Uncertainty in several areas including world trade, tariffs and labor do pose some issues for the agricultural sector that does impact its attractiveness to lenders, according to a couple of financial experts interviewed by Western Grower & Shipper recently.
“There is a lot going on that is impactful to agriculture,” said Dean Cardoza, executive vice president of Bank of America, listing both tariffs and the global trade situation as concerns.
Mark Littlefield, who wears the same title for Farm Credit West, added the uncertainty about the availability of labor is another negative factor for the ag sector. In fact, he said agriculture in general appears to be in an “off cycle” for the next 18 months. “We’ve got to see a little more certainty moving forward. It might be into 2020 before we have a better understanding of the trade wars.”
Uncertainty is not a friend to the financial community as lenders of money favor stability over volatility. Though with that said, both men noted that ag borrowers with a good financial story to tell will be able to find funds to finance their operations. Even though the Federal Reserve has been consistently raising interest rates for the past two years and three more hikes are expected in 2019, interest rates are still historically low.
“Money is still cheap,” said Cardoza. “Historically anything under 10 percent is good. We have been spoiled for a long time with low interest rates.”
Even with projected rate hikes going forward, he said the interest rate will still only be in the 4-5 percent range, which is still very good. Littlefield made the same point, noting in mid-September that even after the latest rate hike, 10-year money was still just over 3 percent. Consequently, he said it is currently an excellent time to invest capital in your operation if you have a good business reason to do so.
When evaluating loan applications, the modern banker in the ag sector is very knowledgeable about the factors that play a role. As mentioned, Littlefield and Farm Credit is concerned about the labor situation in California. Costs are going up and access to labor can be a challenge. A borrower has to have a clear plan for harvesting those crops before getting money to plant them.
Water concerns play just as important a role. A borrower for crop production needs to have access to water as well as a backup plan. Littlefield said farmers do come to the table well prepared, but it is also the role of the lending institution to analyze the opportunities and steer the borrower, for example, to a crop with less water demands if water supply is an issue.
Turning back to some of the global issues, Cardoza said the issues surrounding potential trade wars and tariffs appears to be more impactful to the protein and grain sectors of agriculture. He does not believe the fruit and vegetable sector, as a whole, will be impacted greatly. Of course, exports are very important for some crops but domestic sales still make up the lion’s share for the vast majority of specialty crops.
One major exception is the nut category. Littlefield said almonds and pistachios could see some market disruption if other countries increase tariffs on those two export-centric crops. But looking at the big picture, he believes that the Trump Administration’s effort to get better trade deals could be very beneficial to agriculture.
Another issue the bankers tackled was the high cost of land in California. Littlefield said a lot of land is currently being sold at prices that will not allow the crop on that land to service the debt. He said this is a major issue for new or younger farmers trying to establish themselves. For more established farmers with a larger asset base, the calculation is less critical as the loan on new land can be serviced by the production from a larger portfolio of land.
Cardoza said that is a challenge for new farmers. He added that it is very difficult to get into the business without a leg up from a previous generation of farmers. Speaking of which, he noted that a major issue today is a company’s succession plan. Many farmers, he said, do not have a succession plan because they have no one following them into the business. “The kids don’t want to come back to the farm after college. We always look at that. We have to.”
Both lending institutions for this story did stress their commitment to agriculture and that they are very proactive lenders in the sector. “That’s all we do,” Littlefield said of Farm Credit, noting that investing in new farmers is the company’s recipe for future success.
Recently, he said, younger farms are finding a foothold with smaller operations such as micro-farms, urban farming and farm-to-table operations. “We have programs (for new farmers) below market rate to help,” he said.
Cardoza revealed that Bank of the West is the third largest ag lender in the United States and devotes a larger percentage of its assets to the sector than its competitors in the commercial banking business. “We are a $70 billion bank and we have $7.2 billion committed to the industry. That’s 10 percent of our assets. No one else comes close.”
As such, he said the bank’s exposure is high “and we have to be very good at what we do.”