Federal Farm Credit System

We just discussed Treasury products, all of which have the direct backing of the US Government. Essentially, these securities “go down with the ship” only if the US Government is unable to make required interest or principal payments to bondholders (which you can assume won’t happen for exam purposes). Federal agencies, sometimes referred to as government-sponsored enterprises (GSEs), can also borrow money by issuing bonds, but their debt is only indirectly backed by the US Government.

Indirect backing is a little bizarre. It’s like telling your friend right before they go swimming, “if you get in trouble and start drowning, I’ll only save you if I’m able to.” Indirect backing is still backing from the US Government, but it’s not as powerful as direct backing. Direct backing comes with the assumption that the government will do everything it can to prevent a default. Whether indirect or direct backing exists, both provide an added layer of security for the investor that results in a low-risk investment in regard to default risk.

Generally speaking, the US Government prefers subsidizing important aspects of American life. Providing ourselves with the food we eat is one of them. The US Government created the Federal Farm Credit System, which provides easy-to-obtain loans to farmers across the United States. Whether a farmer is looking for short-term financing to produce a harvest or long-term financing to pay for farming equipment, the Federal Farm Credit System is the best place for them to go.

To finance their activities, the Federal Farm Credit System issues bonds to the investing public. The money raised is loaned out to farmers at favorable interest rates. Because of this system, it’s cheap and easy for farmers to obtain loans from the government.