Rabobank proposal sparks
debate on role of FCS in
farm & rural lending

By Dan Campbell, editor
dan.campbell@usda.gov
Editor’s Note: in late October,
FCSAmerica announced that it was
breaking off negotiations to sell to
Rabobank (see page 35). However, the
issues raised during the Congressional
hearing about the future of FCS in rural
America remain of great importance.


Congressional hearing Sept. 29 in Washington, D.C., examined the state of the nation’s Farm Credit System (FCS) and the likely ramifications of a proposed sale of a key FCS lender to a foreign bank. The hearing presented sharply contrasting views about the nature of farm lending in America and the role of the 92, farmer-owned associations that comprise FCS in meeting farm and rural credit needs.

If there was ever any doubt, the hearing confirmed that the proposal to exit the FCS by Omaha-based Farm Credit Services of America (FCSAmerica) had indeed stirred up a hornet’s nest. It also revealed just how passionate many producers remain about the need for a farmer-owned cooperative lending system for the nation.

Opponents said the proposed sale of FCSAmerica to Netherlands-based Rabobank for $600 million should be blocked because it is a poor business deal for FCSAmerica stockholdermembers and could threaten the continued viability of the overall FCS.

They said Congress should also expand the FCS charter to enable it to provide a greater range of financial services to more customers.

During the hearing — held by the House Subcommittee on Conservation, Credit, Rural Development and Research — several witnesses stressed that their opposition was not based on any ill feeling toward Rabobank. Rather, they said they oppose allowing any private bank — let alone a foreign bank — to gain control of a vital piece of FCS, which Congress created in 1916 to ensure a steady, reliable supply of affordable credit is available to fuel the nation’s farm economy through good times and bad.

Banking industry proponents of the sale to the Netherlands-based Rabobank used the hearing to not only voice support for the sale, but to blast FCS as a “predatory lender,” which they said has outlived its mission and is abusing its present charter from Congress.

As a government-backed entity with access to low-cost funds, FCS can offer interest rates that cannot be matched by community banks, they said. The banking groups accused FCS of using its advantages to cherry pick well-todo, low-risk farm borrowers, rather than catering to higher-risk borrowers, as they say Congress intended. FCS maintains that its mission is to serve all sectors of U.S. agriculture.

Deal criticized as
‘breathtakingly bad’
Myron Edleman, a South Dakota cattleman and grain/hay grower, spoke on behalf of a group of FCSAmerica borrowers who have formed Farmers for Farm Credit, of which he is chairman. The group was formed, he said, to “ensure that other FCSAmerica stockholders could learn the awful truth about the sale of their co-op.” The proposal to sell the co-op lender to Rabobank is “so bad that it is breathtaking,” said Edleman, former Farm Credit Council chairman.

Opposition to the deal among FCSAmerica stockholders is so overwhelming, he testified, that many suspect the board is “now struggling to find a way to unwind this decision without costing stockholders millions of dollars.” He asked that Rabobank and FCSAmerica be required to disclose the terms of any contracts between them, including compensation and management bonuses.

If Rabobank succeeds, “over $1 billion of borrower-contributed capital will be wiped off the books of FCSAmerica,” Edleman testified. “Hundreds of millions more dollars will be flushed down the drain as FCSAmerica exits the system and pays over $800 million as an exit fee into a fund designed to protect Wall Street investors — not farmers. None of this money belongs to the management of FCSAmerica; it belongs to the stockholders...”

Edleman said FCSAmerica’s capital was built up over many years from earnings generated on thousands of loans. “This capital helps to ensure that our families and future generations of Midwest farmers will have access to a financially strong, borrower- owned source of credit.”

If Rabobank becomes lender for FCSAmerica’s 51,000 customers, all business decisions that are today subject to the scrutiny by farmers, Congress and the FCA will instead become the sole prerogative of Rabobank management, he noted. “It is not possible to put a dollar value on what we as farmers will lose.”

The principal of maintaining FCS as a system of “farmer-owned, farmercontrolled lending cooperatives” is absolutely essential to the future of American agriculture, Edleman said.

NCFC, FCC urge repeal
of ‘termination’ option
Glen Keppy, speaking on behalf of the National Council of Farmer Cooperatives (NCFC), urged that Congress revise the system’s charter to eliminate the possibility of other such terminations from the FCS in the future. NCFC also supports additional changes to modernize the Farm Credit Act, he said, citing as an example a proposal that CoBank be allowed to lend to new and emerging types of farmer cooperatives.

“Many things have changed when it comes to agriculture in today’s global economy,” said Keppy, a hog/grain farmer and CHS member from Davenport, Iowa. What has not changed, however, is the need for farmers, ranchers and their cooperatives to have dependable, competitive sources of credit and capital to operate to modernize and expand, and to take advantages of new market opportunities.”

AgBank CEO Jerold Harris, representing the Farm Credit Council (FCC), the industry trade association for the FCS, also urged Congress to repeal the Act’s termination authority “as soon as possible.” That authority was only inserted into the Act 17 years ago to serve the interests of one small, statewide credit association for livestock producers, he said. He, too, stressed the need for more lending flexibility and authority for FCS.

Harris said the Rabobank purchase is not a good deal for its member stockholders. In exchange for $600 million, Rabobank would be getting a lending institution with total assets of $7.8 billion, including $1.35 billion in capital and unallocated surplus, more than $200 million in loan-loss reserves and 40 offices staffed by 900 employees.

The decision to sell out to Rabobank was far from unanimous, according to Harris. Quoting “reliable sources,” he said “a significant number of FCSAmerica board members voted against” the deal.

As a system employee for 40 years, Harris said, “I have seen very good times in agriculture and very bad times. I know first hand that the presence of a healthy, competitive, farmerowned Farm Credit System institution helps all farmers — even those who borrow from other sources — receive a much more competitive interest rate.”

Bankers support sale;
oppose broader charter
Representing the American Bankers Association (ABA), Roger Monson, president of Citizens State Bank in Finley, N.D., spoke in favor of the sale. His testimony also stressed ABA’s grave concern over the parallel discussion about expanding the FCS charter.

Monson called FCS “a company which feels it has outgrown farming and the rural America it was chartered to serve,” and is now “pursuing an expansionist agenda” without willingness to give up the advantages of being a government-sponsored entity (GSE) The FCS must recognize that “with the advantages Congress has bestowed upon it, there are limits and responsibilities. There is no economic or public policy argument that can be made to justify expanding the charter of the system.”

Monson said FCS is providing government- subsidized credit to “those that need it least…the rural rich,” even helping them finance “country estates, weekend getaways, hunting preserves and golf courses.”

For those FCS associations that wish to expand their financial services, the answer is to cut their ties to the federal government, as FCSAmerica has proposed to do, he said. “This is natural evolution, and we support it.” Monson called FCS “a large, sophisticated and highly profitable financial services institution” with $119 billion in assets, $94.3 billion in loans and a net profit of $1.8 billion in 2003.

FCS is the only GSE that competes directly with the private, tax-paying bank sector by doing direct, retail lending, he said. “From a public policy perspective, the justification for why the system continues to enjoy such extraordinary governmental support is tenuous.”

Monson noted that American taxpayers had to “bail out” FCS during the farm credit crisis of the 1980s, after what he termed “a decade of spectacularly poor lending practices.” Farmers in the early ‘80s made extensive use of low-interest loans from FCS, but began to fail in large numbers when interest rates began to shoot up. Ultimately, Congress had to offer $4 billion in bonds to shore up the system in 1988, he said.

Private sector lenders now see FCS as a competitor that “exploits its GSE status to the fullest,” such as offering below-market pricing to gain market share, Monson said. Complaints about these practices to the FCA have been largely ignored, he continued.

Further, the system has made “deft use of statutory and regulatory loopholes” to take in more non-insured deposits, and has ignored its mandate to serve young, beginning, small and women-owned enterprises, instead of focusing on low-risk loans to larger, wealthier borrowers,” he said.
Opponents of the sale have questioned the motives of FCSAmerica management and directors, but Monson said the same accusation could be aimed at FCS management. “When it is convenient for system managers to extol the virtues of their local boards, they do so; but when a local, farmer-owner board makes a decision that displeases them, they heap abuse on their motives and their character. Who really runs the Farm Credit System?”

Wheat growers support
AgStar’s counter offer
Mark Gage, a North Dakota grain grower and president of the National Association of Wheat Growers (NAWG), said his group supports preserving the FCS as a farmer-owned lending system. NAWG does not oppose Rabobank’s entry into U.S. ag lending, he said, calling the bank “a respected and strong lender with a good track record in agricultural finance.”

However, Gage said acquisition of FCSAmerica by Rabobank “will adversely affect the entire Farm Credit System.” The sale could start a chain reaction, in which the strongest FCS institutions would be cherry picked away, leaving the weaker ones to hold up the roof. Each time one institution is sold, it requires the remaining FCS institutions to recapitalize a new association to take its place, drawing away vital system resources, he said.

He, too, questioned the economics of the sale, saying FCSAmerica would be sold for 41 cents on the dollar of assets, including a reserve that represents dividends due to the association’s farmer members. FCSAmerica has “an excessive amount of unallocated capital that has not been paid as patronage,” he said.

FCSAmerica should instead embrace the merger proposal from Minnesota-based AgStar Financial Services, another FCS member, Gage said. AgStar has offered $650 million in cash to FCSAmerica stockholders, and said future patronage could push the value of the offer to more than $1 billion. Most important, farmers would remain in control, since it would stay within the FCS.

Gage also called attention to the massive changes that have occurred in agriculture since the FCS charter was last revised 30 years ago, urging that the debate be used as a stimulus to update that charter and enable FCS to provide more services to producers and rural America.

“The message of the National Association of Wheat Growers is to ensure that this cooperative remains healthy and viable,” he said.

Community bankers blast
‘unfair’ lending advantage
John Evans Jr., appearing on behalf of the Independent Community Bankers of America (ICBA), said “regulator- assisted mission creep” has occurred, allowing FCS to overreach its charter. “If FCS banks are allowed to offer the same products as us, small town banks will be a thing of the past.”

Evans, president and CEO of D.L. Evans Bank in Burley, Idaho, accused sale opponents of “wanting to have it both ways.” Last June, FCS representatives “had the audacity” to lobby the FCA to expand the scope and eligibility of the system’s authority so that FCS entities could make loans to individuals who “have little relation to agriculture,” he said.

CoBank’s desire to have its charter expanded so that it can lend to producer- owned LLCs (considered by some to be a new form of hybrid coop), with both producer and investor class stockholders, is another contradiction of principle, Evans said. The LLCs can wind up with producers holding only 50 percent of the stock, “allowing outside investors to easily take control over this new style of LLC-cooperative.

“Why is the system supporting legislation to potentially allow every other cooperative in the United States to be put on the chopping block except for its own?”

Evans said ICBA surveyed its members on the sale, and found that the majority favored the sale to Rabobank. However, some ICBA members have expressed concern over the Rabobank proposal, Evans noted. They say Rabobank would become yet another major new competitor for community banks, and that it would be buying “a large book of business that was built up over many years using GSE tax and funding advantages.” Further, FCS would likely set up a new bank to serve the region “with the same advantages.”

Some ICBA members are also questioning why an FCS member that exits the system should be required to pay a large fee (about $800 million in the case of FCSAmerica) into the FCS insurance fund. Evans said American taxpayers had to “bail out” FCS during the farm crisis of the 1980s, while rural ag banks were “allowed to fail in staggering numbers, ruining many communities.”

NFU fears “lethal precedent”
John K. Hansen, president of the Nebraska Farmers Union, spoke on behalf of the National Farmers Union and its 260,000 family farm and ranch members. He said NFU has taken a “position of firm opposition” to the sale, and is “extraordinarily concerned” about its short- and long-term impacts. NFU fears that a “potentially lethal precedent” would be set, damaging the entire FCS network.

FCSAmerica is the second largest FCS association, and one of the system’s “most stable, profitable and secure units,” Hansen said. A sale to Rabobank would forever end the potential of dividend payouts to members who have “decades of equity in their own institution.” The sale could shove aside FCS’ Congressional mandate to assist beginning and minority farmers and to help local communities, he added.

FCSAmerica “would go from a farmer controlled and directed lender to instead being owned by the world’s largest ag lender, one that lends to huge, vertically integrated industrialized operations that often compete unfairly with our family-owned farmers and ranchers.”

Unlike some of the other sale opponents, Hansen indicated that caution is needed regarding proposals to broaden the FCS charter. NFU opposed the “Choice” proposal several years ago, which ultimately failed to gain traction in the farm community or on Capitol Hill. It would have allowed FCS associations to lend outside their designated territories and to take on expanded lending roles, he said.

“We were concerned that the Choice proposals could have jeopardized the Farm Credit System’s taxexempt status, promoted “cherry picking” of borrowers and reduced local services. We also opposed differential interest rates for FCS member-borrowers because they are contrary to cooperative principles.”

Hansen urged that further, regional hearings be held in each of the affected states before any action is taken on the Rabobank offer.

At the conclusion of the hearing, Subcommittee Chairman Frank Lucas of Oklahoma pledged continued oversight of the FCS and FCA, adding that “I will work to ensure any future actions taken by the subcommittee are in the best interest of America’s farmers and ranchers.”

In mid October, Rabobank Chairman Bert Heemskerk told the Omaha World Herald that if the FCA should turn the deal down, the bank will look for other avenues to enter the U.S. market.


FCA chair: stakes huge in credit debate; changes sorely needed

Nancy Pellett, chairman and CEO of the Farm Credit Administration (FCA), which regulates the FCS, testified at a Congressional hearing Sept. 29 as to the critical role FCS plays in the nation’s food and fiber system. However, Pellett said she would not take a position on the Rabobank proposal, since the FCA board may ultimately have had to decide its fate.

She provided important background for the debate, stressing that farmers and the rest of rural America have a huge stake in the outcome. FCS has more than $100 billion in loans, representing about 30 percent of the nation’s total ag credit market. The system is “sound in all material respects,” Pellett stressed.

“Without the FCS, we believe the soundness of agriculture and the quality of life in rural America would be greatly diminished,” Pellett warned. FCS is a vital key to the nation’s agricultural strength, the ultimate beneficiaries of which are American consumers, she said. On average, Americans now spend only 14 percent of their income on food, down from 21 percent in the 1970s.

In the early 1990s, Congress directed the General Accounting Office to study the cost and availability of credit in rural America, Pellett said. The results, released in 1994, concluded that no new statutory authorities were needed for FCS in the near term. However, the study said that the restructuring of American agriculture could make changes necessary in the long term.

A decade later, “those changes have arrived,” Pellett said. She noted that average farm real estate prices have skyrocketed from $196 per acre in 1970 to $1,360 in 2004, a 594-percent increase.

At the same time, the rural population has declined from 26 to 21 percent of the nation’s total. Many rural towns are losing population and critical infrastructure, Pellett continued. The number of farmers and ranchers has declined from 3 million to 2 million since 1970, and farmers have become increasingly reliant on off-farm income and government payments. Much of the capital in rural areas is in fixed assets and not easily converted for investment purposes, she said.

In response, FCA developed a five-year plan which calls for giving system lending institutions greater flexibility and to reduce or eliminate regulations that “unnecessarily impair” their effectiveness. It recommends that the FCS be allowed to expand operations, not only within agriculture, but also to serve a broader portion of rural America. Specifically, Pellett said Congress should consider changing the Act so that FCS institutions can make home loans in rural towns of more than 2,500 people (the current cap), and to enable them to engage in syndication lending (bringing in other banks to help them finance projects that exceed their lending limits).

The Farm Credit Act “must be brought into the 21st Century,” Pellett said.

—By Dan Campbell



November/December Table of Contents