home. 3. The periods of the loans may vary from 5 to 40 years. a. A committee of agriculturalists who have loans with the local association, as well as the professional staff, make decisions on whether or not to grant a loan. 4. The disadvantages of the system are in the types of restrictions that apply to the loans. a. With a variable-interest loan, the cost for interest can go up, thus making the loan payments higher. b. There are also restrictions on where a home can be built using this money. c. The FLB associations operate in well-defined areas, so it is not possible to "shop around" for the best loan from this source. D. Production Credit Associations exist to make short- and intermediate- term loans for production expenses, machinery, and building construction or improvement. 1. A variable-interest rate similar to that of the FLB is used. 2. Crop and livestock loans are generally due when the commodity is sold. 3. Intermediate-term loans for machinery or buildings are generally for a term of 1 to 7 years, with some as long as 10 years. 4. Loans can also be used for living expenses and for businesses that directly service agriculturalists (for example, custom sprayers and/or leveling companies). 5. Production Credit Associations may also participate with commercial banks in making production loans. 6. To be eligible for a loan from the PCA, the borrower must meet at least one of the following criteria: a. Own land or be engaged in production b. Be a legal entity with greater than 50% of equity owned by agriculturalists c. Have more than 50% of the assets related to agricultural production d. Derive 50% or more of the income from agricultural production e. Be a farm-related business that provides on-farm services 7. The disadvantages of the system are the restrictions that apply to the loans. E. The Banks for Cooperatives are limited and committed to serving agriculture. 1. Their borrowers are engaged in: a. Marketing, processing, or storing products b. Purchasing, manufacturing, or distributing supplies c. Providing business services (for example, rural electric and telephone cooperatives) 2. Some of the Banks for Cooperatives' larger customers include Farmland Industries, Ocean Spray, Land O'Lakes, CENEX, Sun Maid, and Welch's. 3. Banks for Cooperatives customers must invest in stock in the BCs in proportion to their loan amount. a. This stock allows the co-op to vote for BC representatives on the Farm Credit boards of directors and to vote in other BC business affairs. 4. Since cooperatives' needs correspond to the seasonal nature of farming, the Banks for Cooperatives provide seasonal loans which mature within 18 months. 5. BCs also provide long-term loans for everything from remodeling to purchasing land. Lines of credit are available. a. Interest rates vary, depending on the type and term of the loan. 6. One of the best ways the Banks for Cooperatives help agriculturalists is by promoting U.S. agricultural exports. a. Once a cooperative has found an overseas market, Banks for Cooperatives can provide financial services to the buyer through their Central Bank for Cooperatives (CBC). b. CBC customers include overseas banks, governments, cooperatives, corporations, and individuals. c. The CBC also participates in loans from district BCs when the amount of credit needed by a cooperative customer exceeds the district lending limits. 7. The BCs offer additional services including budgeting, long-range planning, credit standards, and auditing. Their principal objective is to improve the income and well-being of producers of food and fiber. F. The Farmers Home Administration is a government lending agency within the USDA. 1. The Farmers Home Administration makes loans for farm ownership, soil and water improvements, and disaster relief. 2. It also makes loans to agriculturalists who have limited resources. 3. The main requirement for getting an FmHA loan is the inability to get credit elsewhere, i.e., unable to obtain credit, at a reasonable rate, from more conventional sources. a. If at any time the borrower qualifies for credit from another source, he/she must refinance (borrow from someone else) the loan. 4. As noted above, the primary disadvantages of these loans are the very strict limitations on who can obtain money and the requirement for refinancing if the borrower becomes eligible for a loan from another source (which will usually cost the borrower more money through higher interest payments upon refinancing). __________________________________________________________ ACTIVITY: 1. Using Supplemental Worksheet #1, review the steps necessary in applying for a loan. Have the students use their enterprise records to prepare for and complete loan applications. 2. Invite a guest speaker from the local PCA to talk about his or her job and the types of loans made to local agriculturalists. __________________________________________________________ Supplemental Worksheet #1 Name____________________ Date____________________ - - Public Lending Institutions - - 1. Do any of the local cooperatives obtain loans from the Banks for Cooperatives? 2. What sources of public credit are available to agriculturalists? 3. One of the conditions of borrowing from the FLB is that the borrower buy ______________ in the local FLB association in ___________________ to the _______________. 4. Briefly discuss the similarities and differences between FLB loans and PCA loans. 5. Obtain any available information on loans from the FLB, PCA, and FmHA in your area and compare their terms, interest rates, services, and eligibility requirements. How do they differ? How are they alike? Where does their funding come from? Make a chart on the back of this page. 6. What could go "wrong" (from the borrower's perspective) with a variable- interest rate loan? 7. Briefly explain the features of fixed-rate FLB loans. 8. Contact your local FLB and find out what has happened to the interest rate on variable-rate loans over the past 10 years. What has caused the fluctuations? Topic Test Name____________________ Date____________________ - - Public Lending Institutions - - 1. FLB and PCA are funded by the federal government. TRUE or FALSE? 2. The PCA loan officer who processes a loan application will also decide whether or not the applicant gets the loan. TRUE or FALSE? 3. Since PCA and the FLB operate in strictly defined areas, it is not possible to "shop around" for the best loan package. TRUE or FALSE? 4. FLB groups provide both ______________ and _____________ interest rates on their loans. 5. The main eligibility requirements for FmHA loans is the agriculturalist's __________________________ to obtain credit elsewhere. 6. Variable-rate loans from the FLB stay within 2% of the prime rate. TRUE or FALSE? 7. FLB loans can be used for commercial fishing operations. TRUE or FALSE? 8. The FLB also offers rural home loans. TRUE or FALSE? 9. Short-term operating loans from the PCA are due when the crop is sold. TRUE or FALSE? 10. When obtaining a FLB loan, the applicant must purchase ________________ in proportion to the loan, usually _______ % of the loan total. 11. The Central Bank for Cooperatives lends money to (circle as many as apply): a. Foreign buyers of U.S. agricultural products b. Individual agriculturalists c. Small local supply cooperatives only d. Grocery stores 12. The Banks for Cooperatives are a part of the Farm Credit System. TRUE or FALSE? 13. How do Banks for Cooperatives help agriculturalists? (There is only one correct answer.) a. By buying farm supplies at discount rates b. By lending money to their cooperatives c. By providing deficiency payments to agriculturalists d. By providing full-service banking to all Americans 14. The Banks for Cooperatives' primary responsibility (objective) is to make loans directly to individual agriculturalists. TRUE or FALSE? Test Key 1. True 2. False 3. True 4. fixed and variable 5. inability 6. False 7. True 8. True 9. True 10. stock, 5% 11. a & b 12. True 13. b 14. False 12/12/91 GFV/EEZ/sg #%&C