Introduction
When producers need to borrow money, they have several options, including commercial banks, insurance companies, and machinery/equipment financing companies. The Farm Credit System (FCS) has historically been one of the largest agricultural lenders in terms of loan volume, representing 40% of farm production loans and 49% of farmland real estate loans.
FCS distinguishes itself from other types of lenders by providing more flexible loan terms that align with seasonal cash flows and the expertise of loan officers who possess deep knowledge of local agricultural markets. One of the largest differences is their patronage refund system, which effectively reduces borrowing costs for its members.
Patronage Distribution of FCS and Recent Trends
As cooperatives, FCS associations distribute a portion of their earnings back to their members through patronage dividends. Producers who borrowed money from the FCS receive a portion of the lender’s profits back through patronage distribution. This can take the form of cash payments, allocated equity, or a combination of both.
For example, suppose you take out a loan with an 8.5% interest rate from a local FCS association. At a designated time of the year, your lender distributes patronage, and you receive a 1% refund. Your effective interest rate is now 7.5%, after factoring in the refund. This process effectively lowers borrowing costs, strengthens member relationships, and reinforces the cooperative model by ensuring that profits benefit the borrowers who generate them.
In recent years, several FCS associations have significantly increased their patronage distributions mostly driven by increased loan volume, setting new records for returning earnings to members. For instance, Farm Credit East announced a record $140 million patronage distribution for 2024, effectively reducing borrowers’ interest rates by 1.25%. Similarly, Farm Credit Mid-America plans to return $260 million in 2025, marking the largest distribution in its history and bringing its total patronage returned since 2016 to over $1.5 billion. Other associations, such as AgTrust Farm Credit and Farm Credit Services of America, have also expanded their patronage programs, ensuring that a greater portion of earnings is reinvested into the agricultural economy through member returns.
The Impact of Patronage on Agricultural Borrowers
While patronage distribution is a significant benefit, they are not guaranteed, and other loan terms beyond patronage should be considered when evaluating loan options. However, the patronage distribution of local FCS associations should not be overlooked. By reducing effective interest rates, these distributions ease financial burdens on farmers and agribusinesses, allowing them to reinvest savings into operations, expansion, and innovation.
Additionally, strong patronage programs reinforce borrower loyalty and trust in the cooperative model, distinguishing FCS institutions from traditional lenders. As patronage remains a key component of the FCS structure, its continued growth will play a vital role in supporting American agriculture in an increasingly competitive economic landscape.
Gladney, Heather, and Kevin Kim. “Understanding Patronage Distribution of Farm Credit System Association.” Southern Ag Today 5(12.1). March 17, 2025. Permalink
