Federal Farm Credit System

We just discussed Treasury products, all of which have the direct backing of the US Government. In other words, these securities would default only if the US Government couldn’t make the required interest or principal payments to bondholders (for exam purposes, you can assume this won’t happen).

Federal agencies, sometimes referred to as government-sponsored enterprises (GSEs), can also borrow money by issuing bonds. Unlike Treasuries, however, their debt is only indirectly backed by the US Government.

Indirect backing can feel a bit odd at first. It’s like saying to a friend before they go swimming, “If you get in trouble, I’ll save you only if I’m able to.” There’s still a connection to the US Government, but it’s not as strong as direct backing. With direct backing, the expectation is that the government will do everything it can to prevent a default.

Whether backing is indirect or direct, both can add a layer of security for investors and help keep default risk relatively low.

Generally speaking, the US Government prefers subsidizing important aspects of American life, and food production is one of them. To support agriculture, the US Government created the Federal Farm Credit System, which provides easy-to-obtain loans to farmers across the United States. Whether a farmer needs short-term financing to produce a harvest or long-term financing to pay for farming equipment, the Federal Farm Credit System is a key source of funding.

To finance its activities, the Federal Farm Credit System issues bonds to the investing public. The money raised is then loaned to farmers at favorable interest rates. This structure helps make borrowing cheaper and more accessible for farmers.