Pub. 6 2011-2012 Issue 2

www.nebankers.org 22 Extraordinary Service for Extraordinary Members. Bert Ely’s FARM CREDIT WATCH ® Shedding Light on the Farm Credit System, America’s Least Known GSE © 2011 Bert Ely CoBank One Step Closer to Acquiring U.S. AgBank O N JUNE 22, THE FARM CREDIT Administration (FCA) ap- proved CoBank’s acquisition of U.S. AgBank. Although characterized as a merger, clearly Co- Bank is taking over U.S. AgBank. After this deal closes on Jan. 1, 2012, CoBank will have total assets of approximately $95 billion, almost as much as the total assets of the other three Farm Credit System (FCS) banks combined. In addition to funding associations in 23 states, CoBank also funds ag co-ops na- tionwide. It truly will be the behemoth within the FCS. This merger is just the latest step in the dramatic consolidation within the FCS over the last 27 years. At the end of 1984, there were 845 FCS institu- tions, including 37 FCS banks. Today, just 84 FCS associations exist plus five FCS banks (soon to be four)—shrinkage of almost 90 percent, and FCS consoli- dation has yet to run its course. One or two more bank mergers are likely, which will reduce the FCS to three or just two banks: CoBank and one other. Smaller associations, especially those burdened by bad loans, will be acquired by larger associations. At the end of 2010, the 10 largest FCS associations— ranging in asset size from $3.6 billion to $16.4 billion—held 57.13 percent of all association assets. The smallest 20 associations—ranging in size from$30 million in assets to $352 million—held just 3.34 percent of all association as- sets. Surely many among the smallest 20 will be swallowed by bigger fish within the FCS; the same will happen to some of the larger associations. Where Is AgDirect Hiding? As intrepid Farm Credit Watch (FCW) readers will remember, the January 2011 FCW reported about AgDirect, a financing arm of FCS of America (FCSA), which had become a major FCS lender on farm equipment outside of FCSA’s assigned territory, outside of FCA’s cooperative charter, and outside of borrower-rights protec- tions mandated by Congress for FCS borrowers. Perhaps because of the FCW article, FCSA shifted AgDirect into a limited-liability partnership (LLP) and broadened its ownership. On Feb. 10, 2011, the FCA board “authorized three [FCS] associations and their subsidiaries to invest in Ag- Direct,” an LLP “formed to facilitate point-of-sale agricultural equipment financing originated by equipment dealers or FCS institutions.” The three associations are FCSA, GreenStone FCS, and Badgerland Financial. All three are funded by AgriBank. On March 31, 2011, the FCA approved Northwest FCS (funded by CoBank) “as the fourth original partner and investor” in AgDirect. These four as- sociations, the largest and the third, seventh, and 12th largest in the FCS, hold approximately one-quarter of all FCS association assets. FCSA appears to be AgDirect’s managing partner. Presumably other FCS associations will become partners and investors in AgDirect as it extends its lending tentacles across America, outside of the FCS borrower-owner cooperative ownership structure. As FCSA stated in Note 1 to its first-quarter 2011 finan- cial statements, the transformation of AgDirect into an LLP with multiple FCS owners “will facilitate this collab- orative AgDirect trade credit financing program and allow us to leverage the AgDirect program for the mutual ben- efit of our associations and the farmers and ranchers we serve.” According to an FCA news release, AgDirect “will not conduct any activities that the as- sociations are not already authorized to engage in under FCA regulations.” However, neither the equipment deal- ers nor the customers they finance throughAgDirect will be FCSmembers; i.e., they will not become part owners of AgDirect LLP. This is contrary to the cooperative ownershipmodel onwhich the FCS has always been based. Because AgDirect is a taxpayer- subsidized lender, the dealers for which it provides customer financing will enjoy a competitive edge over deal- ers not doing business with AgDirect. Additionally, this taxpayer-subsidized financing could flow to borrowers, such as lawn-maintenance services, who are ineligible to borrow directly from an FCS institution. AgDirect clearly represents a backdoor way for the FCS to extend its lending reach far beyond the scope of its congressional charter. Other FCS associations will likely become partners in AgDirect so that they, too, can expand their lending to non-members. Already opaque, it now appears that AgDirect will disappear from sight in