Farmer Mac (NYSE: AGM) is our single largest position, representing 9.4% of our flagship strategy as of our January 2022 rebalance. It is a mission-driven lender chartered by Congress to create a secondary market for agricultural credit and one of the most important actors in America’s farm credit system.
In a sense, this business is straightforward. Farmer Mac buys agricultural loans from regional banks, passing on the benefit of their federal government guarantees to rural America through cheaper and more widely available credit. The company estimates that farmers and ranchers invest $2 locally for every $1 they save on interest expenses, meaning that this benefit reaches deep into pockets of American society that are just plain difficult to access.
The impact of Farmer Mac’s partnerships with regional banks is also profound. These relationships allow the banks to retain generational relationships even as the value of farmland appreciates beyond their loan limits (which it often does), and stay ahead of less community-minded competitors.
The underlying business dynamics are nothing short of beautiful. Like most banks, the company’s main profit engine is the “spread” between its cost of borrowing and the interest it receives from borrowers. And Farmer Mac is able to borrow remarkably inexpensively thanks to its status as a Government Sponsored Enterprise.
It gets better, because the company makes good loans safely. Cumulative losses in its farm and ranch segment, which represents a little less than half of its balance sheet, have been .12%. That’s a little more than a tenth of 1%! The other three segments have never reported a credit loss, and the company carries roughly five times as much capital as risk-based measures indicate is required thanks to tight regulations.
The outlook for financial growth is strong. Farmer Mac holds just a 5.7% share of the overall US agricultural mortgage market, and has grown its overall business volume at a compounded 10.3% per annum over the twenty years from 2000 to 2020. 99% of this business volume is recurring net effective spread and fees, which makes it reasonable to assume that this growth (and the company’s 16% return on equity) will be durable.
What excites me most, though, is the opportunity for impact that owning these shares affords us. Farmer Mac is uniquely positioned to shape the US agricultural market, support the adoption of regenerative agriculture practices, and ensure that our coming adaptation to the realities of climate change does not needlessly displace farming communities. And though our shares are officially non-voting, our ownership stake gives us a seat at the table to advocate for policies that will reduce harm to animals throughout the agricultural system while supporting sustained economic prosperity.