The Agricultural Credit Act of 1987 is a landmark piece of United States legislation that played a crucial role in the structure of agricultural finance. It established the Federal Agricultural Mortgage Corporation, commonly known as Farmer Mac, which is designed to create a secondary market for agricultural loans. This act aimed to enhance the availability and affordability of credit for the agricultural sector.
Historical Context
Background
The agricultural sector in the 1980s faced severe economic distress, characterized by high interest rates, falling commodity prices, and heavy debt burdens. The crisis necessitated federal intervention to ensure the stability and sustainability of agricultural lending.
Legislative Journey
The Agricultural Credit Act was signed into law by President Ronald Reagan on January 6, 1988. The act emerged from a need to provide farmers with more robust financial support during a period of widespread economic hardship.
Main Provisions of the Act
Establishment of Farmer Mac
The most notable aspect of the Act was the creation of Farmer Mac. This institution was meant to provide liquidity and reduce the costs of financing for farmers by fostering a secondary market for agricultural real estate and rural housing mortgage loans.
Key Features of Farmer Mac:
- Secondary Market Operations: Farmer Mac buys qualified agricultural and rural housing loans from lenders, pools them, and issues mortgage-backed securities.
- Enhanced Credit Services: By offering a secondary market, Farmer Mac helps lower interest rates for borrowers and provides greater access to capital for agricultural lenders.
- Public-Private Partnership: Farmer Mac operates as a publicly traded, government-sponsored enterprise (GSE).
Financial Support Measures
The Act also included several financial relief measures for farmers:
- Loan Refinancing: Provisions for refinancing existing farm loans to take advantage of lower interest rates.
- Debt Restructuring: Programs designed to assist farmers in restructuring their debt to prevent foreclosures.
- Government Guarantees: Increased guarantees on agricultural loans to assure lenders and investors.
Impact on Agriculture and Finance
Benefits for Farmers and Lenders
- Increased Liquidity: By creating a secondary market for agricultural loans, Farmer Mac injected much-needed liquidity into the agricultural financing system.
- Stabilized Farm Credit System: The legislation helped stabilize the farm credit system during a period of financial uncertainty and distress.
- More Competitive Interest Rates: Access to a secondary market facilitated more competitive interest rates for borrowers.
Long-term Implications
- Ongoing Access to Capital: The establishment of Farmer Mac ensures that farmers have ongoing access to affordable and reliable sources of capital.
- Template for Future Legislation: The Act has served as a model for subsequent agricultural financial legislation and policies aimed at enhancing rural credit systems.
Related Terminology
Government-Sponsored Enterprise (GSE)
Definition: A GSE is a financial services corporation created by the United States Congress to enhance the flow of credit to specific sectors of the economy, such as housing or agriculture.
Secondary Market
Definition: The secondary market is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold.
Agricultural Loan
Definition: An agricultural loan is a loan that provides financial support to farmers and agricultural businesses for purposes such as buying equipment, seeds, livestock, land, or other necessary agricultural inputs.
Frequently Asked Questions (FAQs)
What was the primary reason for the enactment of the Agricultural Credit Act of 1987?
The primary reason was to stabilize the agricultural sector, which was reeling from economic hardships, by ensuring better access to credit and more robust financial support structures.
How does Farmer Mac operate?
Farmer Mac operates by buying qualifying agricultural loans from lenders, pooling these loans, and then issuing them as securities. This process provides liquidity to lenders and helps lower borrowing costs for farmers.
Is Farmer Mac a government agency?
Farmer Mac is a government-sponsored enterprise (GSE). While it was created by federal legislation and serves a key public policy purpose, it operates as a publicly traded company.
Conclusion
The Agricultural Credit Act of 1987 stands as a pivotal legislative action designed to bolster the agricultural economy of the United States. By establishing Farmer Mac, it significantly improved the financial mechanisms supporting American farmers, providing them with enhanced access to credit and more resilient financing options. This act not only addressed the immediate crisis of the 1980s but also laid the groundwork for a more stable and efficient agricultural credit system in the future.
