How First Pioneer taps national money markets to provide reliable, competitive credit anytime, all the time

In this article we look at how the Farm Credit System taps into funds from investors worldwide and delivers those funds to borrowers throughout Rural America. In a companion article we look at interest rates.

Once you are approved for a First Pioneer loan, you have access to your funds all year long, on any regular business day. Period. Not the first of next month, or "you are in the line" or "subject to scheduled delivery."

Whether you call your local office for a check, write your own Draftline check or do an e-banking transfer online at www.FirstPioneer.com your approved funds are always available.

It seems so easy.

Chances are, very few of you stop to ask First Pioneer, "But where do you get the money to loan your customers?"

Here is the answer …

A lot goes on

A lot goes on behind the scenes to make it all possible. To begin, First Pioneer Farm Credit is part of a national network of sophisticated financial institutions that work together to provide funding for rural America. That network is called the Farm Credit System, which was created in 1916 to provide a reliable, efficient source of funds to agricultural businesses, in both good times and bad.

The flow of cash to First Pioneer (and thus, to you) begins at the Federal Farm Credit Banks Funding Corporation (Funding Corp.), located in Jersey City, N.J. The Funding Corp. manages the sale of Farm Credit systemwide bonds and notes to securities dealers in the national and international money markets (also called the "bond" markets or "capital" markets). (See the chart to follow the flow of cash.)

Bonds and notes (also called "debt securities" because they represent borrowed funds) are the primary sources of funds for the Farm Credit System. The Funding Corp. issues these debt securities on behalf of the regional Farm Credit banks, and the banks provide loans to associations, who advance funds to customers' checking accounts.

Before an association approves loan applications from members, it has already negotiated a loan and line of credit with its regional Farm Credit bank. First Pioneer's regional bank is CoBank. Headquartered in Denver, Colo., CoBank also lends to several other Farm Credit associations, as well as to agricultural cooperatives and rural utility companies nationwide.

Paul Bajgier, First Pioneer senior vice president and treasurer, says, "First Pioneer has a $1.14 billion loan with CoBank on our books. The exact amount is listed in our annual report's balance sheet. We pledge our members' promissory notes - our members' loans - as collateral, and our loan balance changes every day based on the money we lend and collect."

According to Jim Miller, First Pioneer's senior vice president of finance, "Cash flow between First Pioneer and CoBank is a lot like plumbing. When the First Pioneer checking account gets low, CoBank opens the tap to fill it. When it is full, First Pioneer drains off some cash by paying down our loan to CoBank."

First Pioneer doesn't need to keep a lot of cash on hand to meet customer needs because CoBank's treasury department maintains sufficient liquidity to advance funds to First Pioneer and its other customers as needed. CoBank borrows the lion's share of its money from the capital markets by instructing the Funding Corp. to issue the appropriate amount and type of debt securities that best fit the profile of the loan portfolio.

Doug Williams, managing director of finance with the Funding Corp., explains that the Funding Corp. raises funds by issuing a variety of Farm Credit systemwide debt securities in the national and international money markets. These securities are purchased by securities dealers who sell them to investors. Essentially, Farm Credit securities (bonds and notes) are IOUs from Farm Credit to investors promising to repay a given amount with interest on a given date.

Who invests in Farm Credit bonds?

The Funding Corp. auctions Farm Credit bonds through approximately 50 securities dealers that comprise the "selling group." Each dealer is selected based on its demonstrated capacity to purchase and sell our securities. Examples of investment dealers from our selling group include such well-known names as Merrill Lynch, Lehman Brothers, Morgan Stanley, Goldman Sachs and Fidelity Investments.

The interest rates assigned to Farm Credit debt securities are arrived at in various ways. Some bonds are issued through an auction. The Funding Corp., based on the funding requests from the Farm Credit banks, determines the details of the bonds, such as the amount and maturity date. The interest rate assigned to the bonds is determined through the bidding process.

The investment firm bidding the lowest interest rate is awarded the bonds to underwrite (essentially to purchase and sell). The bonds are sold to investors, such as investment managers, insurance companies, state and local governments, banks and credit unions, corporations and other major investors. Individual investors can also buy Farm Credit bonds in denominations of $5,000 or more through an investment broker. (Be sure to talk to your financial adviser before making any investment decision.)

Why investors buy Farm Credit bonds

Farm Credit securities are very attractive to investors. Farm Credit is usually able to purchase its money for less than the very best major corporations are able to secure money for in the same markets.

Farm Credit securities are viewed very favorably in the marketplace. Here's why:

• Dependable payback of Farm Credit loans. Since the Farm Crisis of the 1980s, the Farm Credit System has established a solid reputation for making good loans to good farmers. Minimal loan losses lead to investor confidence in their "loans" (i.e., notes and bonds). In other words, the across-the-board outstanding credit performance of Farm Credit members benefits those same members with very attractive interest rates.
• The strength of the nationwide Farm Credit System. First Pioneer and its sister associations and banks across the country work hard to offer competitive market rates while achieving good earnings and building strong capital. If Farm Credit's financial performance slips, the market will demand a higher interest rate on our securities.
• Our status as a government sponsored enterprise (GSE). GSEs are financing entities created by Congress to fund loans to certain groups of borrowers such as homeowners, farmers and students. While the federal government does not guarantee repayment of Farm Credit securities, investors perceive GSE status as a strong signal of the importance of agriculture to our country and Congress's intent to stand behind the Farm Credit System in fulfilling its mission.
• Sound, careful regulation. As part of our GSE status, First Pioneer and all Farm Credit entities are examined and regulated by the Farm Credit Administration (FCA) for safety and soundness. This adds a level of oversight and assurance to the investing public and to our owner-borrowers. This is in addition to internal quality control and annual review by an independent public auditor.
• Backed by the Farm Credit Insurance Fund. Farm Credit loans are backed by the Farm Credit Insurance Fund, a self-funded insurance program that guarantees payment to bondholders if any Farm Credit entity were to default on repaying its share of Farm Credit bonds and notes.
• Flexible terms. The Funding Corp. floats a wide variety of bonds, including short-term and long-term securities with various maturities.
• Tax exempt. Interest earned on Farm Credit securities are generally local and state tax exempt.

A balancing act

The Funding Corp. balances the needs of the Farm Credit banks and associations with the desires of the investing community.

Farm Credit banks want flexible funding programs in order to advance funds when our customers need them, based on terms that are convenient to agricultural businesses. According to the Funding Corp.'s Doug Williams, Farm Credit's funding strategies are designed to reduce interest rate risk and obtain cost-effective funding.

These strategies are generally bank-specific resulting in local bank managers making independent funding decisions, rather than collectively issuing larger bonds. Joining to issue larger bonds might impair the flexibility that Farm Credit customers enjoy.

Williams adds that dealers and investors appreciate the high quality of Farm Credit bonds, and also prefer to own large, regularly issued securities, similar to U.S. Treasury issues. Large issues are popular because they are more liquid than smaller issues because of higher trading activity, and therefore can more easily be sold before their maturity date, if needed.

The Funding Corp. operates in the highly competitive bond market, competing with other large issuers for investors' dollars, such as Freddie Mac and Fannie Mae (government-sponsored mortgage lenders) and the U.S. Treasury.

"In addition to stiff competition," Williams says, "the Funding Corp. must be sensitive to many other factors that can affect the appeal of Farm Credit bonds in the market and thereby affect our cost of funds, from uncontrollable fluctuations in the market to the political climate on Capitol Hill."

Products, reputation, solid standing

The Funding Corp. has the products, reputation and solid financial standing to function, in spite of a very competitive bond market and in spite of national and international crises.

Its mission, like the mission of First Pioneer Farm Credit, is to be agriculture's number one source for reliable credit. That was the Farm Credit mission when we started in 1916, and that is our same mission today.

We hope that this article has helped you understand how Farm Credit works - how we raise money to loan to you and to other agricultural enterprises - and why money is available virtually anytime you need it, regardless of economic cycles or national crises.

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