Understanding the Proposed Sale of Farm Credit Services of America

by Dean W. Moreau, president and CEO, Yankee Farm Credit

Yankee agrees that the proposed sale was not good for the System … or for our customers

Many of you have probably read or heard by now about the proposed acquisition of Farm Credit Services of America (FCSA) by Rabobank, which fell through in late October. On October 20, the FCSA Board reversed its decision and decided to remain part of the Farm Credit System.

The original story probably caught you by surprise as much as it did me. I wanted to give you Yankee’s views on this transaction, but first the facts.  

The Players

Farm Credit Services of America (FCSA) is the Farm Credit association serving the states of Iowa, Nebraska, South Dakota and Wyoming. It is basically a large “sister” organization to Yankee, authorized under the Farm Credit Act to provide credit and services to customers within the four states. It is the second largest association in the country with $7.8 billion of assets.  

Rabobank is a very large Dutch cooperative bank with strong roots in agricultural lending in the Netherlands. During the past 30 years, Rabobank has expanded internationally with substantial business in Australia, Ireland, South America and the United States. In the past two years, the bank has pursued a strategy of acquiring direct farm lenders in this country with a stated goal of becoming the largest credit provider to American farmers.  

The Deal  

Earlier this year, Rabobank offered to purchase FCSA for $600 million, which would have been paid out to current FCSA customers in cash based on their last five years’ average loan volume. If the sale had gone through, FCSA would have become a wholly owned subsidiary of Rabobank and no longer a part of the Farm Credit System. Rabobank would have owned and been responsible for servicing all existing FCSA loans. The current customer-elected FCSA Board would have disbanded and a new board consisting of Rabobank appointees (including four of the existing FCSA directors) would have governed the new Rabobank subsidiary.  

The Legal Authority

A rather obscure provision in the Farm Credit Act, dating back to the farm debt crisis of the mid- 1980s, provides the authority for leaving the Farm Credit System (System). It has been used once (in the 1980s) by a relatively small PCA in California that specialized in livestock lending. Using this authority to sell out to a commercial bank threw everybody a curve. It is doubtful that Congress ever intended for large Farm Credit institutions to exit the System.  

The Process  

FCSA would have had to submit a detailed plan to the Farm Credit Administration (FCA) for their OK. FCA has the right to turn down such a request if they believe that it would have a “materially adverse effect” on the System. If the FCA approved such a request, then the shareholders of FCSA would have had to vote to approve the terms of the acquisition.

Why Sell Out?

FCSA argued that the charter of the Farm Credit System is too limited to adequately handle the needs of its marketplace. In addition, the acquisition of FCSA would have enabled a large, one-time cash distribution from retained equity to be paid to its members.  

This letter appeared in the Fall 2004 issue of Financial Partner (F.P.) magazine, Yankee Farm Credit's customer publication. Click here if you would like to start receiving F.P. magazine in the mail.

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