Financial information is consolidated to include the accounts of Farmer Mac and its wholly-owned subsidiary, Farmer Mac Mortgage Securities Corporation.

This discussion and analysis of financial condition and results of operations should be read together with: (1) the interim unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report; and (2) Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the SEC on March 16, 2009.

The discussion below is not necessarily indicative of future results.

Special Note Regarding Forward-Looking Statements

Some statements made in this report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 pertaining to management's current expectations as to Farmer Mac's future financial results, business prospects and business developments. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and typically are accompanied by, and identified with, such terms as "anticipates," "believes," "expects," "intends," "should" and similar phrases. The following management's discussion and analysis includes forward-looking statements addressing Farmer Mac's:

· prospects for earnings;

· prospects for growth in loan purchase, guarantee, securitization and LTSPC volume;

· trends in net interest income;

· trends in portfolio credit quality, delinquencies and provisions for losses;

· trends in expenses;

· trends in non-program investments;

· prospects for asset impairments and allowance for losses;

· changes in capital position; and

· other business and financial matters.

Management's expectations for Farmer Mac's future necessarily involve a number of assumptions and estimates and the evaluation of risks and uncertainties. Various factors or events could cause Farmer Mac's actual results to differ materially from the expectations as expressed or implied by the forward-looking statements, including the factors discussed under "Risk Factors" in Part I, Item 1A of Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 16, 2009, as well as uncertainties regarding:

· the ability of Farmer Mac to increase its capital in an amount and at a cost sufficient to enable it to continue to operate profitably and provide a secondary market for agricultural mortgage and rural utilities loans;

· the availability of reasonable rates and terms of debt financing to Farmer Mac;

· fluctuations in the fair value of assets held by Farmer Mac, particularly in volatile markets;

· the rate and direction of development of the secondary market for agricultural mortgage and rural utilities loans, including lender interest in Farmer Mac credit products and the Farmer Mac secondary market;

· the general rate of growth in agricultural mortgage and rural utilities indebtedness;

· borrower preferences for fixed rate agricultural mortgage indebtedness;

· legislative or regulatory developments that could affect Farmer Mac;

· increases in general and administrative expenses attributable to changes in the business and regulatory environment, including the hiring of additional personnel with expertise in key functional areas;

· the willingness of investors to invest in Farmer Mac Guaranteed Securities;

· the severity and duration of current economic and financial conditions generally and within the agricultural and rural utilities sectors in particular; and

· developments in the financial markets, including possible investor, analyst and rating agency reactions to events involving GSEs, including Farmer Mac.

In light of these potential risks and uncertainties, no undue reliance should be placed on any forward-looking statements expressed in this report. Furthermore, Farmer Mac undertakes no obligation to release publicly the results of revisions to any forward-looking statements that may be made to reflect new information or any future events or circumstances, except as otherwise mandated by the SEC.

Critical Accounting Policies and Estimates

The preparation of Farmer Mac's consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related notes for the periods presented. Actual results could differ from those estimates. The critical accounting policies that are both important to the portrayal of Farmer Mac's financial condition and results of operations and require complex, subjective judgments are the accounting policies for: (1) the allowance for losses, (2) fair value measurement, and (3) other-than-temporary impairment.

During second quarter 2009, Farmer Mac amended its critical accounting policy relating to other-than-temporary impairments upon the adoption of FASB Staff Position (FSP) FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. This FSP amended the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The existing recognition and measurement guidance related to other-than-temporary impairments of equity securities was not amended.

If the fair value of a security is less than its amortized cost basis as of the balance sheet date, Farmer Mac assesses whether the impairment is temporary or other-than-temporary. Other-than-temporary impairment occurs when the fair value of an available-for-sale debt security is below its amortized cost, and it is determined that management (a) has the intent to sell the debt security or (b) more likely than not will be required to sell the debt security before its anticipated recovery. In these cases, the entire difference between the amortized cost basis of the security and the fair value as of the balance sheet date is recognized as other-than-temporary impairment in earnings.

If management does not intend to sell the security and it is not more likely than not that it will be required to sell the security before anticipated recovery, Farmer Mac determines whether a credit loss exists. Many factors considered in this determination involve significant judgment, including recent events specific to the issuer or the related industry, changes in external credit ratings, the severity and duration of the impairment, recoveries or additional declines in fair value subsequent to the balance sheet date, and other relevant information related to the collectability of the security. If Farmer Mac determines that the present value of the cash flows likely to be collected from the security is greater than the amortized cost basis of the security, the impairment is deemed to be temporary. Conversely, if the present value of the expected cash flows is less than the amortized cost basis of the security, a credit loss has occurred and the security is deemed to be other-than-temporarily impaired and the amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income, net of applicable taxes.

For a discussion of Farmer Mac's critical accounting policies related to the allowance for losses and fair value measurement and the related use of estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related notes for the periods presented, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 16, 2009.

Results of Operations

Overview. Farmer Mac's net income available to common stockholders for second quarter 2009 was $25.4 million or $2.49 per diluted common share, compared to $21.4 million or $2.13 per diluted common share for second quarter 2008. Net income available to common stockholders for the six months ended June 30, 2009 was $58.9 million or $5.80 per diluted common share, compared to $13.2 million or $1.31 per diluted common share for the six months ended June 30, 2008.

During the three and six month periods ended June 30, 2009, Farmer Mac's guarantee and commitment fees increased compared to the same periods in 2008 because the average level of guarantees and commitments outstanding during the quarter was higher and the average fee charged during the periods increased. In both cases, the increases are attributable to the rural utilities business added since June 30, 2008. For second quarter 2009, guarantee and commitment fees were $7.9 million, compared to $6.7 million for second quarter 2008 and for the six months ended June 30, 2009, guarantee and commitment fees were $15.3 million, compared to $13.3 million for the six months ended June 30, 2008.

During 2009, Farmer Mac has maintained uninterrupted access to the capital markets at favorable rates, though the Corporation's short-term borrowing costs relative to LIBOR moved back toward their historical levels during second quarter 2009. Toward the end of 2008 and into 2009, Farmer Mac reduced the size of its liquidity investment portfolio as it reevaluated its investment policies. The reduced level of investment has put downward pressure on the net interest income earned from that portfolio compared to earlier periods. For second quarter 2009, net interest income including income and expense related to financial derivatives was $10.0 million, compared to $16.3 million for second quarter 2008. For the six months ended June 30, 2009, net interest income including income and expense related to financial derivatives was $22.8 million, compared to $32.2 million for six months ended June 30, 2008.

Farmer Mac's overall non-performing assets remained steady during second quarter 2009 at $97.1 million (2.17 percent) compared to $96.2 million as of March 31, 2009 (2.12 percent). Because four of Farmer Mac's ethanol loans were transferred to real estate owned, the level of 90-day delinquencies dropped from $86.2 million (1.90 percent) as of March 31, 2009 to $42.3 million (0.95 percent) as of June 30, 2009. As of June 30, 2009, Farmer Mac's ethanol exposure, which includes loans, loans subject to LTSPCs and REO, was $279.1 million, with exposure to 29 different plants, and an additional $27.0 million of undisbursed commitments. Other than the undisbursed commitments, Farmer Mac is not seeking to add more ethanol loan exposure to its portfolio. See "-Risk Management-Credit Risk - Loans" for more detail about Farmer Mac's ethanol portfolio.

The total allowance for losses was $9.3 million as of June 30, 2009 compared to $16.4 million as of December 31, 2008. During second quarter 2009, Farmer Mac recorded a release of its allowance for losses of $6.2 million and charge-offs of $5.7 million, both primarily related to ethanol loans, compared to no release or provision for losses and charge-offs net of recoveries of $0.1 million during second quarter 2008. During first quarter 2009, Farmer Mac recorded provisions for losses of $6.1 million and charge-offs net of recoveries of $1.2 million, both primarily related to ethanol loans, compared to no release or provision for losses and charge-offs of $39,000 during first quarter 2008.

Other than the ethanol portfolio, the loans underlying the Corporation's guarantees and commitments continued to perform well during second quarter 2009, with delinquencies on non-ethanol loans showing slight increases, but remaining below Farmer Mac's long-term average. This is in part a result of the cumulative strong performance of the U.S. agricultural economy over the past several years. However, based on the potential decline in the profitability of certain agricultural industries, Farmer Mac expects that delinquencies are likely to increase during the remainder of 2009 and beyond, although any such delinquencies and related credit losses are expected to remain within Farmer Mac's historical experience. See "-Results of Operations-Outlook" and "-Risk Management-Credit Risk - Loans" for more detail about the outlook for certain agricultural industries.

Farmer Mac's 2009 results included significant gains on financial derivatives. The second quarter gain on financial derivatives was $21.5 million, compared to a gain of $31.1 million during second quarter 2008. For the six months ended June 30, 2009, the gain on financial derivatives was $23.2 million, compared to a loss of $10.7 million for the six months ended June 30, 2008. Fair value gains on trading assets totaled $35,000 for second quarter 2009, compared to losses of $17.3 million for second quarter 2008. For the six months ended June 30, 2009 the gains on trading assets totaled $31.7 million, compared to losses of $7.2 million for the six months ended June 30, 2008. These changes in fair value for financial derivatives and trading assets have historically contributed significant volatility to Farmer Mac's periodic earnings. While such changes may at times produce significant income, as has been the case in 2009, they may also produce significant losses, as has been the case in previous reporting periods. Future changes in those values cannot be reliably predicted; however, as of June 30, 2009 the cumulative fair value after-tax losses recorded on financial derivatives was $70.1 million. Over time, Farmer Mac will realize in earnings the net effect of the cash settlements on its interest rate swap contracts, which may on its own produce either income or expense, but is expected to generate positive effective net spread when combined with the interest earned and paid on the assets and liabilities Farmer Mac holds on its balance sheet. This positive effective net spread will continue to build retained earnings and capital over time. Although the unrealized fair value fluctuations experienced throughout the term of the financial derivatives will temporarily impact earnings and capital, those fluctuations will have no permanent effect upon maturity.

Farmer Mac's year-to-date 2009 results benefited from two first quarter transactions. The first was the conversion of certain Farmer Mac Guaranteed Securities into loans and the subsequent sale of a pool of loans consisting of a portion of the loans previously underlying those securities and other loans previously classified on the balance sheet as loans. The total principal balance of loans sold was $354.5 million. The sale resulted in a gain of $1.6 million and a recovery of previously charged off losses of $0.8 million. The primary purpose of the sale was to eliminate the need to hold capital in support of the loans under Farmer Mac's statutory minimum capital requirements, thereby reducing Farmer Mac's overall statutory minimum capital requirement by approximately $9.7 million. The second transaction was the sale of Lehman Brothers Holdings Inc. senior debt securities that had been written down to $5.4 million as of December 31, 2008. The sale of the securities during first quarter 2009 for $8.6 million resulted in a $3.2 million recovery of previously written off losses. That recovery was recorded as "(Losses)/gains on sale of available-for-sale investment securities" on the condensed consolidated statements of operations.

To assist in the comparison of results to prior periods, the table below summarizes many of the significant items discussed above as they relate to Farmer Mac's results of operations for the three and six month periods ended June 30, 2009 and 2008 and reconciles those items as separate components of net income available to common stockholders, distinct from the recurring items during the periods presented.

                                             For the Three Months Ended          For the Six Months Ended
                                              June 30,           June 30,        June 30,          June 30,
                                                2009               2008            2009              2008
                                                                    (in thousands)
Recurring items:
Guarantee and commitment fees              $        7,908       $    6,659     $      15,318       $  13,293
Net interest income including realized
gains on financial derivatives                     10,141           16,660            20,300          31,877
Other income                                          101              662               335           1,123
Credit related charges                              6,238              (38 )             164             (87 )
Operating costs                                    (7,070 )         (6,683 )         (14,522 )       (12,874 )
Related tax expense                                (5,800 )         (5,854 )          (6,786 )       (10,846 )
Preferred stock dividends                          (4,130 )           (560 )          (8,066 )        (1,120 )
Subtotal                                            7,388           10,846             6,743          21,366
Items resulting from fair value
fluctuations:
Fair values changes in financial
derivatives                                        31,288           38,748            46,280            (251 )
Fair value changes in trading assets                   35          (17,268 )          31,660          (7,157 )
Related tax (expense)/benefit                     (10,964 )         (7,519 )         (27,280 )         2,592
Subtotal                                           20,359           13,961            50,660          (4,816 )
Other items:
Other-than-temporary impairment - credit
losses                                             (2,292 )         (5,344 )          (2,373 )        (5,344 )
(Losses)/gains on asset sales                        (300 )            150             4,431             150
Related tax benefit/(expense)                         230            1,818              (558 )         1,818
Subtotal                                           (2,362 )         (3,376 )           1,500          (3,376 )
Net income available to common
stockholders                               $       25,385       $   21,431     $      58,903       $  13,174

Set forth below is a more detailed discussion of Farmer Mac's results of operations.

Net Interest Income. Net interest income was $19.9 million for second quarter 2009, compared to $24.4 million for second quarter 2008. Net interest income was $43.3 million for the six months ended June 30, 2009, compared to $42.3 million for the six months ended June 30, 2008. The net interest yield was 176 basis points for the six months ended June 30, 2009, compared to 149 basis points for the six months ended June 30, 2008.

The following table provides information regarding interest-earning assets and funding for the six months ended June 30, 2009 and 2008. The balance of non-accruing loans is included in the average balance of interest-earning loans and Farmer Mac Guaranteed Securities presented, though the related income is accounted for on the cash basis. Therefore, as the balance of non-accruing loans and the income received increases or decreases, the net interest yield will fluctuate accordingly. The average rate earned on cash and investments reflects lower short-term market rates during the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The lower average rate on loans and Farmer Mac Guaranteed Securities during the six months ended June 30, 2009 reflects the decline in market rates reflected in the rates on loans acquired or reset during the past year. The lower average rate on Farmer Mac's notes payable due within one year is consistent with general trends in average short-term rates during the periods presented. The downward trend in the average rate on notes payable due after one year reflects the retirement of older debt and the issuance of new debt at lower market rates during the latter part of 2008 and 2009.

                                                        For the Six Months Ended
                                       June 30, 2009                                June 30, 2008
                            Average        Income/       Average         Average        Income/       Average
                            Balance        Expense         Rate          Balance        Expense         Rate
                                                         (dollars in thousands)
Interest-earning
assets:
Cash and investments      $ 1,554,738     $  15,958           2.05 %   $ 3,553,861     $  76,910           4.33 %
Loans and Farmer Mac
Guaranteed Securities       3,359,356        72,945           4.34 %     2,108,105        62,011           5.88 %
Total interest-earning
assets                      4,914,094        88,903           3.62 %     5,661,966       138,921           4.91 %

Funding:
Notes payable due
within one year             3,223,496        15,144           0.94 %     3,784,194        58,187           3.08 %
Notes payable due after
one year                    1,482,193        30,418           4.10 %     1,653,313        38,438           4.65 %
Total interest-bearing
liabilities                 4,705,689        45,562           1.94 %     5,437,507        96,625           3.55 %
Net
non-interest-bearing
funding                       208,405             -                        224,459
Total funding             $ 4,914,094        45,562           1.85 %   $ 5,661,966        96,625           3.41 %
Net interest
income/yield                              $  43,341           1.76 %                   $  42,296           1.49 %

The following table sets forth information regarding the changes in the components of Farmer Mac's net interest income for the periods indicated. For each category, information is provided on changes attributable to changes in volume (change in volume multiplied by old rate) and changes in rate (change in rate multiplied by old volume). Combined rate/volume variances, the third element of the calculation, are allocated based on their relative size. The decreases in income due to changes in rate reflect the reset of variable-rate investments and adjustable-rate mortgages to lower rates and the acquisition of new lower-yielding investments, loans and Farmer Mac Guaranteed Securities, as described above. The decreases in expense reflect the decreased cost of funding due to lower interest rates in the debt markets.

                                                         For the Six Months Ended June 30, 2009
                                                            Compared to the Six Months Ended
                                                                      June 30, 2008
                                                               Increase/(Decrease) Due to
                                                         Rate               Volume           Total
                                                                     (in thousands)
Income from interest-earning assets:
Cash and investments                                 $     (29,445 )     $     (31,507 )   $ (60,952 )
Loans and Farmer Mac Guaranteed Securities                 (19,185 )            30,119        10,934
Total                                                      (48,630 )            (1,388 )     (50,018 )
Expense from interest-bearing liabilities                  (39,409 )           (11,654 )     (51,063 )
Change in net interest income                        $      (9,221 )     $      10,266     $   1,045

Farmer Mac's net interest yield excludes income and expense related to financial derivatives and includes yield maintenance payments received upon the early payoff of certain borrower's loans. The following paragraphs describe the effects of these items on the net interest yield and the table below presents them as adjustments to reconcile to the net effective spread Farmer Mac earns on the difference between its interest-earning assets and its net funding costs, including payments for income and expense related to financial derivatives.

Farmer Mac accounts for its financial derivatives as undesignated financial derivatives. Accordingly, the Corporation records the income or expense related to financial derivatives as gains and losses on financial derivatives. For the three months ended June 30, 2009, this resulted in an increase of the net interest yield of $9.9 million (83 basis points), compared to an increase of the net interest yield of $8.1 million (55 basis points) for the three months ended June 30, 2008. For the six months ended June 30, 2009, this resulted in an increase of the net interest yield of $20.5 million (84 basis points), compared to an increase of the net interest yield of $10.1 million (36 basis points) for the six months ended June 30, 2008.

Farmer Mac's net interest income and net interest yields for the three months ended June 30, 2009 and 2008 included the benefits of yield maintenance payments of $0.1 million (1 basis point) and $1.5 million (10 basis points), respectively. The net interest yields for the six months ended June 30, 2009 and 2008 included the benefits of yield maintenance payments of $0.4 million (2 basis points) and $2.9 million (10 basis points), respectively. Yield maintenance payments represent the present value of expected future interest income streams and accelerate the recognition of interest income from the related loans. As these figures demonstrate, the amounts of these payments, which are largely the result of borrower refinancing, were greatly reduced in 2009 compared to 2008. Because the timing and size of these payments vary greatly, variations do not necessarily indicate positive or negative trends to gauge future financial results.

The following table presents the net effective spread between Farmer Mac's interest-earning assets and its net funding costs. This spread is measured by including income or expense related to financial derivatives and subtracting yield maintenance payments.

                            For the Three Months Ended                          For the Six Months Ended
                      June 30, 2009            June 30, 2008             June 30, 2009             June 30, 2008
                    Amount       Yield       Amount       Yield       Amount        Yield       Amount        Yield
                                                        (dollars in thousands)

Net interest
income/yield       $ 19,901        1.66 %   $ 24,358        1.66 %   $  43,341        1.76 %   $  42,296        1.49 %
Expense related
to financial
derivatives          (9,937 )     -0.83 %     (8,065 )     -0.55 %     (20,525 )     -0.84 %     (10,120 )     -0.36 %
Yield
maintenance
. . .