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Legal Opinion Summary
Topic:Investment in Farmers’ Notes: May a production credit association discount notes that an almond processor makes to local almond growers?
ID Number:98-07
Issue Date:11/25/1998


A production credit association (PCA) asked whether it could discount notes that an almond processor makes to local almond growers. The almond processor will offer production financing to local almond growers who are eligible to borrow directly from the PCA. Farmers will use most of the loan proceeds to buy inputs, chemical sprays, fertilizers, labor, and equipment to harvest almonds that they will subsequently sell to the processor. The almond processor will endorse all notes that it sells to the PCA with full recourse. OGC concluded this transaction satisfies all of the fundamental requirements of the Farmers' note regulation, 12 C.F.R. 615.5172.

Section 615.5172 implements section 2.2(10) of the Act (12 U.S.C. 2073(10)), which authorizes each direct lender association to invest its funds as may be approved by its funding bank under FCA regulations. The purpose of this regulation is to enable PCAs and ACAs to invest their excess funds in assets that finance agriculture. As a result of this program, PCAs and ACAs help agribusinesses that offer farmers financing for supplies, equipment, and other inputs at competitive prices. The Farmers’ notes program lowers agricultural production costs and increases farm income.

OGC concluded that it would defeat the underlying purpose of the Farmers’ notes regulation if the almond processor could not finance the sale of farm supplies to the almond growers and instead had to sell these goods itself. The almond processor would lack the financial strength to offer this program to local growers unless the PCA is permitted to discount these obligations. OGC determined that the almond processor qualifies as a “private dealer” within the meaning of the regulation because it has expanded its operations so it now “deals” in both an agricultural commodity (raw and processed almonds) and debt obligations that finance almond production.

OGC concluded that this transaction complies with 615.5172 because: (1) the almond growers are eligible PCA borrowers, (2) the processor endorses the notes with full recourse, and (3) the PCA's total investment in Farmers’ notes does not exceed the 15-percent portfolio cap and the 50-percent capital limit in 615.5172(c).

(November 25, 1998)