As competition heats up in the agriculture industry, the regional agricultural cooperative banks are searching for new ways to compete and survive.
The answer, according to a source studying the situation, is to grow the agricultural-backed securitization sector into a more mature market by basing its funding model on a system that more closely resembles auto securitization.
The miming of the auto industry is considered appropriate, said the source, because in that sector, "your Nissans can compete with your Ford Credit's and your GMAC's."
A mergers and acquisitions and advisory firm rumored to be representing the interests of cooperative farming banks like CoBank and Ag Services of America, has contacted Morgan Stanley Dean Witter, Chase Securities, Credit Suisse First Boston and Fitch IBCA about pursuing a strategy that may include a search for funding opportunities outside of the farm bank's typical target market - the individual farmer - to make inroads into the big pockets of large corporate farmers and equipment manufacturers.
What has led to this development, is the fact that the regional banks that traditionally have been lenders to the small farmer, such as CoBank and Ag Services, lately are getting squeezed by competitors both big and small.
On the large end, corporate farmers like Perdue Chicken have offered small, individual farmers free funding for operating and startup costs, in exchange for the farm's production of only Perdue chickens. In other situations, a large corporate farm simply buys the small farm outright.
Meanwhile, on the small end, local outfits that operate much like a credit union for farmers can concentrate on covering only one or several counties, and can offer local farmers better rates or more friendly terms, as they still operate on a purely individual basis.
The trend is for farmers to migrate toward the credit unions or the large corporations for cheaper funding, thus leaving the regional cooperatives out in the cold.
The solutions being worked up at the advisory firm so far have included going after securitizeable dollars from the large corporate farms like Perdue or focusing efforts on going directly to the credit union-like financing entities. But this latter effort has backfired before.
"They got massacred by the farming community when they tried to do this before," the source said. "Basically, the farmers didn't want the capital wholesalers coming in and dictating to their local cooperatives the terms and rates and conditions that they could lend money to the people who are nonprime borrowers."
The nonprime aspect is also a reason the regionals are looking for financing opportunities with the corporate farms, the source said, because "typically, you're dealing with people with horrible credit in the farming community, and quite frankly, nobody is going to put tons of money into something that is poor credit."
All of these concerns are pushing advisors to get the regionals comparable to an auto style issuer somewhere between a Chrysler and a Household, the source said.
Casey Garten, vice president at CoBank, said that the main hurdle preventing the securitization of farm loans in a stand alone, public deal is the lack of standardization in the loans, something that the auto sector has perfected.
"The fact that every farmer has been so diversified, it's been very difficult to find a standard farm loan," Garten said. "Every lender looks at different ratios and structures each loan differently. But as agriculture continues to consolidate, and farmers within agriculture get more specialized, such as taking care of just one end of swine production, for example, the opportunity does exist out there for [growth through securitization.]
Thus far, Garten said, the uniqueness of the farm loans have kept the sector relegated to the commercial paper market, where banks can fund these companies through multi-seller conduits.
While Moody's Investors Service estimates that the total amount of term "ag-backed" issuance year-to-date is $1.9 billion, the commercial paper market owns the most farm paper, with volume in the multi-billions. Most of the term volume comes from tranches spun off into privately placed term offerings when an interested investor can be found.
"A stand alone public deal of standard farm loans is a year or so away," Garten said.
One solution, said the source studying the problem, would be for the cooperatives to merge, but the fact that the banks are regulated tightly by the government would make this complicated. Others have recommended growth purely by volume.
"Some banks have told us that if we get more money out there in the market, we'll be more profitable in the end, so give money to everybody that you possibly can," Garten said, "as long as, mind you, we can cover the investment bank's spreads."