Proposed sale of Farm Credit
System lender to Dutch bank
ignites controversy
proposal to sell one of
the nation’s leading Farm
Credit System lenders to
a Dutch co-op bank has
sent a shockwave
throughout the nation’s farm co-op
and ag credit communities. “Can they
really do that?” has been the frequent
question asked ever since the proposed
sale of Omaha-based Farm Credit
Services of America (FCSA) to
Rabobank Group of the Netherlands
was announced at the end of July.
The charter of the Farm Credit
System was revised in the late 1980s so
that member associations can exit the
system. The law was approved when
there were about 1,200 farmer-owned
lending associations in the Farm
Credit System. Today, there are only
92 associations and the sale of one of
the biggest such lenders has raised a
number of policy questions.
Any sale would have to be approved
by a vote of FCSA’s 51,000 stockholder
members (mostly farmers and ranchers),
and would also need to be
reviewed and approved by the Farm
Credit Administration, the regulatory
board that oversees the 100 or so
banks and associations that comprise
the nation’s Farm Credit System.
Opposition to the deal, which
appears to be considerable, seems to be
based not so much on resentment
toward Rabobank, but rather toward
the very notion that a key component
of the Farm Credit System could be
sold to any foreign bank, and whether
that would ultimately lead to the
diminishment, or even the dissolution,
of the entire system.
FCSA provides credit to
farmers and ranchers in Iowa,
Nebraska, South Dakota and
Wyoming. It has a loan portfolio of
about $8 billion, making it the second
largest of the 92 associations that provide
financing to farmers in the $120-
billion Farm Credit System. By comparison,
Rabobank has more than $500
billion in total assets. Rabobank has
cooperative roots, but its members are
349 Dutch banks. It does not conduct
business as a cooperative in the United
States.
Dutch bank bids $600 million
Rabobank has offered $600 million
for FCSA, and an additional $800 million
exit fee would be paid to the Farm
Credit System. It says it would be able
to offer its patrons a much wider array
of financial services than is possible
through the Farm Credit System. It
would also be able to provide services,
such as home loans, in towns that
exceed populations of 2,500 people
(the cap faced by Farm Credit System
associations).
Rabobank would select four FCSA
directors to sit on the initial 11-person
board of the new banking entity that
would operate as part of Rabobank.
FCSA members would stand to collect
an average payment of about $11,000,
according to some reports. However,
actual payments would vary widely
based on the size of
individual loans.
The Farm Credit
Administration
(FCA), FCSA’s federal
regulator, has
received a resolution from the FCSA
board that it plans to submit a formal
request to terminate its status as a
Farm Credit System lending institution,
and to then merge into a subsidiary
of Rabobank. Once the request
is submitted, FCA has 60 days to act
on the proposal. The agency could
deny the request if it determines the
exit would be harmful to the Farm
Credit System as a whole.
"We are very excited about this
opportunity with Rabobank," FCSA
board chairman Paul Folkerts said.
"Over the long term, we believe it will
better position us to meet the changing
needs of our customers and agricultural
producers, and to provide better
service and more choice in the
financial products and services they
need to succeed."
As of this writing (in late August), it
appeared likely that there will be
Congressional hearings on the proposed
sale. Such hearings would try to
determine the likely impact of the sale
on farmers and ranchers in FCSA’s service
area, the expected effect on the rest
of the Farm Credit System and whether
FCSA management and directors have
been offered any type of financial
inducements to recommend the sale.
Several banks, including CoBank,
and associations within the Farm Credit
System and the Farm Credit Council
(the trade organization of the Farm
Credit System) have expressed opposition
to the deal. In addition, a group of
FCSA stockholders calling themselves
"Farmers for Farm Credit," have begun
organizing to oppose the sale. That
group says it is "dedicated to preserving
an American farmer-owned and controlled
cooperative lender."
AgStar makes counter bid
One concern is that if FCSA leaves
the system, people who buy Farm
Credit System bonds may begin to
question the continued financial viability
of the system. If investors were to
stop buying bonds, it could force a rise
in interest rates for farmers and ranchers
needing loans, says Paul DeBriyn,
president of AgStar, another Farm
Credit System bank which has tendered
a counterproposal to buy FCSA.
Under the AgStar offer, technically a
merger proposal, there would be a cash
distribution of $650 million, and the
offer’s value could rise to more than $1
billion with future cash patronage dividends.
Further, by remaining within
the Farm Credit System, memberstockholders
would preserve their ownership
and control of the bank and
keep it headquartered in the Midwest
-- at Mankato, Minn., AgStar notes.
It is FCSA’s lack of paying patronage
to members which has left it holding
some large cash reserves and
reportedly made it an inviting target
for a takeover bid. AgStar, on the other
hand, has paid patronage since 1998,
including $23 million to its 12,000
members in 2003.
In a joint letter to the FCSA board,
the CEOs of three key Farm Credit
System banks -- William Collins of
AgriBank FCB, F. Andy Lowery of
AgFirst and Douglas Sims of CoBank
-- are urging that the counteroffer
from AgStar be accepted, which they
say would be backed with their banks’
own $84 billion in assets.
In a letter to customers, Sims and
CoBank Chairman J. Roy Orton say:
"The sale [to Rabobank] could have an
adverse effect on the Farm Credit
System and pose a severe threat to the
cohesiveness of the only cooperative
financial institution managed to serve
rural America."
They also stressed that one reason
FCSA even exists today is that the
Farm Credit System invested more
than $600 million (25 percent of it
from CoBank or its predecessor) into
the Omaha Farm Credit District during
the farm crisis of the 1980s.
Sale price questioned
Orton says Rabobank’s proposal
amounts to 44 cents on the dollar of
FCSA’s book value of $1.35 billion at a
time when other rural lenders are selling
for more than twice that much.
Neil Harl, an Iowa State University
ag economist, told the Des Moines
Register that the proposed sale has
"touched off a flood of phone calls from
farmers expressing anger, frustration
and opposition" to the sale. "I’ve rarely
taken so many angry calls," he said.
Another press report quotes John
Blanchfield of the American Bankers
Association as saying his organization
lacked enough details to comment on
the proposed sale, but that in general,
ABA supports privatization of the
Farm Credit System because it "focuses
its lending on larger, wealthier borrowers,
abusing its federal sponsorship."
Farm Credits System banks counter
that the opposite is true -- that they
do, as mandated by Congress, strive to
lend to young and beginning farmers
and ranchers who they say are all too
often ignored by commercial lenders.
United FCS, another Farm Credit
System lender which serves about 6,000
farmers and ranchers in Minnesota and
Wisconsin, has issued a statement saying
the proposed sale of FCSA should
spark dialogue within the Farm Credit
System "not over who should acquire
whom...but instead on what’s best for
rural America. Rural America has
changed dramatically in the 88 years
since the system was established, and
yet its charter and authorities are essentially
unchanged," says Marc Knisley,
Minnesota Valley FCS president. "We
can and should be doing more for rural
America, and we view the recent decision
of FCSA to exit the system as a
symptom of these deeper, underlying
issues."
