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…

AGAINST THE GRAIN
Aug 26th 2004
Why is a Dutch bank moving into agricultural finance in America?
WHAT on earth is Rabobank up to? This Dutch co-operative bank has been
busily expanding its franchise in farm-finance, an area American banks
have done everything to avoid since a meltdown in the 1980s. If that
was not odd enough, Rabobank’s most recent move is truly unique. At the
end of July, it reached an agreement to buy Farm Credit Services of
America, an institution that is a component of America’s odd network of
government-sponsored entities (GSEs). That agreement has unleashed an
unholy row.

These financial institutions, including the well-known housing-finance
giants Freddie Mac and Fannie Mae, enjoy the implicit backing of the US
Treasury, and thus low funding costs, as well as tax breaks. All of
these advantages would be lost if Rabobank’s purchase goes through.
But no GSE has ever before agreed to a buyout. And soon after
Rabobank’s offer, a backlash began. A sister institution in Minnesota
made a counter-offer backed by a lobbying group representing other
government-backed farm lenders. Two American Senators have called for
Congressional hearings. Concerns have been voiced about whether the
sale of Farm Credit Services could weaken the overall farm-credit
system: might a foreign buyer be less sensitive to local conditions?
The biggest question is, however, unlikely to be raised: whether the
offer for Farm Credit Services means that, finally, it is time to scrap
the GSE system entirely. “The reason the farm-credit system came into
existence is that no one else would provide credit,” says Ray Goldberg,
a professor at Harvard Business School. “Now someone else will.” The
same argument, it will not have gone unnoticed, applies to Fannie and
Freddie.
Founded in 1916 as the first of the GSEs, the farm-credit system is now
over-regulated and fragmented. It encompasses about 100 different
financial institutions with $95 billion in assets. Farm Credit Services
is one of the largest, with almost $8 billion in assets drawn from just
four states: Nebraska, South Dakota, Iowa and Wyoming. It initiated the
sale to Rabobank, and will pay heavily to ensure it goes through. It
currently has a net worth of $1.3 billion, and will pay a fee of $800m
to leave the overall farm-credit system. Rabobank will then pay $600m,
or a bit more than the remaining book value, with the proceeds
distributed to the shareholders of Farm Credit Services, who comprise
most of its customers.
It is easy to see the deal’s logic for each side. The odd four-state
limitation for operations means that Farm Credit Services has
increasingly run into problems servicing customers whose operations
have expanded into adjacent states or even internationally. By law,
moreover, Farm Credit Services is unable to take deposits. If its
acquisition goes ahead, these and other restrictions would be lifted.
For Rabobank, the acquisition is a small piece of a larger plan. Since
2002 it has purchased a bank in California, covering the farming areas
from Fresno to the Mexican border; an agricultural-land finance company
in St. Louis; and an Iowa-based farm-credit institution. And Rabobank
would like to make further acquisitions that would give it better
access to meat processors and breeders in the south, as well as tomato-
and citrus-growers in the southeast. It has an agreement with
government-controlled banks in western Canada that could lead to an
acquisition there, and has become a huge force in the
agricultural-banking markets of Australia, New Zealand and Ireland. It
plans to expand in emerging economies, too.
Such enthusiasm is less odd than it looks. True, agriculture is
notoriously cyclical and has been shrinking as a percentage of the
global economy for years–not very attractive features for lenders. But
a powerful niche player could overcome these obstacles. And it can sell
derivatives to farmers attempting to hedge weather and price
fluctuations. Rik van Slingelandt, head of Rabobank’s international
operations, says that, with the farming industry consolidating
globally, farmers will want a global financial institution.