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Center for Rural AffairsUse Farm Credit $800 million exit fee to help beginning farmers

Agriculture.com Staff 07/07/2010 @ 9:09am

The proposed purchase of Farm Credit Services of America by Dutch banking conglomerate Rabobank raises critical issues that cry for the attention of Congress, as well as the farmer stockholders and federal regulators being asked to approve the sale, says the Center for Rural Affairs (CRA).

Omaha-based Farm Credit Services is a producer owned cooperative that lends to farmers and ranchers in Iowa, Nebraska, South Dakota and Wyoming. The banks were initially created with federal money that has since been repaid and to this day enjoy competitive advantages over local rural banks. System banks are tax exempt and the feds back the bonds issued to raise money to loan to farmers, CRA says.

"But Farm Credit Services has not always used those advantages in the interest of all of agriculture. It has positioned itself as a leading financier of industrial agriculture. It has financed some of the biggest corporate hog operations and has a reputation for cherry picking the biggest and most lucrative farm borrowers," CRA said in an article scheduled to run in the September issue of their newsletter.

"Furthermore," they say in the article, "the extraordinarily strong $1.3 billon of capital reserves held by Farm Credit Services suggests that it was using its preferred status to build capital, rather than to keep interest rates low or pay patronage dividends. In theory, that capital provides a means to buyoff the federal Farm Credit Administration, which regulates System banks and must approve the sale."

Under the proposed sale, $500 million of that capital plus a $100 million premium from Rabobank would be paid to the stockholders (borrowers), averaging over $10,000 per borrower. The remaining $800 million of reserves would be paid back to the federal Farm Credit Administration's insurance corporation and used to lower interest rates or increase patronage dividends to borrowers of other system banks.

Before passing on the sale, farmer stockholders should ask some funda mental questions, CRA says. "First, why relinquish their share of a bank with $1.3 billion of capital for just $600 million Ð less than 50 cents on the dollar."

The organization says Congress should be safeguarding the public interest. "Would turning the dominant position of Farm Credit Services over to an international banking conglomerate damage competition? Would Rabobank use its size and power to subsidize loans in the short term to drive out competitors Ð particularly smaller community banks? Surely Congress did not create and subsidize a farmer owned lending institution only to hand a dominant market position to an international banking conglomerate," they say.

The group also says Congress should examine the aggressive focus of Farm Credit Services on industrial agriculture and explore new avenues for ensuring adequate credit availability to the rest of agriculture.

One place to start would be the $800 million that would be transferred back to Farm Credit Insurance Corporation if the buyout goes through, CRA says. "Instead of using that to subsidize Farm Credit System borrowers in the rest of the country Ð corporate farms and all Ð Congress should instead redirect that money to a beginning farmer fund. That fund could support initiatives to open opportunity to a new generation of farmers."

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