When word leaked July 22 that Rabobank hopes to buy Omaha’s Farm Credit Services of America, the ag lending grapevine quickly jammed with chatter, rumor and gossip on why the $500 billion Dutch lending cooperative would pay up to $3.5 billion for a four-state piece of the nearly 100-year-old Farm Credit System (FCS).
The grapevine gasped again when it was reported that a smaller FCS lender, AgStar Financial of Mankato, Minn., had risen to challenge Rabobank’s purchase of Omaha, one of the FCS’s crown jewels.
AgStar’s bid, although lower, explained the grapevine, proved that the FCS would move aggressively against outsiders attempting to poach any of its 102 members who hold $91 billion in ag loans nationwide.
While that’s probably true, no one at any of the three institutions or the system’s government regulator, the Farm Credit Administration, would comment publicly on Rabo’s stunning move, AgStar’s countermove or how the government views any of the moves.
Following the trail. So what’s it all about?
When banks go shopping, it’s about one thing and one thing only: money. Be it dollars, pesos or Euros, banks deal in one cold, hard reality – cold, hard cash.
And Omaha’s Farm Credit Services of America is bursting at the seams with it.
After an ugly, nearly-bankrupting run of bad loans, bad losses and bad luck in the 1980s, the Omaha cooperative lender recovered strong and now sits on $1.32 billion in cash.
More importantly, says Bert Ely, a commercial bank consultant and long-time critic of the Farm Credit System, all but $47 million of that huge hoard is unallocated retained earnings.
But even if Rabobank captures Omaha, Ely explains, it will not pocket the cash.
“That’s the coop members’ money. If Omaha sells to Rabo, then the billion three is disbursed to members and management.”
Greed. Given that not-minor technicality, Ely suspects Omaha’s biggest motivation in entertaining any offer from Rabobank “is really about is plain old greed; greedy management.”
Look at it this way, Ely continues.
“Let’s say the stockholders” – 58,000 in Omaha’s lending territory of Nebraska, Iowa, South Dakota and Wyoming – “receive 95 percent of the unallocated retained earnings if Rabo buys.”
“Well, that still leaves $60 to $65 million for Omaha’s senior managers and directors to divvy up among themselves. Not a bad payday.”
Approval. As easy and lucrative as that sounds, Ely admits Rabo’s bold bid and the golden parachutes it implies for the Omaha bosses hinge on whether the Farm Credit Administration approves the deal.
Right now, he suspects, FCA will turn thumbs down on it. It’s an educated guess that rests largely on the out-of-the-blue competing bid from Omaha’s much smaller FCS colleague, AgStar.
“It looks like AgStar is just a stalking horse for the system,” says Ely, to keep the system for the system and give its regulator, FCA, a way out of the tight jam Omaha and Rabo put it in.
A tight jam. Not only is FCA in a tight jam, it’s in a very big, very tight jam.
As of last Dec. 30, Farm Credit banks and associations nationwide held $13.86 billion in unallocated surpluses.
If Rabo succeeds in acquiring Omaha, other FCS shareholders across the county might clamor for Omaha-like sales of their cooperative lender to banks so they too could unlock this vast vault of their money.
Figure it out. “Why wouldn’t other FSC members do the same thing?” asks Ely. “I can’t think of any reason for them not to. Unallocated retained earnings are owned by everyone and no one, so a ‘grab’ for them is logical. For years I’ve expected someone some day to figure out how to do this.”
But again, regulator FCA holds the single key to open this treasure chest. If Omaha agrees to Rabo’s rich offer (more than two-times Omaha’s book value, calculates Ely), then FCA likely will have to choose between a farm lending institution the commercial banking industry and many in Congress say has outlived its mission and a sleek, global ag powerhouse from The Netherlands.
Right now, though, it’s all just chatter, rumor and gossip. Rich, money-dripping chatter, rumor and gossip.
(Alan Guebert’s Farm and Food File is published weekly in more than 75 newspapers in North America. He can be contacted at firstname.lastname@example.org.)
© 2004 ag comm