Agriculture Farm Financing

Yesterday’s dirt-under-his-fingernails yeoman farmer who tilled the soil with a horse-drawn plow would be astounded by today’s mechanized and diversified farm. Advances during the past 100 years have made Alabama agriculture far more efficient and less labor intensive — and far more complex and costly. He also would be bowled over by the many funding sources available to modern farmers.

Operating capital is needed in Alabama to produce everything from corn, cotton, catfish and cattle to peanuts, poultry and timber products. There are borrower-owned lending institutions serving rural Alabama that are part of the nationwide Farm Credit System. Banks, both large and locally owned, comprise another share of Alabama’s agricultural loan business. According to the American Bankers Association, in the South bank farm loans increased by 3.7 percent in 2012, rising to $6.1 billion.

In addition, there’s the federal Farm Service Agency, with offices in every state. FSA provides operating loans, ownership loans and emergency farm loans in case of disasters, along with guaranteed loans for farmers who do not meet the standard underwriting criteria.

According to SNL Financial, overall agriculture loans at banks, thrifts and credit unions rose 11 percent in the second quarter of 2012 from the previous year. While economic uncertainty can slow business and loan demand, agricultural lending is relatively strong in many regions in the state.

Jason Thomas, vice president and branch manager of the Athens office of Alabama Farm Credit, says loan demand is up in his region, which he attributes to greater crop yields and higher prices for row crops, such as soybeans, wheat and corn. “Typically, you don’t get good crop yields and good prices, and we’ve had both for the past few years, ” Thomas observes.

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Those good years have put some extra cash in the pockets of farmers who borrow from cooperatives, because they also own its stock. In 2012, Alabama Farm Credit shareholders received a patronage refund that reduced their interest rate by 1.2 percent. The Cullman-based cooperative has five locations in northern Alabama, and like all cooperatives, borrowers become part owners in the association through stock purchases determined by the amount of the loan. Borrowers vote on co-op decisions and elect its board of directors. Unlike banks, there are no deposits at cooperatives.

Alabama Ag Credit President and CEO Douglas Thiessen says agriculture is strong overall in Alabama and across most of the nation. This has allowed the Montgomery-based cooperative, which has nine branches serving southern Alabama, to give back $5.6 million in cash to its shareholders in 2012.

Loan demand is affected by the degree of success in the agricultural industry, which in large part is driven by two variables — commodity prices and input costs.

Thiessen points out that when commodity prices are high, producers are able to increase their revenue, but input costs typically go up faster than commodity prices. Higher prices for fuel, fossil fuel-based fertilizer, seeds and other input costs, as well as rising prices for farmland, can result in an increased need for farmers to borrow money. Commodity prices have been high in recent years, but agriculture lenders note that commodity prices are extremely volatile and can change even daily.

Camp Powers, president of the Montgomery-based south Alabama division of First South Farm Credit, which serves Alabama, Mississippi and Louisiana, says that despite higher prices for commodities, he has not seen a major upswing in agriculture in any one particular area.  Instead, increases in loans have been incremental and spread across all agriculture sectors.

“The farm sector is just as nervous about the economy as everyone else, ” he says, “and what affects the local businessman affects the farmer as well.” Powers says land purchases during the past 18 months have gotten smaller, with investors taking their money out of low-performing CDs and putting it into farm real estate. “You can get a better return on a tract of timber, so a lot of people are buying for the investment.”

Charles Thomas, president of Citizens Bank in Greensboro, says about 40 percent of the bank’s loans are in agriculture. And a significant portion of those loans, at least until recently, were issued for raising catfish. The west central Alabama town in Hale County is known as the state’s catfish capital, but high feed prices and overseas competition have hurt the industry. The small community bank has about 300 shareholders, who in the past were mostly locals.

Thomas says during the last three years catfish feed have jumped from $200 to $450 a ton. And prices for catfish during that time fell from $1.20 a pound to 60 to 70 cents a pound, but are inching back up and are now at the 85 to 95-cent range. “Our agriculture lending is down and some fish farmers have tapped out their loans, and they’re waiting to see if the price of fish will go up and feed costs will come down.”

Agriculture is also the largest industry in Hartford, located in southeastern Alabama in Geneva County, home to the Slocomb Tomato Festival.  About 20 percent of loans at City Bank of Hartford are agricultural, says David Bailey, president of the locally owned community bank.  Cattle and row cropping are two of the area’s primary farming enterprises. Peanuts and cotton have historically been among the top crops, and farmers are now also growing wheat and corn.

According to Bailey, the greatest challenge to farmers when borrowing money is their balance sheet, which doesn’t fit in the same box as other borrowers, and many auditors are unfamiliar with agriculture loans. Bailey says there is no longer any asset-based lending being offered today. “If farmers had the collateral, then we would make the loan, ” he adds. “Today, auditors ask ‘How did you do last year?’”

Large banks, such as Wells Fargo, have also developed a strong presence in agriculture lending in Alabama. According to SNL Financial, Wells Fargo is the largest agricultural lender in the United States. Its agriculture loans rose 7.8 percent in the second quarter of 2012 to $5.8 billion. Mark Imig, Wells Fargo’s regional vice president for commercial banking in Alabama, says he sees the biggest increase in timber and forest products. “Our timber customers are doing well, and we’re also doing well with land, ” notes Imig, who works in Wells Fargo’s Birmingham office. “The price of land is higher, so more capital is required.”

Today’s farmers not only supervise crop production but must evaluate market factors, negotiate with lenders for financing, monitor input expenditures and improve output. Imig points out that farming today is a sophisticated operation that requires managing many variables. “It requires more than tilling the dirt, you have to be a very good business person.”

Pittsburgh-based PNC Financial Services also has cut a sizeable slice of the agriculture loan business in Alabama, providing credit for crops, livestock, real estate or major equipment acquisitions.  Agriculture banker Clay Wiggins, who works in PNC’s Trussville office, says that because input costs continue to rise there is a need for access to more capital. Financing may be a more economical way to spread expenses over several years as opposed to using large sums of cash at one time.

Hudson Williams, executive vice president of Regions Bank in Grenada, Miss., is one of 15 bankers nationwide who serves on the American Bankers Association’s Agriculture and Rural Bankers Committee. He says most people have no idea of the expenditure of modern farming. “A medium-size field tractor costs $150, 000, and it’s about $700 to seed and fertilize just one acre of corn, ” he notes.  “The general population doesn’t understand the cost and risks involved. It takes a whole lot of capital to farm.”

Jessica Armstrong is a freelance writer for Business Alabama. She lives in Auburn.

text by Jessica Armstrong • photo by Dennis Keim

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