Farm Credit West and Northwest Farm Credit Services, agricultural lending associations within the Farm Credit System, are pursuing a potential merger.

Experts say a merger — part of a broader consolidation trend within agricultural lending — comes with pros and cons for borrowers.

Combined, the associations would have a mammoth footprint.

Farm Credit West, with 14 offices, works with farmers in Arizona and California’s Central Coast, Imperial Valley, Southern San Joaquin Valley and Sacramento Valley.

Northwest Farm Credit Services, with 44 offices, provides financing and related services in Montana, Idaho, Oregon, Washington and Alaska.

“By joining our associations, we can be better positioned to strategically address marketplace changes and provide even greater value for our customer-members,” Sureena Bains Thiara, chair of Farm Credit West’s board of directors, said in a statement earlier this year.

Nate Riggers, chair of Northwest Farm Credit Services’ board, said the merger is a “strategic move for both cooperatives.”

Since February, the organizations have been assessing merger benefits for stockholders and finalizing agreement terms.

Linda Hendricksen, chief marketing and learning officer at Northwest Farm Credit Services, said the proposal is pending regulatory review. Approval is expected in October, at which time the association will share more details.

The merged association plans to begin operations Jan. 1 under the leadership of Farm Credit West’s president and CEO, Mark Littlefield. The management team will include leaders from both associations.

Headquarters will be in Spokane, with regional operating centers in each state. The agricultural lenders do not anticipate office closures or branch staffing changes.

The possible merger is part of a decades-long trend toward consolidation within the Farm Credit System, or FCS.

The FCS traces its origins to 1916, when President Woodrow Wilson established the Federal Land Bank System.

The system’s purpose is to provide a permanent, reliable source of credit to U.S. agriculture.

FCS lenders are regulated by the Farm Credit Administration, an independent federal agency. The FCS is organized as a borrower-cooperative, meaning borrowers own the associations and vote on board members.

The FCS has four regional banks that provide funds and support to smaller lending associations, which in turn give loans to eligible borrowers.

The past two decades, mergers and acquisitions have shrunk the number of lenders by 41%.

In her book, “Food, Farming and Sustainability,” Susan Schneider, a law professor at the University of Arkansas School of Law, writes that in the mid-1940s there were more than 2,000 lending associations in the Farm Credit System. That fell to about 900 in 1983, 200 in 1998 and 74 in 2016.

In 2022, 69 lenders remain.

The typical FCS association used to cover several counties, wrote Schneider. Now, the typical association covers a much larger region.

Many factors have driven consolidation, said Erik Hanson, assistant professor of agribusiness and applied economics at North Dakota University and author of the 2020 paper, “Consolidation in the Farm Credit System.”

“The Farm Credit System is following some (consolidation) trends you see in ag generally and in finance generally,” Hanson said.

As the number of farms has decreased and the size of farms has increased, lenders have often viewed it as more economical to cover a wider region with more customers, said Hanson.

He said technology and customers’ comfort with doing business remotely also have made consolidation more workable.

The smaller number of lenders, however, comes with pros and cons.

Experts say one benefit of mergers is that by combining capital, lenders can provide larger loans.

According to Hanson, lenders that join forces may also become more efficient and profitable by broadening the consumer base, commingling talent pools and diversifying risk.

By offering the best of both organizations, Hanson said, the merger should benefit borrowers.

Schneider, the law professor, wrote that “customers may benefit if greater institutional efficacy is passed along through lower interest rates.”

But there are also downsides.

Although a larger association may provide larger loans, critics say this incentivizes lenders to focus on serving big operations at the expense of smaller farms.

Another downside, Hanson said, is that a borrower may experience “loss of local control” because as the customer pool expands, the individual farmer may have less influence.

”As the business gets bigger, the individual farmer maybe has less and less of a say, less and less of a connection to the way that decisions are being made for that business,” said Hanson.

Experts predict farmers will experience both the positive and negative impacts of consolidation as the number of agricultural lenders continues to shrink.