SALEM, Ohio – This summer’s proposed sale of one of the largest ag-lending services in the country first grabbed the attention of rural America and now Congress.
In late July, Farm Credit Services of America agreed to a purchase offer from the Dutch bank Rabobank. This tentative agreement was the topic of a recent U.S. House agriculture subcommittee hearing where representatives argued the deal wasn’t in farmers’ best interests.
Limiting risk. The Farm Credit System is the overarching name of a network of nearly 100 independent agencies that provide financial assistance to the rural community.
Farm Credit Services of America is the second largest agency in the system, with $7.8 billion in loans. It services Iowa, Nebraska, South Dakota and Wyoming.
Congress created the Farm Credit System in 1916, at a time when lenders shied away from agricultural loans because of the risk. In the Federal Farm Loan Act, Congress mandated Farm Credit to serve farmers through good times and bad, and be a dependable lender.
If Rabobank, or any other for-profit bank, took over a Farm Credit agency, that mandate’s security would be gone, said Donnie Winters, president of Farm Credit Services of Mid-America, which serves Ohio and is the largest agency in the country.
Winters worries if agriculture took a downturn, Rabobank could say there’s too much risk in agriculture and focus on other industries instead.
In a House hearing last week, Farm Credit supporters asked the committee to repeal the provision that allows entities to leave the system.
Security. Although Farm Credit isn’t a government entity, the name gives farmers a sense of security. This is because during agriculture’s financial crisis in the 1980s, Congress protected farmers by extending Farm Credit a $4 billion line of credit.
Farm Credit drew $1.4 billion of that, and will have it officially paid off within the next few months, Winters said.
In need of modernization. The real issue is that the current Farm Credit structure has been around for 33 years, Winters said, reiterating a point made in the House hearing. It hasn’t been significantly updated since 1971 and agriculture has changed since then.
For example, in 1971, the ruling was made that home loans could be given to nonfarmers if there were less than 2,500 people in the community, Winters said. But this was at a time when 1,000-1,500 people lived in the county seat. Now populations are growing and that number is up to 4,500-6,000, he said. This means fewer people are eligible for those loans.
Another example is within Amish communities, Winters said.
Some of those farmers are diversifying by building furniture or barns. When these people become more cabinet makers than farmers, Farm Credit is restrained on the money it can continue to lend.
A choice. These situations leave Farm Credit agencies with a choice: either refuse service, or exit the system so they can serve the customers.
The structure needs to be reviewed so Farm Credit agencies can make changes without leaving the system, Winters said.
Not everyone agrees.
The American Bankers Association interprets these claims to mean Farm Credit wants to enter off-farm, nonagricultural lending.
“Since there already is an abundant supply of competitive credit available to all Americans, provided by taxpaying private-sector banks and financial firms, there is no rational need to expand that supply with subsidized [government-sponsored-entity] credit,” said Roger Monson, the association’s agricultural and rural bankers committee chairperson.
Monson said there must be limits on Farm Credit and if it wants to offer more services to more customers, it must do so outside the Farm Credit System.
If it happens. If the latest deal moves forward, with approval from Farm Credit Administration and shareholders, Rabobank would take over the 43 branch offices and keep the employees.
Farm Credit System would then re-charter that territory so it could continue to serve farmers in those areas. However, Winters said, it could take many years to get the entity up to the level where it is now.
The acquisition’s price tag is at $600 million, which would be divided between shareholders.
Farm Credit Services of America, however, would have to pay a $800 million exit fee. This fee protects Farm Credit entities from taking their capital and leaving the system. The money would go into the system’s insurance fund.
Another deal. Although the Farm Credit Services of America board already voted to approve the Rabobank offer, another bank proposed a merger in August.
Under this proposal, Minnesota-based AgStar would merge with Farm Credit Services of America. AgStar is already part of the Farm Credit System. The newly merged lender would pay shareholders $650 million in patronage, which is $50 million more than the Rabobank offer.
The exit fee would also be waived because it would be considered a merger.
(Reporter Kristy Hebert welcomes feedback by phone at 800-837-3419, ext. 23 or by e-mail at email@example.com.)
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