Years (decades!) ago, I worked briefly for a bank. I recall that ag lending was, at the time, at best a poor stepchild to commercial lending. This Economist article provides a fascinating look at Rabobank’s (Dutch Bank) acquisition of Farm Credit Services – a US Government sponsored lending entity. Perhaps some Wisconsin Financiers should think about this…<\/p>\n
AGAINST THE GRAIN
\nAug 26th 2004
\nWhy is a Dutch bank moving into agricultural finance in America?
\nWHAT on earth is Rabobank up to? This Dutch co-operative bank has been
\nbusily expanding its franchise in farm-finance, an area American banks
\nhave done everything to avoid since a meltdown in the 1980s. If that
\nwas not odd enough, Rabobank’s most recent move is truly unique. At the
\nend of July, it reached an agreement to buy Farm Credit Services of
\nAmerica, an institution that is a component of America’s odd network of
\ngovernment-sponsored entities (GSEs). That agreement has unleashed an
\nunholy row.<\/i><\/p><\/blockquote>\n
\nThese financial institutions, including the well-known housing-finance
\ngiants Freddie Mac and Fannie Mae, enjoy the implicit backing of the US
\nTreasury, and thus low funding costs, as well as tax breaks. All of
\nthese advantages would be lost if Rabobank’s purchase goes through.
\nBut no GSE has ever before agreed to a buyout. And soon after
\nRabobank’s offer, a backlash began. A sister institution in Minnesota
\nmade a counter-offer backed by a lobbying group representing other
\ngovernment-backed farm lenders. Two American Senators have called for
\nCongressional hearings. Concerns have been voiced about whether the
\nsale of Farm Credit Services could weaken the overall farm-credit
\nsystem: might a foreign buyer be less sensitive to local conditions?
\nThe biggest question is, however, unlikely to be raised: whether the
\noffer for Farm Credit Services means that, finally, it is time to scrap
\nthe GSE system entirely. “The reason the farm-credit system came into
\nexistence is that no one else would provide credit,” says Ray Goldberg,
\na professor at Harvard Business School. “Now someone else will.” The
\nsame argument, it will not have gone unnoticed, applies to Fannie and
\nFreddie.
\nFounded in 1916 as the first of the GSEs, the farm-credit system is now
\nover-regulated and fragmented. It encompasses about 100 different
\nfinancial institutions with $95 billion in assets. Farm Credit Services
\nis one of the largest, with almost $8 billion in assets drawn from just
\nfour states: Nebraska, South Dakota, Iowa and Wyoming. It initiated the
\nsale to Rabobank, and will pay heavily to ensure it goes through. It
\ncurrently has a net worth of $1.3 billion, and will pay a fee of $800m
\nto leave the overall farm-credit system. Rabobank will then pay $600m,
\nor a bit more than the remaining book value, with the proceeds
\ndistributed to the shareholders of Farm Credit Services, who comprise
\nmost of its customers.
\nIt is easy to see the deal’s logic for each side. The odd four-state
\nlimitation for operations means that Farm Credit Services has
\nincreasingly run into problems servicing customers whose operations
\nhave expanded into adjacent states or even internationally. By law,
\nmoreover, Farm Credit Services is unable to take deposits. If its
\nacquisition goes ahead, these and other restrictions would be lifted.
\nFor Rabobank, the acquisition is a small piece of a larger plan. Since
\n2002 it has purchased a bank in California, covering the farming areas
\nfrom Fresno to the Mexican border; an agricultural-land finance company
\nin St. Louis; and an Iowa-based farm-credit institution. And Rabobank
\nwould like to make further acquisitions that would give it better
\naccess to meat processors and breeders in the south, as well as tomato-
\nand citrus-growers in the southeast. It has an agreement with
\ngovernment-controlled banks in western Canada that could lead to an
\nacquisition there, and has become a huge force in the
\nagricultural-banking markets of Australia, New Zealand and Ireland. It
\nplans to expand in emerging economies, too.
\nSuch enthusiasm is less odd than it looks. True, agriculture is
\nnotoriously cyclical and has been shrinking as a percentage of the
\nglobal economy for years–not very attractive features for lenders. But
\na powerful niche player could overcome these obstacles. And it can sell
\nderivatives to farmers attempting to hedge weather and price
\nfluctuations. Rik van Slingelandt, head of Rabobank’s international
\noperations, says that, with the farming industry consolidating
\nglobally, farmers will want a global financial institution.<\/p>\n","protected":false},"excerpt":{"rendered":"Years (decades!) ago, I worked briefly for a bank. I recall that ag lending was, at the time, at best a poor stepchild to commercial lending. This Economist article provides a fascinating look at Rabobank’s (Dutch Bank) acquisition of Farm Credit Services – a US Government sponsored lending entity. Perhaps some Wisconsin Financiers should think […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25],"tags":[],"_links":{"self":[{"href":"http:\/\/www.zmetro.com\/index.php?rest_route=\/wp\/v2\/posts\/523"}],"collection":[{"href":"http:\/\/www.zmetro.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.zmetro.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.zmetro.com\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"http:\/\/www.zmetro.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=523"}],"version-history":[{"count":0,"href":"http:\/\/www.zmetro.com\/index.php?rest_route=\/wp\/v2\/posts\/523\/revisions"}],"wp:attachment":[{"href":"http:\/\/www.zmetro.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=523"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.zmetro.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=523"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.zmetro.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=523"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}