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Wednesday, October 8, 2008

Farmer Mac's Amber Waves Of Pain

Farmer Mac's Amber Waves Of PainThe agricultural sector swept in and bailed out its own Wednesday at a time when farmers are feeling the impact of the credit crunch.

Federal Agricultural Mortgage, the rural cousin of Fannie Mae and Freddie Mac announced a $65.0 million capital infusion from a group of banks on Wednesday.

Federal Agricultural Mortgage, which is also known as Farmer Mac and was created by the U.S. government as a secondary market for agricultural real estate and rural housing mortgage loans, saw its shares soar 65.6%, or $2.69, to $6.79, on Wednesday, but that will be cold comfort to investors who paid more than $30 for it in August. The shares held up well until last month, when the Treasury took control of Fannie Mae, in which Farmer Mac held preferred shares.

The Farm Credit System, which is a federally chartered network of borrower-owned lending institutions, purchased $60.0 million in preferred stock of Farmer Mac. In addition $5.0 million of Farmer Mac senior cumulative perpetual preferred stock has been purchased by Zions Bancorporation of Salt Lake City.

“Farmer Mac enhances the availability of agricultural mortgages, and more recently, rural utility loans, thereby assisting in the steady and dependable flow of capital to American farmers and ranchers and rural America,” said Robert B. Engel, chief executive officer of CoBank, one of the Farm Credit System institutions. He was speaking on behalf of his fellow Farm System Bank presidents.

Meanwhile, just as Farmer Mac got a bailout on Wednesday, U.S. Agriculture Secretary Ed Schafer said the credit crunch may impact agricultural production next year.

Schafer warned that the costs of farming have soared and without loans it may be difficult to pay for operations. According to the U.S. Department of Agriculture, farm expenses are expected to rise 16% to $294.8 billion this year.

Engel said “agriculture is a key economic driver in our economy, providing food, thousands of jobs and biofuels that help make our nation more energy-independent,” which is why the Farm Credit System wants to ensure that U.S. agriculture has the capital it needs to survive.

As fertilizer and seed companies such as Potash, Agrium, and Mosaic continue to raise price due to soaring fuel prices, higher costs of borrowing and supply concerns, farmers feel the pain.

Last month, Farmer Mac plummeted after it filed a document with the U.S. Securities and Exchange Commission saying it would incur charges due to its exposure to Fannie Mae securities. The agency owned $47.2 million of Fannie Mae preferred shares at the end of June. About $44.0 million of value has been wiped off those shares, whose dividends are being suspended as Washington opted to support Fannie and Freddie bondholders at the expense of owners of those companies' common and preferred shares. Farmer Mac said last week it also had exposure to Lehman Brothers Holdings, which filed for bankruptcy last month, and may suffer a substantial write-down.

Farmer Mac also announced Michael A. Gerber will now serve as acting president and chief executive, replacing Henry D. Edelman, who was the only president and CEO that Farmer Mac had ever had.

Farmer Mac said Gerber will continue as CEO of Farm Credit of Western New York, an association in the Farm Credit System.

By: Ruthie Ackerman,
Forbes.com; October 1, 2008