The merger of three major agricultural lenders in the Upper Midwest is raising questions about how big is too big when it comes to the Farm Credit System. Some also are worried the consolidated companies will ignore small and beginning farmers and siphon business away from commercial banks.

AgStar Financial Services, based in Mankato and a major agricultural lender for farmers in Minnesota and northwest Wisconsin, will merge with two other cooperatives — Badgerland Financial in Wisconsin and 1st Farm Credit Services in Illinois. The three will become Compeer Financial, with headquarters in Sun Prairie, Wis.

Stockholders of all three approved the deal earlier this month. When it takes effect July 1, Compeer will have nearly 50,000 clients and $18.6 billion in assets, making it the nation's third largest farm credit association.

For Bert Ely, an independent banking consultant and analyst for the American Bankers Association, the merger is neither necessary nor wise.

"I think it's just a matter of being bigger and being able to pound your chest more and pay bigger salaries," he said. "In terms of meeting their public mission of serving family farms and larger farming operations, these associations were each big enough to meet their loan demand and did not have to merge to better serve their customers."

But Rod Hebrink, AgStar president and CEO, who will also lead Compeer Financial, said there are plenty of reasons for the associations to merge. Farm operations are growing larger, technology needs and expenses are increasing and lenders need more diversity in their loan portfolios and more cost efficiency to succeed in a weak farm economy, he said.

"Rural America is short of capital, and one of the strengths of the Farm Credit System is being able to borrow capital from outside of rural areas and invest in rural areas," he said.

The Farm Credit System was created 100 years ago to provide a permanent reliable source of credit to U.S. agriculture, which often was unavailable or unaffordable in rural areas. It has evolved into four regional banks and 73 associations organized as cooperatives that each serves a specific geographic area.

As a government-sponsored enterprise, the profits from its real estate lending are exempt from federal, state and local taxes, but income earned from the non-real estate side is subject to taxation.

Besides the Compeer merger, another recently approved merger in Minnesota becomes effective July 1, Ely said. AgCountry Farm Credit Services in northwestern Minnesota and eastern North Dakota will join United FCS in west-central Minnesota and north-central Wisconsin, creating the eighth largest association in the country.

Farm credit competes directly with commercial banks, and according to a recent report, the two systems hold nearly identical amounts of the farm sector's total debt.

Michael Boland, professor of agricultural economics at the University of Minnesota, is not surprised by the merger of the three associations and said it's a trend that's been going on for more than 30 years.

"From a historical standpoint, farmers are consolidating and getting bigger, and the suppliers that provide inputs to farmers such as seeds, crop protectants and nutrients are consolidating and getting bigger as well," he said.

Credit is just another element of farming that is consolidating, mainly to become more cost-efficient and to meet the growing costs of complying with new financial regulations, beefing up cybersecurity and trimming fixed costs of human resources and other administrative functions, he said.

Boland is not surprised that rivals in the commercial banking industry have criticized the creation of Compeer.

"These criticisms have been there for decades," he said. "The farm credit systems are just trying to create a diversified portfolio within the charter that's been given them."

Ed Elfmann, vice president of congressional relations for the American Bankers Association, said that the continued expansion of Farm Credit Services is threatening to choke out community banks.

"The associations have a huge tax advantage, and when they have more size, they're going to be able to compete in more areas," he said.

A congressional research report said that Farm Credit is authorized mainly to provide operating loans for the short-term financing of feed, fertilizer, seed and fuel; installment loans for intermediate-term financing of equipment or breeding livestock, and real estate loans for long-term financing of land, buildings and homes.

However, Elfmann said that Farm Credit has moved well beyond that mission to finance nearly anything related to farming or rural communities, including broadband services and rural hospitals.

"They've really stretched the definition recently of what's considered an agricultural loan," Elfmann said. "We're also wondering with them getting that large whether there will be a loss of local control and local decision-making."

AgStar's Hebrink said local control will remain strong because the associations are chartered to serve specific geographic areas and therefore have no duplication or overlap.

"There are no branch offices that are closing, and there's really very little change in the staffing at any of them," he said.

The three associations have a total of about 1,200 employees, Hebrink said, and about 55 jobs will be phased out after the merger, nearly all of them administrative and more than half of them through attrition.

As far as complaints that the Farm Credit lenders are overreaching their missions and providing non-ag loans, Hebrink said that rural America has many expensive needs that community banks can't meet on their own.

Companies such as AgStar are often called on to partner on financing large projects originated by others, he said.

"The reality is that in our local marketplaces we get along very well with banks," Hebrink said. "We are both competitors and collaborators."

Ely, a longtime critic of the Farm Credit System, is not convinced that the continued consolidation will be good for either banks or co-op members of the three associations.

"I just think the managers will be even more oriented toward serving the larger borrowers who are least in need of taxpayer-subsidized financing," he said.

Tom Meersman • 612-673-7388