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Rabobank offers to buy part of U.S. Farm Credit System

(Monday, Aug. 23, 2004 -- CropChoice news) -- Scott Kilman, Wall Street Journal, 08/19/04 via the Agribusiness Examiner:
A takeover fight has emerged for a little-known but critical cog in the U.S.'s Farm Credit System, which is causing an unprecedented headache for regulators and threatening to ignite a political donnybrook in Congress.

The Minnesota arm of the Farm Credit System Wednesday lobbed in a competing bid for a sister organization, Farm Credit Services of America in Omaha, Nebraska, in hopes of keeping it out of the hands of Dutch financial giant Rabobank Group, which two weeks ago agreed to pay $600 million for the Nebraska lender.

The dollar amounts are small in an era of bank megamergers, but the dust-up in the arcane area of quasi-governmental agricultural lending has suddenly focused fierce debate over the future of the massive Farm Credit System and whether parts of it should be privatized.

"This has opened a huge can of worms," said Rep. Frank Lucas, an Oklahoma Republican who is making plans for hearings by his agriculture subcommittee. Tom Daschle of South Dakota is calling for hearings in the Senate, where he is leader of the Democrats.

Rabobank, which got its start lending to Dutch farmers, is unique among the world's big banks by focusing on agriculture. The world's 24th-largest bank, with $500 billion in total assets, it has expanded into the farm belts of Australia, New Zealand and Ireland and has its eyes on Canada and Brazil.

In the U.S., Rabobank has long done business with food and agribusiness giants such as Tyson Foods Inc., Cargill Inc. and ConAgra Foods Inc. The proposed deal would fulfill its goal of becoming a major lender to U.S. farmers.

Similar to a credit union, Farm Credit Services of America is a borrower-owned cooperative that lends to farmers in four states: Iowa, Nebraska, South Dakota and Wyoming. It had loan volume of $7.6 billion during the first six months of this year. A majority of its directors approved the Rabobank offer, but the deal is subject to approval by its borrower owners.

"For us, agriculture is still a sexy business," said Cor Broekhuyse, who heads Rabobank's operations in the Americas.

Rabobank's problem is that the Omaha lender is part of a perk jealously guarded by U.S. farmers. Its territory is at the geographic center of the Farm Credit System, a network of lenders created by Congress 88 years ago with a mission of supplying affordable credit to farmers. The network is the single largest source of loans for U.S. farmers, holding $60.6 billion in farm loans, or about one-third of total farm business debt.

As a government-sponsored enterprise, the Farm Credit System enjoys tax breaks and its bonds are so prized that it can raise funds for less cost than commercial bankers. While the federal government doesn't back Farm Credit System bonds, the system holds quasi-government status in the minds of bondholders and farmers. They assume Congress wouldn't let the system fail, and they have been correct. The system received a $1.7 billion federal bailout during the 1980s farm-debt crisis.

To sell itself, Farm Credit Services of America would have to give up these advantages and pay the system an $800 million exit fee. In exchange, the Omaha lender would be freed from restrictions that prevent it from offering such services as taking deposits and making home loans in towns.

Many farmers --- as well as Farm Credit System executives --- were flummoxed when the Omaha lender's board agreed to sell out. "I didn't know you could even do that," said David Williams, a 73-year-old Villisca, Iowa, farmer and customer who opposes the deal. "Aren't they violating their mission?"

The answer to that question is the responsibility of the Farm Credit Administration, a tiny federal regulator that oversees the system and has never had to pass judgment on an outside acquisition before. The agency is empowered to block the sale of a system institution if its departure would materially hurt those left behind. It isn't clear how the three members of its White House-appointed board are leaning. Chairwoman Nancy C. Pellett didn't return phone calls seeking comment.

Whatever the regulators decide will be controversial. Blocking the Rabobank deal could anger the powerful American Bankers Association. Its rural banking members have long resented having to compete for farmers head-to-head with a government-sponsored enterprise.

"Why does the Farm Credit System still need GSE [government-sponsored enterprise] status if Rabobank thinks their business is so good that it's willing to buy some of it?" said Denny Everson, head of agribusiness lending at First Dakota National Bank in Yankton, South Dakota.

If the Farm Credit Administration approves the Rabobank deal, many system supporters will howl as a powerful new competitor materializes. Also, other associations might try to defect in order to cash in.

The Omaha association owners never thought they could receive so much money for their shares, which they were required to buy to qualify for a loan from the cooperative. The Omaha association had been retiring a small amount of its shares each year for $5 a share. Rabobank is offering $600 million for a lender with ten million shares, giving the deal an indicated value of $60 a share.

It wouldn't be that simple: Each of the Omaha concern's 50,890 owners would be paid based on the amount of business they have done with it over the years. The amount would vary widely among owners, but the average payment works out to $11,790.

Many top officials of the Farm Credit System oppose the Rabobank deal. "We want the system to stay as large as possible," said Jamie B. Stewart, president and chief executive of Federal Farm Credit Banks Funding Corp., which raises funds for the system by selling debt securities.

Many system executives back a merger offer unveiled yesterday by AgStar Financial Services, part of the same government-sponsored enterprise, that is designed to keep the Omaha lender within the fold and away from Rabobank. Executives of AgStar, Mankato, Minnesota, say the owners of the Nebraska lender would receive $650 million.

"If Farm Credit Services of America were to leave [the system], we would have a big hole in the middle of the country," said Paul DeBriyn, president and CEO of AgStar. "If that becomes a trend, it would create a question about the viability of the entire system."

In response to the AgStar offer, Jack Webster, CEO of Farm Credit Services of America, immediately raised doubts about the financial muscle of AgStar, which has about one-third the assets of the Omaha lender. The directors of the Omaha lender, who rebuffed an earlier overture from AgStar this summer, were slated to discuss the new offer during a teleconference last night.

Rabobank, meanwhile, issued a statement calling its offer superior. [August 19, 2004]