No CoBank Oversight Leaves Co-Op Devastated

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The Farm Credit System (FCS), a $333 billion giant in agricultural lending, plays by different rules. Unlike rural community banks and other financial institutions, which answer to an alphabet soup of agencies, Farm Credit institutions answer primarily to the Farm Credit Administration (FCA). The FCA doesn’t do much by way of enforcement, leaving Farm Credit associations across the country to mostly regulate themselves. But shady activity is happening under the noses of Farm Credit institutions all across the country.

Farm Credit East in Connecticut. Capital Farm Credit in Texas. And third time’s the charm: CoBank.

Ashby, Minnesota is home to Ashby Farmers Cooperative Elevator, a cooperative with a financial relationship with CoBank, one of the FCS’s banks, and the only FCS institution permitted to lend to cooperatives. Unfortunately for members of the Ashby Farmers Cooperative Elevator, the cooperative has hit tough times. Its long-time manager, Jerry Hennessey, “is alleged to have stolen some $2 million in at least the past 10 years, a time when he was known to go on safaris and other expensive big-game hunting trips.”

That’s a lot of money lost, meaning a lot of farmers and producers harmed. For any business or cooperative, it’s up to its partners – including its lender – to be vigilant and conduct due diligence. So what could CoBank have done to prevent this?

According to the attorney tasked with picking up the pieces of this disaster, “A co-op is not required to conduct an annual financial audit, although the bank’s lender, CoBank, could have required one.” And now CoBank is out $8 million.

Why didn’t CoBank require an audit of its clearly troubled, cash-strapped customer?

CoBank is a massive financial institution, with more than $131 billion in total assets. “CoBank is massive, maybe it let one slip through the cracks,” its defenders might say. But if CoBank is so big that it can’t pay proper attention to its customers, then should it be that size at all?

And even more troubling is that CoBank, with its size and resources, should have been able to perform an audit to see whether something was amiss at Ashby Farmers Cooperative Elevator. This wasn’t just a simple oversight by a small Farm Credit association – this was a massive blunder by the biggest, most well-equipped Farm Credit institution. If CoBank is letting things slip, then what’s happening at the smaller associations that don’t have nearly the same resources?

You’d think that after the first few instances of fraud or less-than-savory dealings, the FCS, and FCA, would buckle down and investigate the shady activity at Farm Credit associations. But now this issue has spread to larger Farm Credit institutions.