Springfield Business Journal Editorial Vice President Eric Olson discusses agricultural lending with Jessica Allan, agricultural lender and commercial relationship manager at Guaranty Bank; Billy Claiborn, senior vice president and senior ag lender at Old Missouri Bank; and Jay Roderick, commercial loan officer for The Bank of Missouri.
Eric Olson: Agricultural financing is nothing new, as long as farmers have needed money. But what’s the state of the industry right now? Have there been any significant or recent changes in your business?
Billy Claiborn: We have a fairly high concentration in ag lending. We’ve seen a steady increase in our ag lending. We expand out a fairly large area around Springfield, 50, 60 miles. We’ve seen our ag portfolio increase steadily over the last probably 10 years. We’ve seen some major increases from the poultry side. In 2011, we had a lot of the specialty layer operations that moved into this area. That’s been a big plus for us. We were early on board and have financed quite a few of those. That’s been a major spark in our growth.
Olson: At your bank, what is the percentage of ag lending in the overall portfolio?
Claiborn: I’d say we’re probably a good third, probably 30%, 40%.
Jay Roderick: We’re probably 25%. But like Billy said, it’s been steady for us as well. Property values go up, our loan size goes up. Our portfolios have grown.
Jessica Allan: Guaranty is in a little bit more unique situation. I was with Hometown Bank, which Guaranty obtained about three years ago. Hometown had a very sizeable ag portfolio; Guaranty not so much. I handle quite a few ag businesses and so do most of our lenders down in the Joplin region. We’re definitely growing up in Springfield. As far as percentages, I wouldn’t know because we deal with different regions.
Olson: What’s driving the steady increases that you’re mentioning in your loan portfolios? Jay said property rates, and Billy said poultry, but any new industries?
Claiborn: A lot of these specialty layer operations, the cage free, free range, pasture raised, non-GMO, organic, that’s been a major expansion for this area. There’s been hundreds of these operations that have come in and been started. Most of these, you’re talking $1 million-plus getting one of these operations even built. Like the Vital Farms, they’ve got processing here in Springfield. We work with about five different integrators. If you think back 50 years ago, we had small dairy operations everywhere, and they’ve just kept shrinking. The specialty layers ... it’s a growing market. They want something in this area or south where it’s warmer and they can turn their chickens outside.
Allan: Another area of growth we’ve seen is your truck farmers, your farmers market people. There’s a lot of people getting into that niche farming. Instead of the 100-acre farms, we’re financing 20, 40 acres, but sometimes they’re making much more because it’s going out value added. It takes about five years for them to get established, but after that fifth year, they see pretty good profit margins.
Olson: I was looking at some Federal Reserve data on the national scope. Ag loan demand had a steep decline in 2020, and it attributed some of that to the $20 billion that the federal government paid out to farmers during that time. That sounds like it hasn’t really affected our local market in the same way it has nationally.
Claiborn: There was a lot of influx of cash coming in from the government payments and with COVID there was some uncertainty out there. They had some cash coming in that they could use in their operation and not need to borrow as much money. Everybody was probably cutting back on expenses and watching what they were doing. There’s probably some reduction in that. Now on the other hand, as we go into 2022, I think input costs, feed costs are probably up 25%, 30%, fertilizer is up 100%. There’s a lot of costs that’s going to be higher. Those same operations, they’re going to need 30%, 40%, 50% more money than what they had maybe in 2020. I think you’re going to see the operating lines probably increase quite a bit this year.
Allan: I think people used that time and federal money to expand on their own, doing something a little bit different than what they’ve been doing. I have a customer who’s in crops and instead of doing traditional fertilizer this year, he’s using more organic methods, which seems to be paying off for him. I have beef farmers who took advantage of the beef crisis, I guess you could say, in 2020 and were able to get in with some of the local processors and start selling straight to the farm instead of using a middleman.
Olson: Use of some creative means.
Allan: Farmers are very creative.
Olson: What are the most common ag-related loans that you guys are writing? Is it land acquisitions?
Roderick: That’s mostly what we’re seeing. Had some people expand their cattle operation.
Allan: It’s a good mix of working capital, land, cattle, crops, poultry.
Claiborn: This is a fairly diverse area. You see about all the types of agriculture in this area. The cow/calf operations are probably going to be a little better this year, getting prices back up. They’ve been able to lock in some good profit margins. I think we’ve seen a lot of our backgrounders running more cattle because they can lock in some profits. The poultry continues to expand. On real estate values, we’re seeing some sizeable increases in land values and every time land values go up, the size of that loan increases to compensate. A lot of full-time farmers are getting larger just because of the economics of the farming. We have a lot of part-time farmers that are in this area. They want to live in the rural area outside of town and so they have some cattle and on the side come into the city and Springfield area and work. We’re seeing both areas expand.
Olson: It seems like historically the farm would pass down from generations. We’ve seen changes in industry and modernization of farming practices and just the way the economy has shaped agriculture. Are you seeing less of that?
Roderick: Primarily our area is still a family farm.
Allan: Sometimes it skips a generation, like instead of father to son it’s grandfather to grandson. But for the most part, it is staying with the family.
Claiborn: I talked about the poultry expansion, it’s kind of been back to the family farm a little bit on that. The pasture-raised poultry, especially, some of the big players, it doesn’t fit their model. They like the larger size operation. The amount of pasture some of these pasture-raised layer operations need for a 20,000-hen operation, you have to have 50 acres of pasture available. We got into the cage layers and we were at a million birds-plus, with the specialty egg market, we’ve kind of gone back the other way. It’s a totally different market. The perceived quality of the organic, non-GMO has caused that market to explode and expand where the cage market has gone the other direction. A family can have a full-time farm operation now where in the past maybe they had to have that outside job.
Olson: Related to the succession of these farms, I want to talk a little bit about financing those, passing on to the next generation. Last summer, the USDA began providing $67 million in competitive loans through a new program, the Heir’s Property Relending Program to help ag producers and landowners resolve those ownership and succession issues. Have any of your clients tapped into that?
Allan: Most of my clients who are transitioning, they have actually organized the operations so it will be Allan Family Farms, and I would own 30%, my father owns the other 70%. And then upon transition, the paperwork states I would overtake ownership. That way it’s a smooth and seamless transition and you don’t have to deal with probate and beneficiary deeds, etc.
Olson: Is that primarily what the USDA program is for?
Allan: Yes. From the research I have done on it, it’s mostly for those where dad suddenly passes away, mom is already gone, nobody knows who owns the land. People of the younger generation, they’re starting to realize we need to get this organized. So, they’re talking with their parents, let’s do estate planning so this stays in the family.
Roderick: When I’ve attended different farm meetings in the past five years, succession planning is a big topic and you hear it at almost every one. They’re giving farm operations tips on what they can do.
Claiborn: Maybe in Iowa and some of the south, in crop areas, you have a lot higher percent of maybe absentee ownership and percentage of the farms that are rented out. In some of those cases, you get people not living in the area and they pass away, and it goes to children and they’re scattered throughout, there can be some issues there. I don’t think we see that much of a percentage of rented property here compared to some of the major crop areas.
Olson: Are there any internal programs that you’re getting creative with financing based on family issues or changes with the industry or modernization?
Allan: Ag lending in itself has to be creative. Every operation is different. Every operation has different goals, different people involved, how they want people to be involved. Are we just poultry? Are we going to be poultry and cow? It gets creative with every customer.
Claiborn: The market right now in ag is fairly competitive. There’s been some lenders that maybe historically hadn’t been in ag that have ventured into ag in the last few years because they’ve seen that it’s been profitable. The competition makes you be creative sometimes on getting the business and keeping the business.
Olson: Are there any hurdles for these operators to access capital right now?
Claiborn: The land cost right now has increased considerably. To have the capital to start out, it takes a lot more money and it’s probably harder to start due to the cost involved of getting a large enough size operation that you can live off of.
Allan: I really agree with that. Don’t think you’re going to do this full time, right away. You need that in-town job, more likely, to get your feet on the ground. Unless, maybe you’re inheriting and you’ve been involved with it from day one.
Olson: What about in terms of scrutinizing the loan applications? Has that increased at all like with standard business lending and mortgage lending? What advice do you have for applicants?
Claiborn: On the ag side, cash flow is the key. Being able to generate enough to service the debt and put in the crop. Working capital – and cash flow and collateral – is very important. When you get into analyzing, you’ve got to look into the cash flow more than capital. This area has a lot of creative people and there’s niche markets. Ag is a pretty broad area.
Olson: There is quite a variety of things you could do within agriculture, it’s not just crop and livestock. I think of fibers.
Claiborn: We’ve got an operation that milks camels. Camel milk is a specialty milk that they use for kids with autism and medical purposes. They ship it all over the country. There’s not very many of those, but they have a strong demand for their product. They bottle it in pint bottles. It’s sweeter than normal milk. They’ve got more demand than they can supply.
Olson: What’s another new market that people might be getting into?
Roderick: I hear more people getting into the hair sheep. I don’t have any clients that do that, but as I drive around the country I see more and more of them. It’s for the meat because they don’t produce wool.
Olson: Are restaurants getting into that?
Allan: It’s restaurants and it’s also your local farmers markets, those specialty meats, goat, sheep, lamb, that you don’t normally find in the grocery store, people are interested in them. Diamond, Missouri, has one of the largest goat and sheep markets in the state.
Olson: Farming is hard work. Is it recommended to go into farming these days?
Roderick: I think it’s obtainable. Like we’ve talked about, niche markets, you have to find something to set yourself apart. Have a good business plan and know your cost of production.
Allan: You have to be willing to keep your regular job for a portion of time. If you do that and allow the farm to grow, it’s eventually going to be able to sustain you.
Olson: In that regard, it’s very similar to somebody who’s an entrepreneur and has worked for a company and put in 40-plus hours a week, but has something going on the side that they want to explore and invest in. But they do have to do that side hustle for a little bit. It’s very entrepreneurial in that way.
Claiborn: Poultry has changed the agriculture area in this area more than anything in a number of years. You’ve got a lot of organic poultry – well, that takes organic grain. So that’s opened up a market for people to raise organic crops in this area. We’re got some non-GMO layer operations that open up raising non-GMO type products. You have the feed mills that expand to be able to operate that. And the trucking operations hauling the grain. All of these have been smaller operations that have created jobs in this area. If you go up to Buffalo, there are two large mills on either side of the road. One is organic and one is conventional. It’s amazing the amount of tonnage of feed that’s hauled out of those places every day. Every one of those layer operations needs somebody to raise pullets. So we get a lot of pullet operations. That’s a baby chick. There’s about three different companies that you’ll see on the grocery store shelves right now that are eggs from locally grown chicken here in southwest Missouri. You’ve got Vital Farms, Happy Egg is from Noble Foods. Mid-state Specialty Egg. And a lot your Walmarts and Sam’s, the Marketside brand, they source as local as they can.
Olson: Hearing all that, it makes me wonder about your portfolios. Are there any niche jobs or businesses that could help them solve problems in their farming operations?
Claiborn: Right now, fertilizer prices are high. The litter that comes out of the barns that’s very popular right now; everybody’s wanting to buy that to use on the crop operation or pastures to spread fertilizer. A lot of people spreading litter, hauling litter, that’s creating jobs. There’s actually even a pelleting mill that’s going in up in Buffalo that’s going to pellet organic litter. It’s a type of industry that just keeps building.
Allan: Agriculture has a massive economic impact, whether it’s direct, secondary, tertiary. I have several customers who I would consider a business, you do an SBA loan with them, but they’re in business because of agriculture. I have a trucking business and all he does is haul grain. That’s all he has time for at the moment. Another one, he transferred his trucks into hauling litter rather than hauling rock because that’s where the opportunity lies at the moment.
Olson: What’s your top financial advice for farming operations?
Roderick: Probably hit on some things we’ve talked about before, like a business plan, knowing their cost of production and farming. There’s a lot of risk management tools to utilize.
Olson: What are those risk management tools?
Roderick: Like with cattle, you can sell your calves on a future contract. So, say it’s April and your calves weigh 500 pounds. Well, I can sell 800 pounds in September and lock in that price today. There’s crop insurance. You can even buy insurance for your pasture.
Claiborn: Like he said, know your cost of production. That’s the key right now. We got a lot of cattle backgrounders in this area. Like August futures, they got up to $1.89, well it’s down under $1.79 now. That may be your profit margin. If they know their cost and can use a hedge or a put or option contract to lock in their prices and get some protection in there, it’s all mostly a necessity. With the Ukraine situation, we’re seeing grain prices fluctuate greatly right now. Even on the dairy side, you can lock in milk prices. The ones that are doing good are doing a good job marketing and protecting their operation from risk.
Roderick: We’re in a world market. Something happens on the other side of the world and it affects the market here for really no strong reason, but it does.
Claiborn: Fundamentally, we should see better prices. Our cattle numbers are dropping and we’ve got a lot of drought conditions out west. There’s a lot of cows that had to go be killed just because they didn’t have pasture, didn’t have hay. The lower numbers should help our pricing situation in this area. Our export market has been good and should continue to be good unless we have some outside factor that affects it.
Excerpts by Executive Editor Christine Temple, firstname.lastname@example.org.
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