The lenders that support specialty crops

Cattle, grain and dairy farms are under pressure, but what about other kinds of agriculture? We step outside the Midwest to visit fruit and vegetable farms and the lenders that support them.

By William Atkinson

It’s no secret that the Midwest ag market is struggling. Creighton University’s Rural Mainstreet Index, which the university has released every month since 2005, is an index of the economic health of 10 Midwestern states, based on data from community bank executives in 200 small, rural, agriculture-dependent communities within those states. The index has been below “neutral growth” for 20 straight months.

Among surveyed bankers in the region, 11 percent reported that farm foreclosures represent the greatest risk to their banking operations for the next five years, more than double the 4.5 percent who said the same at this time last year. In addition, 86.7 percent of bankers believe that low agricultural commodity prices are the greatest threat to the rural economy.

Does the same dim view hold for agricultural commodities in other parts of the country, such as the East Coast, the South, the Southeast, and the West Coast? Not really, according to Curt Covington, senior vice president of agricultural finance for Farmer Mac, which has $17.8 billion in outstanding program volume. Covington is among the nation’s leading experts in agricultural finance. As he sees it, the majority of these specialty crops, which include citrus, apples and peaches, blueberries and strawberries, avocados, table and wine grapes and tree nuts, are, for the most part, doing quite well.

In fact, according to the recently released Winter 2016/2017 Agricultural Lender Survey Results published by Farmer Mac and the American Banking Association, 80 percent of ag lenders expressed “moderately high” or “high” concern for grains, 63 percent expressed similar concern for beef cattle, and 55 percent for dairy. However, only 17 percent expressed “moderately high” or “high” concern for fruit and nuts, and only 20 percent for vegetables.

“For the most part, specialty crops along the West Coast, through Texas and Arizona, and even the South and Southeast, have had some pretty decent years,” Covington says. “They continue to sell well in the domestic and export markets.”

With few exceptions, Covington doesn’t see many banks that have stopped or reduced lending into these sectors. “Our portfolio of loans in these areas continues to grow, and we are happy to consider them,” he says.

Problems on the horizon?
A few commodity- and borrower-specific considerations can help banks stay in the black.

While the overall market for these specialty crops is healthy, banks should stay current on crops that are struggling. One is citrus in Florida, which is being plagued by “citrus greening” disease, leading to some significant declines in yield.

Red Delicious apples are also struggling, mostly due to a lack of demand. And, raisin growers are dealing with very thin margins due to lower demand and higher cost of labor.
Covington believes lenders should focus on two things when evaluating potential borrowers in this specialty crops sector. One is working capital. “For one thing, none of these specialty crops have any safety net underneath them,” Covington says. “For another, the crop insurance programs for some of these specialty crops are, at best, thin. So, it is important that the borrowers be very well-capitalized.”


of bankers expressed “moderately high” or “high” concern for fruit and nut crops, compared with 80% for grains

The other criterion is crop diversification: ensuring that borrowers are diversified enough to mitigate risk. “Most successful specialty crop growers have diversity in crop and variety, giving them multiple marketing windows throughout the year,” Covington says. For example, most apple growers grow several varieties of apples, and most citrus growers grow a wide variety of oranges, as well as lemons. “As an example, the typical table grape grower will have dozens of varieties, with harvest occurring as early as May and as late as Thanksgiving.”

While the fruit and nut ag market varies around the country, two concerns specific to California bankers relate to water and labor. Water, of course, has been a scarce commodity for years. “In terms of labor, certain fruits have to be handpicked,” says Terry Crawford, senior vice president, agribusiness team lending at $1.4 billion-asset Central Valley Community Bank in Fresno, Calif. “These days, the labor force is getting older and harder to find, so picking will continue to become more expensive in the future.”

Growth prospects

At Central Valley Community Bank, lenders look for three criteria when considering loans for growers in its region. The 22-location bank lends to growers of a wide variety of crops, including cherries, cannery tomatoes, wine grapes, table grapes, virtually all of the tree fruits, walnuts, almonds, pistachios and a lot more.

“The first thing we look at is liquidity,” says Crawford. “We like to finance 75 cents on the dollar, with the borrower having a 25 percent margin in their operating budget.” Second, the bank examines the borrower’s historical profitability to ensure they are farming profitably. Third, the bank looks for secondary support. “We want backup collateral, such as real estate equity.”

Diversity is also important to $98 million-asset Willamette Community Bank in Albany, Ore. Known as the grass-seed capital of the world, Albany is also home to a wide variety of crops, including livestock, hazelnuts, blueberries, wine grapes and vegetables. “Most of our farmers don’t have a lot of extra capital,” says Sue Kalina, relationship manager for ag lending at Willamette Community Bank. “For example, they tend to purchase used equipment because they don’t want to take on extra debt.” In addition to crop diversification, lenders at Willamette Community Bank look for family farms with established succession plans, which are key to protecting both the farms themselves and their banks’ investments now and in the future.

William Atkinson is a writer in Illinois.

Organic growth?

With any produce, there is also the question of organic versus conventional farming methods. Do lenders prefer one over the other? “There is clearly a niche for organic fruits, vegetables and nuts,” says Curt Covington of Farmer Mac. “However, it would be disingenuous to say that the organic market is eventually going to overtake the conventional market. The conventional market will continue to control the store shelf.” He acknowledges that demand for organic is growing: “Consumers want it, and the large retailers have figured out how to market it.”

Still, not all organic produce is profitable. “We have quite a bit of organic farming in the valley,” says Sue Kalina at Willamette Community Bank. “In fact, most of our blueberries are organic. However, the blueberry market has been poor this last year, so not many bankers are touching that market. It is a permanent crop, though, so we will see it come back.”