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Published June 29, 2010, 01:05 PM

CoBank seeks change

WASHINGTON — CoBank, the largest institution in the farm credit system, is trying to convince Senate conferees on the financial services bill that it should be considered an end user of derivatives when it uses interest rate swaps to manage risk on loans it has made, CoBank CEO Bob Engel said.

By: Jerry Hagstrom, Special to Agweek

WASHINGTON — CoBank, the largest institution in the farm credit system, is trying to convince Senate conferees on the financial services bill that it should be considered an end user of derivatives when it uses interest rate swaps to manage risk on loans it has made, CoBank CEO Bob Engel said.

“When we have a loan on our books, we have to hedge” just as a corn farmer does when he uses futures and derivatives to protect the price on part of a crop, Engel said after a speech to the National Council of Farmer Cooperatives, which are his biggest customers.

Risk

Engel differentiated Denver-based CoBank’s attempts to manage risk on loans from the use of certain derivatives by investment banking houses to protect their own investments.

When CoBank loans money to a customer, “We have skin in the game,” added Todd Van Hoose, CoBank’s Washington representative.

If CoBank would use the swaps to protect its own assets it should come under the regulations that the Senate bill proposes, Van Hoose said.

Engel and Van Hoose said they support the House version of the provision that affects them, but that the Senate version would bring them under the increased regulatory net. Van Hoose said the increased regulation would not prohibit CoBank from using derivatives, but would increase the cost.

Engel told the farm co-op leaders that he expects the bank’s cost of doing business to go up after the financial services bill passes and that it will pass along those increased costs to customers. But Engel also assured the co-op leaders that the bill will not interfere with the bank’s participation in loan syndications.

Optimism

Jon Hixson, the Washington representative for Cargill, the Minneapolis-based agribusiness firm, told the co-op leaders he is “optimistic that there will be an end-user provision that will allow hedging to go on.” As a private, family-owned company, Cargill needs to hedge itself against interest rate hikes because it uses a lot of debt financing, Hixson said.

If the bill would achieve 100 percent transparency in financial transactions so that the regulators knew what was going on, other reforms might not be necessary, Hixson said. Cargill thinks “there needs to be more capital in the system on the dealer side,” Hixson said.

“The last 24 months took a chunk out of Cargill’s hide,” he noted.

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