Farm Credit of Central Florida explains where ag lending has been, where it is now and what the future may bring.

FFVA recently had the opportunity to go one on three with leaders from Farm Credit of Central Florida, ACA on how the agricultural lending industry is faring in this tight economy. We sat down with Craig Register, executive vice president and chief lending officer; Regina Thomas, senior vice president and chief business development officer; and Ron O’Connor, director of marketing and governmental affairs.

FFVA: Talk a little about what the Farm Credit System is and how it became what it is today.

O’Connor:  No, Farm Credit is a GSE – a government-sponsored enterprise, and it is a real success story among GSEs. It was started with federal seed money, which has all been repaid by the Farm Credit System, and now the entire system is operated with its own capital. It is regulated by the Farm Credit Administration, whose three-person board is appointed by the President of the United States with Senate oversight.

FFVA: What makes Farm Credit different from regular commercial banks?

O’Connor: I think the unique thing about Farm Credit is it’s a cooperative, and as a member-owned cooperative the borrowers share in the profits. When we have a profit. it is shared with our members based upon their usage of the cooperative, providing them with a lower effective rate of borrowing.

Like other financial institutions, Farm Credit is  governed by our board of directors. Farm Credit’s governing board is comprised primarily of ranchers, farmers, and growers who are also Farm Credit members. They set the policies carried out by the staff.  The loan decisions are made locally, not in New York or in some ivory tower by people who don’t know anything about agriculture. That is one of the strengths of Farm Credit.

FFVA: So where does the money come from?

Craig Register: The Farm Credit System is very strong and well-capitalized. The Federal Farm Credit Banks Funding Corporation in New Jersey sells system-wide bonds to pension funds, central banks and others domestically and internationally. Farm Credit bonds are in high demand due to their perceived low risk. They are seen as good investments due to the system’s strong capital position, prudent lending practices, and its status as one of the most successful and respected GSEs.

FFVA: How has agricultural lending been affected by the downturn? Have certain kinds of loans or different borrowers been affected more than others?

Regina Thomas: The slowdown in the economy has definitely affected ag lending and the availability of credit. All the banks are responding to current market conditions.

Register: Any of the agricultural commodities dependent upon construction have been negatively impacted. Particularly hard-hit were the tree and sod industries as well as landscape contractors. The general economic downturn and high unemployment affected portions of our portfolio that were highly dependent upon salaried income. In particular, this adversely affected our residential loan portfolio.

FFVA: What were the signs that things weren’t going well?

Register:  The recession started in  late 2007. In 2008 we began experiencing increased defaults  that accelerated through 2009.  By the fall of  2010, we were seeing fewer defaults and reduced delinquencies. During the economic downturn, lending institutions, including Farm Credit, had to take additional provisions for loan losses. This increased our reserves for losses but significantly reduced our earnings. There are positive signs that credit quality is stabilizing, which will result in improved earnings.

FFVA: Did you work with borrowers to help them manage their loans?

Register: Yes, we worked closely with our members to find constructive solutions to their financial challenges. Since 2008, we have had borrowers – especially in the nursery industry – who needed to have some relief on their loans. So in some cases we gave them interest only for a period of time, or we provided an extended amortization.  We provided similar relief to other members outside the nursery industry. The result of these efforts and positive actions taken by our members have allowed many of them to weather the recession and keep their loans in good standing.

FFVA: How difficult is agricultural financing today?

Register: We have seen some softening in demand for ag loans. Many of our borrowers have been preserving liquidity, reducing debt and delaying significant capital investments. They are trying to determine which way the economy is headed. On the positive side, we are seeing an overall improvement in our borrowers’ financial metrics with some industry segments, especially fruits and vegetables, beginning to undertake expansion projects. Certain kinds of agricultural land have experienced a dramatic decline in value, particularly those influenced by future development potential. This has made lending on some properties a challenge.

FFVA: What, specifically, do people have to pay attention to if they want financing?

Thomas: In this credit market we’re asking for more useful financial information. Today, I think all our ag producers need to have a great relationship with their accountants, attorneys, and their lenders. In working with lenders the more organized and complete the financial information is, the faster the loan application turnaround.

Register: A number of skill sets are needed to effectively borrow money today. The better you understand your financials, business drivers, and industry economics, the easier it will be to borrow. 

FFVA: What’s around the bend in agricultural lending?

Register: We see stabilization in credit quality, so that’s a good thing, and with it, fewer defaults. I do think you’ll continue to see fairly restrictive underwriting standards. The lending industry will likely expect stronger credit metrics (i.e. capital and capacity ratios) from new customers. Additionally, because of the losses sustained by lenders in the past several years, many will be looking for more protective collateral packages.

FFVA: So it’s not all doom and gloom?

Thomas: I think exciting things are happening. People are starting to grow crops like pomegranates, olives and peaches. Initially, it  may be tough to finance commodities without a track record, but there will be lending opportunities created. Florida agriculture is very resilient, and we see continued opportunity for growth in many of the state’s commodities.

Photo credit: Image of money in article banner is from Farm Credit of Central Florida's website.