Unlike during the financial crisis when money was scarce and loans were hard to find, there is currently much liquidity in the market and lenders have plenty of funds to loan. But, as always, the key ingredient in securing a loan is the ability of the borrower to pay it back.
According to a couple of financial experts, that fairly general statement about the current economic situation holds true for a specific industry such as agriculture, but ag financing also has its own nuances, which, in many ways, makes it an attractive investor sector.
Bob Dingler, who is the executive vice president and director of the food and agribusiness division of Rabobank, noted that agriculture, compared to other business categories, did pretty well during the financial crisis that took root in 2007 and wreaked havoc on the financial sector for several years. While there was much turbulence during those years, Dingler said the agricultural sector “rolled steadily along” and proved the adage “that regardless of what happens in the economy people still have to eat.” He said today the economy is doing fairly well, “banks are awash with cash” and from a risk perspective, the climate is good for commercial ag loans.
In separate interview with WG&S, Dingler and Mark Littlefield, president of Farm Credit West, discussed the current state of agriculture as it relates to borrowing money for crops or capital improvements. These financial experts also proved to be very well acquainted with specific agricultural trends and note that the crop that the grower wants to produce with the money he borrows is an extremely important part of the lending decision. While the financial situation of the individual or firm is the top determinant in a loan approval, Rabobank, Farm Credit, and no doubt other agricultural industry lenders, have extensive research departments and know the relative merits of growing pistachios versus a field corn crop or lettuce versus cotton. Both men singled out the dairy industry as one of the few segments of agriculture on a downturn, and both noted that the tree nut sector is facing some demand issues in the world market because of the rising dollar and financial situation abroad.
“Research is something that sets Rabobank apart,” Dingler said. “We have a dedicated food and ag research team that does sector research both for use by the bank internally and for our clients and prospects. We have a pretty diverse portfolio up and down the state. Certain crops like almonds span more than one market. We know what an almond orchard is worth or we know how much it costs to plant one.”
He allowed that specialty crops “are a bit trickier” but in basically all lending decisions “it’s a factor of who is the borrower, how much equity do they bring to the deal, what is their overall financial condition and how do we get paid back, that determines if we make the loan or not.”
He noted that research has revealed that at Rabobank “we see a relatively stable ag economy over the next 12 months. There will be a few hiccups for some sectors namely dairy and nut crops. A bigger issue for ag is water availability. In 2016, state-wide we saw an improvement in the water situation. What happens in 2017 will be a question mark.”
With regard to interest rates, Dingler said modest increases appear to be on tap. “We expect to see interest rates move slowly upward. We’ve seen a 25 bp (basis points) rate hike (1/4 of 1%) already this year and may see two more before year end. I don’t expect to see them go any lower.”
Turning specifically to Rabobank’s underwriting rules, Dingler said: “We have always applied very stringent and conservative underwriting standards and that didn’t change (because of the financial crisis). While not always popular, that policy has kept ag lenders out of trouble and in the market with our borrowers.”
He repeated that “water is key” when a borrower comes in with a request for funds to grow a crop. “They must have two sources of water,” he said.
Dingler noted that statistically California has about a 25 percent chance that any year is going to be a dry year. If that situation, occurs the borrower has to have an alternative method of irrigating that crop.
When looking at loans, the Rabobank executive said it is very important as to what crop the borrower wants to plant. For a permanent crop, such as almonds or tree fruit, there has to be a marketing strategy. He noted that in the long term it may be difficult for almond prices to maintain the levels they have seen in recent years. World markets have weakened.
For row crops, such as lettuce or broccoli, Dingler said typically the grower doesn’t borrow as much so the underwriting process is not as complicated. It is typically a much shorter borrowing situation and the grower has much more of their own cash in the deal.
Dingler did express concerns for the next generation of farmers. Costs are high, and it is difficult, he said, for a brand new farmer to finance a new operation. “We do worry about where the next generation of farmers is going to come from.”
While Littlefield of Farm Credit West expressed some of the same sentiments and concerns from his organization’s perspective, he also noted that ag lending is all that Farm Credit does, so it has a different viewpoint than banks that operate in many different sectors.
For example, one such difference is when it comes to young farmers trying to get in the business. “We only exist to finance farming operations,” he said. “We need to exist 100 years from now and that won’t happen unless there are new farmers.”
He said many new farmers have family backing but he said Farm Credit directs many young farmers to government resources that can help them get started. He noted that the organization has a robust program to help these future farmers…and customers…get started. He did allow that a young farmer with a family background in the business is going to have a much easier time borrowing money than an urban kid, with no agricultural background, deciding that he or she wants to be a farmer.
From a 40,000 foot view, Littlefield said the general situation for securing funding today is far different than it was during the height of the financial crisis. At that point liquidity had dried up and there was literally very little money to loan. “It was very challenging to meet the needs of our customers. Today the market is flooded with liquidity. There are available funds for loans.”
Over the next two years, Littlefield expects “interest rates to rise nominally…less than 1 percent in total.”
With that being the situation, the key to borrowing in agriculture, he said, is the particular risk factor of the ag sector that you plan to operate in. Specifically, Littlefield said dairy, some greenhouse production and boutique wineries have the most challenging situation in the immediate term. He also noted that the dollar has strengthened considerably making the export market a bit less friendly, which can hurt sectors highly dependent on export sales, such as almonds.
As a general trend, Littlefield said diversification appears to be the direction of many ag operations, and it a trend that Farm Credit supports. A grower of one crop adds another which very much helps the financial situation as it give more opportunities to hit a good market. He did note that some very successful operations have found niches and do well specializing in one specific crop. But as a strategy, he indicated that diversification is preferable from a loan underwriting perspective.
Littlefield also touted the firm’s research department as a tremendous advantage for its customers. “Ag is all we finance. We do it all day long,” he said adding that Farm Credit has experience in virtually every ag sector.
He also noted that the bank is not a transactional lender. Its customers are stockholders.
Looking at the broad ag sector in California and Arizona, Littlefield said there is some expansion currently being undertaken but not as robust as it was a decade ago. Moving forward, Farm Credit sees that the economy has softened a bit but the firm still expects to see a relatively strong U.S. economy in the short term. He said the lending environment appears to be very stable.
But just like the Rabobank representative, Littlefield said the available of water is a very important factor in a farming operation’s loan request. Farm Credit does not require two sources of water, but it does want the applicant to have a clear plan for securing water for his crop. And, he said, Farm Credit’s research department does work with its customers to reduce their water needs or switch to crops that match up better with the water they do have. He said among the institution’s customers there are very few people who flood irrigate. Much more efficient methods of irrigating are now being used. In addition, he said a farmer has to be smart about what he grows. “You need six acre feet (of water) for a corn crop. You only need 3.5 acre feet for pistachios. Maybe that makes more sense.”
He said Farm Credit representatives help their customers work through these issues and create a better farming strategy to utilize the resources available to them. In succinctly stating the organization’s lending philosophy, Littlefield said “we finance relationships.”
