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Legal Opinion Summary
Topic:Eligibility: May a Farm Credit System association finance a business that offers various farm-related services, including custom blending and spreading of fertilizer, custom seed harvesting, and soil testing and analysis?
ID Number:99-11
Issue Date:09/10/1999

An association sought guidance on how and to what extent it could finance a business that offers various farm-related services, including custom blending and spreading of fertilizer, custom seed harvesting, and soil testing and analysis. Part of the proposed loan would refinance an expense related to a subsidiary that provides raw material for the custom-blended fertilizer. OGC concluded that the association could finance all of the customer’s operations pursuant to 12 C.F.R. § 613.3020(b), even those related to selling goods, because the customer derived more than half of its income from providing farm related services that are directly related to the agricultural production of farmers or ranchers.

For purposes of dividing a customer’s income between goods and services, OGC concluded that it is proper, under FCA regulations, to count all income from a value-added service as part of the firm’s service-related sales. Goods that are consumed by the service, or incidental to it, need not be accounted for separately. The association may finance the subsidiary that supplies an ingredient of the fertilizer (which is a good, not a service) once it determines that most of the borrower’s income stems from sales of services. The regulation allows the association to serve all the customer’s credit needs (“whole-firm financing”) including those that relate to selling goods. In contrast, if the business in question received more of its income from selling goods than services, the association would be confined to financing only the portion of the business devoted to providing farm-related services.

FCA’s regulation permitting whole-firm financing was upheld by the United States Court of Appeals in Independent Bankers Association of America. v. FCA, 164 F.3d 661, 669 (D.C. Cir. 1999).

(September 10, 1999)