Farm Credit sale to Rabobank puzzling to many ag leaders

The sale of Omaha’s Farm Credit Services of America to Dutch lending giant Rabobank, formally announced July 30, continues to rock American ag lenders. Almost everything about the sale’s terms and impact on the $117 billion Farm Credit System (FCA) is a puzzle.
Not to Rabo and Omaha dealmakers, though. Both Rabo’s U.S. boss, Cor Broekhuyse, and Omaha’s chief, Jack Webster, defend the $600 million sale as the greatest thing since bottled Heineken.
A good thing. When completed, both note in telephone interviews, American farmers and agribusiness will see greater competition among ag lenders, more services offered farmers and ranchers and more money in rural communities.
Maybe – even probably – but that sunny forecast cannot blind Omaha’s 51,000 shareholders to what appears to be a nearly in-the-dark, bargain basement sale of their cooperative lender.
Nor can FCS’s government regulator, the Farm Credit Administration, bless the union without a detailed examination of what the Omaha-Rabo marriage will do to rest of the FCS family.
In a word, it will be costly – for two reasons.
First, if the Omaha sale goes through, more system lenders would likely be poached, furthering weakening the overall system. Second, by law, FCA must have lending institutions in every state. If others, like Omaha, are sold, FCA must re-establish those lenders somewhere, somehow.
Already, two FCS members, the $31 billion CoBank and smaller AgStar – whose competing bid to buy Omaha was dismissed by Omaha’s board – have vowed to fight the Omaha-Rabo deal.
The Farm Credit Council, FCS’s Washington lobbyist, is busy wiring Capitol Hill to oppose the sale, also.
And all have good reasons.
Price to pay. The biggest is the $600 million price Rabo will pay for Omaha.
By any measure, the price is a flat-out steal of Omaha’s 43 offices in South Dakota, Iowa, Wyoming and Nebraska and its $7.5 billion loan portfolio, said FCS insiders parsing the scant details released by Omaha and Rabo.
They explain it this way: Omaha is swimming in cash; its June 30 financial statement shows $1.305 billion in unallocated retained earnings and a fat $208 million reserve to cover loan losses that have averaged but $6.5 million.
Omaha’s pile got that big, they contend, mostly by not paying patronage to members.
And it hasn’t, Omaha boss Webster confesses.
“We’ve used our profit to build capacity and strength and to offer customers competitive products.”
Buy a way out. For Omaha to sell itself, however, it first must buy its way out of the federated cooperative Farm Credit System.
That exit fee, according to Omaha’s math, is an estimated $800 million.
The money, explains Webster, will come from the lender’s unallocated reserves.
But the $800 million is actually shareholder money, explains Douglas Sims, CoBank’s CEO.
In short, he said, Rabo is “actually buying a big piece of the Farm Credit System with shareholders’ own money. I don’t blame Rabobank. If it can steal this bank, it should.”
By Sim’s pencil, the purchase price Rabo and Omaha agreed to will give shareholders about 42 cents for each dollar of stock they own.
“I don’t understand why cooperative members would sell their co-op for 42 cents on the dollar when the going rate for farm banks is 2-to-2.5 times capital,” he notes.
Omaha’s Webster disagrees. Unallocated reserves are just that – unallocated – he said.
Use as they want. The board can use them how it sees fit, and it sees fit to tap $800 million of the reserve to pay the FCS exit fee.
Moreover, Webster adds, Omaha’s stock value is pegged at $50 million and its 51,000 shareholders “will get paid $600 million for it. That’s a great deal for them.”
When viewed from that narrow angle, sure. But other FCS sources said that as many as one-third of the 17-member Omaha board of directors view it like CoBank’s Sims – and they voted against the sale July 30.
Webster deflects all questions about the board vote and other specific details, saying only that Omaha’s shareholders will have all the facts on the deal before they vote it up or down about Christmas.
Right now, though, this deal looks like a Christmas turkey.
(Alan Guebert’s Farm and Food File is published weekly in more than 75 newspapers in North America. He can be contacted at agcomm@sbcglobal.net.)