Last month, I published a 15,000-word deep dive into Farmer Mac. For readers short on time, or those who might want to revisit the Farmer Mac investment case, I summarise the thesis in the Government Sponsored Enterprise (GSE) below.
Company overview
Farmer Mac is a $1.8 billion market cap U.S-listed company, created by the government in 1987 to provide secondary financing to the then-struggling agricultural industry.
In 2008, Farmer Mac’s charter was extended to the rural utilities industry. Today, via its five divisions, it provides financing to the farm agriculture (63% of loan volume), corporate agriculture (6% of loan volume), power & utilities (23% of loan volume), broadband infrastructure (3% of loan volume) and renewable infrastructure (5% of loan volume) industries, with the latter two being the faster growing divisions. Its core loans are real estate secured, limiting the potential downside.
Through its GSE status, Farmer Mac borrows short-term debt from capital markets and then lends to financial institutions on a long-term basis, earning a net effective spread of 0.3% (power & utilities) to 2.2% (broadband infrastructure), across its portfolio.
Farmer Mac employs a mix of strategies to deliver its mission, from holding loans directly on its balance sheet (46% of loan volume), issuing AgVantage securities (29% of loan volume), purchasing the USDA guaranteed securities (9% of loan volume) and long-term standby purchase commitments & others (16% of loan volume).
Business quality and track record
Mission-critical: As the only company with its GSE structure and mandate, Farmer Mac is the only company in the U.S. that can achieve its mission. While this doesn’t equate to a monopoly position on secondary agriculture and power financing, Farmer Mac plays a mission-critical role by further enabling other participants.