Rabobank

Document Sample
Rabobank Powered By Docstoc
					Will Rabobank shadow change Farm Credit’s future?

By Steve Cocheo, executive editor

When ABA Banking Journal devoted its November 2003 cover to a profile article concerning
Farm Credit Services of America, there was no expectation that the huge midwestern arm of the
Farm Credit System would dominate the coverage in the 2004 agricultural banking report as
well.

But surprise has been the one common element running through the proposed takeover by
Rabobank of FCS of America, which serves Iowa, Nebraska, South Dakota, and Wyoming. For
one thing, the farmer-borrower-stockholders of FCS of America generally never thought of their
shares as being a source of a healthy windfall. For another, bankers who already groaned under
the favored-competitor status of FCS of America never thought things could get still more
―interesting,‖ with an international megabank moving onto their turf.

Institutional members of the Farm Credit System, and their regulator, the Farm Credit
Administration, watched as a little-noticed provision of the system’s 1980s rescue package
resurfaced, permitting a member to withdraw from the system.

The final surprise–for now–was the press-time rejection of the Rabobank offer by FCS of
America’s board.

Prior to this development, ABA Banking Journal brought together six experts to discuss the
implications of Rabobank’s concept. Much of what they said still applies.

The panelists, in alphabetical order, were:<blockquote><ul>
<li><strong><font color="green">Peter Barry</font><strong>, professor of agricultural finance,
University of Illinois, Urbana-Champaign.</li>
<li><strong><font color="green">John Blanchfield</font><strong>, director, ABA Center for
Ag and Rural Banking.</li>
<li><strong><font color="green">Bert Ely</font><strong>, principal, Ely & Co., Inc., and
editor, <em>Farm Credit Watch</em> newsletter.</li>
<li><strong><font color="green">Neil Harl</font><strong>, emeritus professor of economics,
Iowa State University, Ames.</li>
<li><strong><font color="green">Roger Monson</font><strong>, president and CEO, Citizens
State Bank of Finley, N.D., and chairman of ABA’s Agricultural and Rural Bankers Committee.
<li><strong><font color="green">Jeff Wolfgram</font><strong>, manager, Dakota Mac, and
vice-president, First Dakota National Bank, Yankton, S.D.</li></ul></blockquote>
The following report is the result of the hour-long telephone discussion, edited for space and
clarity.

<strong><em>ABA BJ: Let’s say Rabobank succeeds. What are the implications of privatization
of Farm Credit Services of America?</em></strong>
<strong><font color="green">MONSON</font><strong> (Citizens State Bank) The Farm Credit
System’s member organizations have been pushing the envelope for years. If they want to do
that, they need to exit the system. The shareholders should be allowed to decide if their
organization is going to be sold and leave the system.

If this merger were to take place, the resulting institutions will be an additional choice for the
farmer-producers in that area, because I’m sure that the Farm Credit System will still attempt to
be a player in the market in some fashion.

<strong><font color="green">WOLFGRAM</font><strong> (First Dakota Nat’l Bank) If that
does happen, there’s no doubt going to be some short-term and long-term challenges for that out-
of-territory Farm Credit entity. In the department of the bank that I’m in, we work with out-of-
region underwriters every day. I see how challenging it can be when you aren’t right in the
farmer’s backyard.

<strong><font color="green">BLANCHFIELD</font><strong> (ABA) I’m concerned about the
political effect on the deal. There is strong sentiment in some quarters to try to get Congress to
pass legislation that would restrict or prohibit the opportunity for Farm Credit System owners—
the farmers—from selling if that is what they choose to do. That’s very troubling to ABA.

<strong><font color="green">HARL</font><strong> (Iowa State) There are a good many
questions about the likely status of new Farm Credit players in the market. But one certainty is
that there will be a startup period during which new units will have to build capital before they
can really become as competitive as they ultimately would be. Eight or so years from now, I
think there could be very intense competition in the market, because basically what you would be
doing is replicating the present Farm Credit System as a lender, on top of the Rabobank-FCS of
America organization. In fact, it’s been observed there could be destructive competition, because
there would be so much capacity. My greatest concern is the impact on long-term land lending.

By the way, it isn’t quite correct to characterize the Rabobank acquisition as a privatization. In
many respects [Farm Credit System lenders] are already private. They simply have a privileged
position relative to the cost of money.

<strong><font color="green">BARRY</font><strong> (Univ. of Illinois) ―Privati-zation‖ is
often used to refer to the relinquishment of GSE status, so in that sense I think the usage is
appropriate.
In terms of implications for other parts of the Farm Credit System, I think we would see a much
higher level of attention given to capital management by the Farm Credit Administration, i.e.,
―how much,‖ rather than simply ―more is better.‖

This deal and the possibility of letting other entities onto the turf of FCS of America is likely to
surface territorial issues and FCA would be involved in the decision as to whether or not to allow
more competition within the Farm Credit System itself.

As far as opportunities for banks, this deal could open up opportunities for community banks in
particular. It may even include partnering opportunities with Rabobank.
<strong><font color="green">ELY</font><strong> (Ely & Co.) I’m a longtime advocate of
privatizing all the GSEs. Regarding Professor Harl’s point, I use the term ―privatization‖ because
these are not genuine private-sector entities. They have both a cost-of-funds advantage and an
income-tax advantage.

Rabobank, by contrast, will be a genuine private-sector competitor, albeit one with a very good
credit rating. Whether or not Rabobank takes that four-state territory and puts it into a bank or
banks, we don’t know yet. Don’t forget, Rabobank already owns a U.S. bank—Valley
Independent Bank, in El Centro, Calif.,—that has been very aggressive in increasing its lending.

My hope is that this deal would lead to other Farm Credit System institutions leaving the system.
Potentially, that could have a snowball effect that would lead to the eventual privatization of the
entire system. That would level the playing field between system institutions and private
institutions, and I think that would be good for agriculture and rural America.

<strong><font color="green">HARL</font><strong> Dangling money in front of shareholder-
farmers is a pretty strong economic inducement, so there is a fairly high probability that that
indeed would occur. I’m hearing that there are other players, both foreign and domestic, who
would probably be interested in some segments of the Farm Credit System.

An interesting effect will be that as each unit leaves the system, that will enrich the insurance
fund, so the system could end up with a very, very large insurance fund. [Departing Farm Credit
institutions must pay exit charges to the Farm Credit Insurance Fund; Rabobank’s payment is
estimated at $800 million.]

That raises interesting competitive aspects too. The $800 million-plus exit fee paid out of this
four-state market will essentially reduce borrowing costs for farmers in the other 46 states.

But the fundamental issue here is whether the Farm Credit System should continue, and whether
it should be protected. I don’t think Congress ever intended for the stockholders to be able to
exercise their rights as owners. I don’t think the stockholders thought in those terms either—until
very recently.
So I think Congress probably will get its oar in the water before this first deal is consummated.

<strong><font color="green">BARRY </font></strong> As far as the attractiveness of system
institutions to other potential purchasers, there are three very large associations with $7-$8
billion dollars of assets, FCS of America being one.

AgStar is in the next tier, and then the largest sizes after that are in the $2 billion to $3 billion
range, with a large number of smaller ones. If there were to be a run on purchasing Farm Credit
System institutions, it probably would start with the largest ones.

Now the AgStar [counteroffer for FCS of America] is from a sister institution within the system.
It would preserve the $800 million dollars that would otherwise go into the insurance fund. It
would retain farmer control in terms of ownership and it would accomplish the same level of
distribution of cash to stockholders.
And so in a way FCS of America has two good offers.

A third one is to stay just the way they are. But maybe part of FCS of America’s motivation [to
sell] is to try to break into other areas by leaving the system.

<strong><font color="green">WOLFGRAM</font></strong> In the Omaha World Herald,
Rabobank acknowledged that even if this merger does not go through, it will go after other
entities of the Farm Credit System.

It’s scary from a community banker’s standpoint. First Dakota is a $480 million bank located in
southeastern South Dakota, competing against a $500 billion company.

<strong><font color="green">MONSON</font></strong> There are a lot of competitors today
for the ag production loan business, including not only chartered banks but also other financial
services providers, such as John Deere.
I’m not here to say whether the system should go away or not, but I do ask whether the delivery
of capital to rural America might change, so that the system in some way might be a point of
access for commercial lenders.

<strong><font color="green">ELY</font></strong> I’ve heard a lot of concern—and I’m sure
it’s a very genuine concern—about Rabobank burning up the countryside with its competitive
clout. But I think it’s important to keep in mind that Rabobank is a huge institution
headquartered more than 3,000 miles away.

Twenty years ago, bankers were scared stiff that Bank of America was going to buy the bank
across the street and drive them out of business. The joke is, now they say ―We’d love it if Bank
of America would buy the bank across the street, because then we’d have a net inflow of
customers.‖

So the Rabobank deal may actually provide a great business opportunity for smaller banks in
serving smaller customers that Rabobank may not be too interested in.

<strong><font color="green">WOLFGRAM</font></strong> Something I still need to get a
grasp on is what their strong credit rating will mean in terms of interest rates. Our bank is
generally 25 to 50 basis points higher than what Farm Credit offers. I’m worried about that gap
widening, say, to a 100-basis-point difference.

But don’t get me wrong—I think good community banks are here to stay and that they’ll flourish
no matter what happens with the players in this deal.

<strong><font color="green">BLANCHFIELD</font></strong> I believe we are going to see a
merger mania within the Farm Credit System. I’m trying to figure out if it is going to be good or
bad. There are 95 or so associations left. It’s been predicted that the system will be down to 20
lenders in 20 years—but I think they’ll be down to 20 lenders a heck of a lot sooner than that.
<strong><font color="green">BARRY</font></strong> It wasn’t too long ago there were well
over 1,000 associations within the Farm Credit System, and now there are less than 100. So
there’s been a degree of mania for some time.

<strong><font color="green">HARL </font></strong>Agriculture is quite cyclic. Right now, it
is at the top of the cycle. A concern is, will an enlarged distant lender be as sensitive as the closer
lender in times of economic stress?
I spent some time on the West Coast during the farm debt crisis where in one state there were
about half a dozen large distant banks that were loaning quite a bit of money and they were not
as sensitive.

<strong><em>ABA BJ: Let’s turn the telescope around for a moment and consider concentration
from the perspective of the customer/borrower. </em></strong>
<strong><font color="green">ELY</font></strong> Commercial banks tend to be more heavily
involved in financing what we might traditionally call the family farmer, the part-time farmer,
the weekend farmer, and I would not expect that to change. The Farm Credit System is focused
on serving larger farmers and that’s what Rabobank is probably going to be focused on. Not that
they’re not going to do any small loans at all, but I would think because of their size they would
tend to go after the larger credit. So I don’t see this hurting the family farmer. To the extent that
Rabobank walks away from some of the smaller borrowers, that’s going to stimulate competition
among the banks because it’s going to be a bigger market.

<strong><font color="green">WOLFGRAM</font></strong> I don’t disagree that
Rabobank/Farm Credit Services will continue to go after the mega farm. That’s what Farm
Credit really gears itself after. But I worry that Rabobank will add things like zero amortization
loans. It’s my understanding that this loan type is how Rabobank has penetrated certain markets
outside of the U.S. I worry about the impact of that kind of borrowing on some customers if
things don’t stay so rosy—and about how a community bank can compete with something like
that in the meantime.

<strong><font color="green">HARL </font></strong>In some places such borrowings are
almost treated like capital. But when the downturn comes, that’s when the collision with reality
occurs.

<strong><font color="green">MONSON</font></strong> We need to be mindful of what
happened in the ’80s. Farm Credit was the one whose volumes dropped dramatically. And it was
the local commercial banks who picked up the slack.

<strong><font color="green">BLANCHFIELD</font></strong> Here in Washington the Farm
Credit System has carpet bombed everyone with the concept that in good times and bad the Farm
Credit System has been there. Clearly, the record shows that in bad times they were out of there.

<strong><font color="green">BARRY </font></strong>It’s true the system’s original role was
to serve the family farmer, but even more specifically, it was to serve their real estate needs.
Hence the creation of the land banks.
Land remains by far the largest input in the agricultural sector. It never surprised me to see the
results that the system tends to serve larger wealthier borrowers because they’re the ones that can
afford to buy land.

<strong><font color="green">HARL </font></strong>This is really a matter for management
for the board of directors in each Farm Credit System district. Unfortu-nately, my observation
has been that those boards have not been as aggressive as boards ought to be. Management has
been exercising greater influence than might be a case in a non-Farm Credit financial institution.

<strong><font color="green">ELY</font></strong> You say that it ought to be up to the board,
but shouldn’t it ultimately be up to the owners?

<strong><font color="green">HARL</font></strong> Sure, but until very recently I don’t think
any stockholder really thought that they had the power to sell their bank. Congress needs to look
at what will constitute a workable model for management and governance going forward—if the
system is to survive.

<strong><em>ABA BJ: If Congress does reexamine things, I can see potential upsides for
commercial banks, but would there also be any downsides?</em></strong>
<strong><font color="green">BARRY</font></strong> Congress should revisit the status of
both statutes and regulations. The exit rules and the fee that the exiting institution must pay were
intended to be a disincentive to exit. It’s turned out to be an incentive, at least for the purchasing
institution—Rabobank in this case—to be able to make a below-market offer and boost its rate of
return.

Privatization of the entire Farm Credit System would be a major source of increased competition.
I’m not thinking of this from the perspective of the subsidy advantage side. Just imagine
releasing all those new, now-profit-oriented institutions on the market.

<strong><font color="green">ELY</font></strong> We don’t want to understate the
competition that they represent now, especially in real-estate loans. That would become even
worse in terms of subsidized competition if the system institutions were allowed to go into each
other’s territories.
One thing you need to keep in mind is the Farm Credit System was created to lend to agriculture,
not to rural America, as system institutions are increasingly trying to do. As long as they are
going to have special advantages, they need be limited to lending to only those sectors of
agriculture that need a subsidy.

<strong><em>ABA BJ: I keep reading about the need for more infrastructure in rural America,
like broadband internet access...</em></strong>
<strong><font color="green">ELY</font></strong> Yes, but does the financing need to be
subsidized? And then, even if the answer is ―yes,‖ is the Farm Credit System the most efficient
way to deliver the subsidy for such needs? And will the subsidy go where you’d like it to go?
The whole GSE concept in general is not a very efficient subsidy delivery mechanism. And when
you take a look at the Farm Credit System, much of it is lending to large operations—folks least
in need of a subsidy.

<strong><font color="green">HARL</font></strong> It’s vital that Congress take a look at this.
It’s not appropriate to race ahead using rules that were never intended to be applied in this kind
of a setting.
If we are going to have a stockholder sale Congress needs to look at the question of transfer of
stock. It should reflect value, not be a fixed amount.

Stockholders should be bearing the risk of stock ownership. They aren’t now. It’s
unconscionable for someone who paid a fixed amount for stock to pocket several years of
earnings from somebody else who owned it previously without that being reflected in the value
of the stock positively or negatively as the case may be.

I think Congress is likely to take a fairly broad review here and I think that restrictions on
lending are obviously going to be a consideration.

<strong><font color="green">ELY</font></strong> I fear you are far too sanguine about
Congress being fair. My concern is that Congress will give the system almost anything it wants
because there are no negative budget implications—at least in the short run.

<strong><font color="green">MONSON</font></strong> One of the greatest fears I have as a
banker is that Congress will put a wall around the Farm Credit System. Then no one leaves, no
one enters, and they [get] extended powers. That would be devastating to community banks.
<strong><em>BJ</em></strong>

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:7
posted:9/21/2011
language:English
pages:7