The nation's largest Farm Credit lender wants a federal law changed so that it can lend to a new generation of co-operatives recently authorized by changes to Wyoming and Minnesota laws.
CoBank, whose charter restricts its lending to farmer-owned co-operatives, says it needs more lending power to remain competitive. But bankers argue that the $27 billion-asset Denver company is trying to encroach on their turf and that it could use its status as a government-sponsored enterprise to undercut them on rates.
"If they get what they are asking for, anything that has some farmer element could become an eligible CoBank borrower," said John M. Blanchfield, the director of the American Bankers Association's Center for Agricultural and Rural Banking.
Though CoBank has yet to find a sponsor for its proposal to change the definition of a farmer-owned co-op, it is circulating the proposal among the House and Senate agriculture committees. Bankers voiced their opposition at a House committee hearing in October, and though the issue is probably dead for this year, Mr. Blanchfield said he expects debate to resume in early 2004.
Jack Cassidy, CoBank's senior vice president for corporate relations, said the recent changes to the two state laws compel his company to seek expanded definitions so it can meet its obligations under the Farm Credit Act to lend to farmers under the new state laws.
"We are trying to get ahead of the curve," Mr. Cassidy said.
In the past year Minnesota and Wyoming have passed laws that redefine what a co-operative is. In traditional co-ops, members buy shares to provide the initial start-up capital and have all the voting power. In Minnesota and Wyoming the laws now let co-ops have private investors as long as the co-op remains under member control.
Michael M. Reyna, the chairman and chief executive officer of the Farm Credit Administration, which regulates CoBank, testified in the House that the Minnesota and Wyoming laws would let outside investors have voting rights proportional to their investments and would permit dividends over 10% on shares in the co-op. This, he emphasized, would make such entities ineligible for CoBank loans. The reason: No CoBank borrower can have a member with more than one vote, and the co-op must not pay more than 10% in dividends.
CoBank wants the law changed so it can lend to co-ops as defined by each individual state; allow associations of farmers with at least 50% of farmer ownership to be eligible for CoBank loans; and allow CoBank to lend to cooperatives for five years if the cooperative decides to go to a new structure that would make it ineligible.
CoBank currently lends to about 80% of the 1,500 farmer-controlled co-operatives in the country with loans outstanding, Mr. Cassidy said. It is the only one of the 112 Farm Credit System institutions to do so.
In testimony before Congress, Roger D. Monson, the chief executive officer of the $39 million-asset Citizens State Bank in Finley, N.D., said CoBank should be governed by federal law and not allowed to change the scope of its lending on a state-by-state basis. He also called the five-year transition period "preposterous."
"Under their proposal, taxpayer-subsidized credit would be extended to a fortunate few business, while others would not be able to access the same taxpayer subsidized credits," Mr. Monson said in his Oct. 16 testimony.
The new laws in Minnesota and Wyoming are aimed at giving farmers who own co-ops better access to capital. Bankers did not oppose the changes in state laws, because they thought their farm customers could benefit by having outside investors. They were not thinking about the Farm Credit System's response.
Mark K. Scanlan, the director of agricultural finance for the Independent Community Bankers of America, said that though bankers support the idea of co-ops having outside capital, they do not want to see non-farmer-controlled organizations designated as farmer co-ops.
Steve Johnson, the government relations manager for the Minnesota Bankers Association, said that state's original bill actually would have permitted co-ops to accept deposits and make loans. Once that provision was out of the bill, the association did not oppose it.
Dave Johnson, the Wyoming Bankers Association's executive director, said the reason his organization did not oppose the change to the state law was that it was presented as something to help farmers have more options for their products and lead to banks' doing more business with farmers as operations grew.
"We didn't realize it could make Farm Credit more powerful," Mr. Johnson said.
