New CoBank Loan Highlights Need for Farm Credit Oversight

If there’s one thing you can trust the Farm Credit System (FCS) to do, it’s to stretch the rules – especially the “similar entity” rule – and twist the spirit of Farm Credit’s mission. Its explicit mission in the Farm Credit Act: “improving the income and well-being of American farmers and ranchers by furnishing sound, adequate, and constructive credit and closely related services to them, their cooperatives, and to selected farm-related businesses necessary for efficient farm operations.” But year after year, this last clause has been twisted and tortured to support Farm Credit’s unrestrained, out-of-bounds growth.

Just last week, it was revealed that Farm Credit is about to twist it just a bit more. CoBank, a Farm Credit institution with authority to lend to utility cooperatives and select farm-related businesses, may potentially finance a Kentucky-based, for-profit broadband company, Kenect.

CoBank is allowed to lend to agricultural cooperatives to help American farmers flourish. The intent is for it to lend to phone cooperatives and other utilities in rural areas where there isn’t enough service. It’s not meant to finance for-profit entities. And what’s so strange, in this instance, is that Kenect is a for-profit subsidiary of the customer-owned, not-for-profit Kenergy – the very kind of entity that CoBank has statutory authorization to work with! Why, then, is this not-for-profit cooperative creating a for-profit subsidiary to access funding that the subsidiary shouldn’t be eligible for in the first place? Why isn’t the subsidiary a not-for-profit?

Kenergy is in this peculiar situation because it is forbidden by statute from entering “into any arrangements for financing nonregulated activities through an affiliate that would permit a creditor upon default to have recourse to the assets of the utility.” If this is the case, and if CoBank is arranging the financing, then why doesn’t CoBank offer lending terms which preclude its seizure of the utility’s assets? If that’s not reasonable, then why is CoBank even lending to a for-profit entity and not insisting that the affiliate of Kenergy be a not-for-profit?

This messy situation is only made more complicated by the “similar entity” rule, which allows CoBank to lend to entities which would normally be ineligible, but are deemed eligible because their “operations are functionally similar” to those of an eligible entity. By law, CoBank can lend to Kenect, even if it’s for-profit. But this rule has been abused to justify loans which stand in clear violation of the spirit of the Farm Credit Act: a loan to Verizon to purchase European Vodafone, a loan to a real estate investment trust to invest in server “farms” and a deal to finance a battery company. Those are only a few, but illustrative of the misplaced authority that Farm Credit has been given.

Any loan extended under the similar entity rule should, at the very least, undergo review by Farm Credit’s regulator, the Farm Credit Administration (FCA), before it may be executed. And beyond that, the FCA needs to reexamine why the similar entity rule exists. If there’s a deficiency in the number of rural utility cooperatives, then FCA should promulgate rules to incentivize their creation using System funds. By letting the similar entity rule exist, FCA is just putting a bandage on a problem instead of fixing it at its root. The FCA has the power to do this on its own. If it doesn’t, then Congress should step in and compel it to.

New CoBank Loan Highlights Need for Farm Credit Oversight

If there’s one thing you can trust the Farm Credit System (FCS) to do, it’s to stretch the rules – especially the “similar entity” rule – and twist the spirit of Farm Credit’s mission. Its explicit mission in the Farm Credit Act: “improving the income and well-being of American farmers and ranchers by furnishing sound, adequate, and constructive credit and closely related services to them, their cooperatives, and to selected farm-related businesses necessary for efficient farm operations.” But year after year, this last clause has been twisted and tortured to support Farm Credit’s unrestrained, out-of-bounds growth.

Just last week, it was revealed that Farm Credit is about to twist it just a bit more. CoBank, a Farm Credit institution with authority to lend to utility cooperatives and select farm-related businesses, may potentially finance a Kentucky-based, for-profit broadband company, Kenect.

CoBank is allowed to lend to agricultural cooperatives to help American farmers flourish. The intent is for it to lend to phone cooperatives and other utilities in rural areas where there isn’t enough service. It’s not meant to finance for-profit entities. And what’s so strange, in this instance, is that Kenect is a for-profit subsidiary of the customer-owned, not-for-profit Kenergy – the very kind of entity that CoBank has statutory authorization to work with! Why, then, is this not-for-profit cooperative creating a for-profit subsidiary to access funding that the subsidiary shouldn’t be eligible for in the first place? Why isn’t the subsidiary a not-for-profit?

Kenergy is in this peculiar situation because it is forbidden by statute from entering “into any arrangements for financing nonregulated activities through an affiliate that would permit a creditor upon default to have recourse to the assets of the utility.” If this is the case, and if CoBank is arranging the financing, then why doesn’t CoBank offer lending terms which preclude its seizure of the utility’s assets? If that’s not reasonable, then why is CoBank even lending to a for-profit entity and not insisting that the affiliate of Kenergy be a not-for-profit?

This messy situation is only made more complicated by the “similar entity” rule, which allows CoBank to lend to entities which would normally be ineligible, but are deemed eligible because their “operations are functionally similar” to those of an eligible entity. By law, CoBank can lend to Kenect, even if it’s for-profit. But this rule has been abused to justify loans which stand in clear violation of the spirit of the Farm Credit Act: a loan to Verizon to purchase European Vodafone, a loan to a real estate investment trust to invest in server “farms” and a deal to finance a battery company. Those are only a few, but illustrative of the misplaced authority that Farm Credit has been given.

Any loan extended under the similar entity rule should, at the very least, undergo review by Farm Credit’s regulator, the Farm Credit Administration (FCA), before it may be executed. And beyond that, the FCA needs to reexamine why the similar entity rule exists. If there’s a deficiency in the number of rural utility cooperatives, then FCA should promulgate rules to incentivize their creation using System funds. By letting the similar entity rule exist, FCA is just putting a bandage on a problem instead of fixing it at its root. The FCA has the power to do this on its own. If it doesn’t, then Congress should step in and compel it to.

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