and planning process, designated Project
1995, with the objective of designing and
implementing thoughtful change. The var-
ious analyses and reports flowing from Project
1995 examine the likely future environment
for the FCS, identify major issues, and suggest
alternative strategies. Project 1995 will ap-
parently be a continuing process of strategic
planning at all levels in the System. In reading
the various Project 1995 summary docu-
ments, one can easily conclude that greater
market penetration may be a major objective
of the System.
In the Project 1995 report relating to fi-
nancial markets, the agency status issue is
addressed (Farm Credit System, 1984a, p.
30). Options are identified in the event loss
of agency status becomes a reality. The op-
tions are defined in terms of clientele to be
served and funding source options. The re-
moval of agency status for the FCS has been
evaluated by Lins and Barry. The agency ad-
vantages over other lenders in acquiring loan-
able funds enumerated by Lins and Barry
include the implicit government backing of
securities, certain regulatory exemptions and
preferences, and limited tax exemptions. They
cite arguments for and against removal of
agency status.
An affirmative act of Congress would be
required to remove the FCS agency status.
Given the current financial stress in agricul-
ture, loss of agency status or imposition of
a “user fee” for the FCS appear to be remote
possibilities. If the current situation persists,
an explicit guarantee would appear to be a
more likely possibility. Such a guarantee could
assure an orderly flow of funds to qualified
borrowers, despite continuing stress on the
System and the industry.
FCS borrowers are in the unique position
of being equity owners of their creditor. Dur-
ing a period of financial stress, this dual
relationship has the potential to create a
problem for the System. If borrowers are
aware of loan loss sharing obligations, and if
the association capital base is eroding, there
may be a tendency for the better credits to
migrate to other lenders, thereby placing fur-
ther stress on the institution. Depending on
the specifics of the loan loss agreement, the
district and the System could also be affected.
EQUITY CAPITAL
The preceding discussion suggests that fi-
nancial markets for agricultural debt capital
106
are well developed. The same is not the case
for agricultural equity capital. Currently, ag-
ricultural equity markets are highly local-
ized, informal, and probably inefficient. The
same is the case for the long term asset leasing
markets. Institutional barriers, such as the
prohibition of alien and/or corporate own-
ership of farm land, no doubt account in part
for the lack of a formal organized market in
agricultural asset equities. However, other
factors such as the extra-market value placed
on land, the desire to “preserve the family
farm,” and similar agricultural fundamental-
ist views are no doubt contributing factors.
As suggested earlier, decontrol of financial
markets has increased financial risks in ag-
riculture and in other industries, and we are
aware of no evidence that business risks in
agriculture have been moderated. This would
suggest a need for a market for spreading the
agricultural equity risk over a broad base.
Clearly, the investment banking industry and
other financial service entities have in place
the instruments to provide equity investment
opportunities in agriculture on an organized
market base that would provide liquidity.
However, such markets will develop only if
agricultural equity instruments provide re-
turns comparable to other investments with
similar risk and liquidity characteristics. Al-
though the future course of events with re-
spect to ownership structure is far from clear,
it seems inevitable that there will be a trend
toward separation of the ownership and op-
erating functions.
CAPITAL REQUIREMENTS AND
FINANCIAL STRUCTURE
Capital requirements in agriculture, in real
terms, are determined by the rate of capital
formation in the industry. When decision-
makers elect to invest in technology to en-
hance output, to improve efficiency, or to
augment industry financial capital, capital
formation can occur at a rapid rate. Much of
the capital in agriculture is specialized to
the extent that it is difficult to transfer to
other industries. However, real negative cap-
ital formation (disinvestment) may occur as
a consequence of failure to maintain capital
stocks as assets depreciate or by causality
losses.
Capital requirements in agriculture can be
met by cash flow (retained earnings) from
the industry, by a net infusion of equity cap-
ital from поп-agricultural sources, or by debt