Shownotes
“We don't do agricultural lending." That's the common phrase uttered across America, but why? Phil Love, the leader of Pactola, and Mark Ritter delve into the benefits of agricultural lending, how to approach it, and the advantages for lenders.
WHAT YOU WILL LEARN IN THIS EPISODE:
✅ How agricultural lending empowers credit unions to support small businesses in farming communities.
✅ The role of credit unions in providing operating lines of credit and real estate loans for sustainable local food production.
✅ Key challenges and opportunities in agriculture lending, including navigating commodity markets and risk management.
✅ How credit union agricultural lending strengthens rural communities and supports America’s food supply.
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TIMESTAMPS:
00:00 Phil’s role at Pactola, a credit union service organization focused on agricultural lending, and describes his farming activities, including harvesting honey
06:48 Phil explains the three types of agricultural lending: real estate loans, equipment loans, and operating lines
09:48 Discussion on how credit unions in rural communities can leverage credit union agricultural lending to support farming as community banks consolidate
11:56 Phil outlines the challenges in agricultural lending, including assessing small business balance sheets, succession planning, and external risks such as commodity markets and weather
17:45 Discussion of beef prices, carryover debt, the One Big Beautiful Bill, inflation, interest rates and oil prices
KEY TAKEAWAYS:
💰 Agricultural lending boosts small farming businesses, helping credit unions fund local food production.
💰 Credit unions use operating lines of credit and real estate loans to support rural communities through agricultural lending.
💰 Credit union agricultural lending mitigates risk management challenges for farming operations.
💰 Farmer Mac and crop insurance enhance agricultural lending for sustainable local food systems.
ABOUT THE GUESTS:
Phone 605-223-5154
RESOURCES MENTIONED:
SEO KEYWORDS:
Credit Union Conversations, Mark Ritter, MBFS, Credit Unions, CUSO Agricultural Lending, Small Business, Farming, Local Food, Rural Community, Farm Credit, Commercial Banks, Equipment Loans, Farmer Mac, Community Banks, Crop Insurance, Commodity Markets
Transcripts
Funding the Businesses That Feed America
[:[00:00:29] I love corn harvest and going down to the local stand and getting corn. I think tomatoes are healthy, but I'm pretty sure I ate more tomatoes this summer than any doctor would recommend. I, and one of my favorite things about living up here in the countryside. Is I go to my local farm, h and b farm over in Muncie, Pennsylvania, and I meet the owner and [00:01:00] it's a great woman named Caitlin.
[:[00:01:29] And as I was thinking about it a while back, I sup, I support all these small businesses with my funds, but what I don't do is support them. Through the credit unions, and that is a whole in my resume and a whole in our business. We love relationships. We love small businesses. We love being part of the community, [00:02:00] but I don't hear many credit unions helping out this huge part of our industry.
[:[00:02:22] Phil Love - Guest: Doing great, mark. Hey, thanks for having me on your 99th podcast.
[:[00:02:34] So, and to give people a little bit of, tell people about your day job and then tell people about your, what's probably another full-time job at the farm?
[:[00:02:57] And so our team works [00:03:00] with that amongst other stuff. And in addition to that. We live on a small farm in, in northeast of Dallas and Texas where we have, we raise black Angus cattle primarily, or obviously for beef we have honeybees, we have an ay, and then we have some chickens and ducks for for eggs, and we'll sell beef and the honey and then sell eggs occasionally.
[:[00:03:35] Phil Love - Guest: Yeah. That it's possible. You know, I mean, egg prices have been quite crazy with some of the pandemics and stuff like that where they've, you know, wiped out a lot of the commercial production.
[:[00:04:04] Phil Love - Guest: It does, and honey is one of the most copied things that you see in the store when you buy honey in the store.
[:[00:04:34] And the amazing thing about honey is. There's a difference in the time of year that you harvest it. Typically when we har, if we harvest honey later in the year going into fall, it's darker in color and it's a little more robust than if we have stuff that's in the early part of the year. We typically like to try to do something in July or August.
[:[00:05:12] Mark Ritter - Host: I love going to my local farms and farm markets where they have the different types of honey and they're labeled by the flowers, the type of the year.
[:[00:05:32] Phil Love - Guest: yeah, and that's a huge thing because bees pollinate so much of our crop and that's been a, a big issue that we've seen over the past. Year is a lot of commercial bee production has lost mass amounts of their high, of their colonies to varroa mites and other pests.
[:[00:05:56] Mark Ritter - Host: okay, so I'm gonna dig into some business here. And the [00:06:00] que Yeah. A lot of times I talk to people with questions that I kind of have a background in and know a little bit. I'm gonna ask probably some of the dumbest, most basic questions for our audience and for myself.
[:[00:06:46] So educate me.
[:[00:07:16] So then he can get to the point of selling, and you have your, hopefully he's made enough money to pay that operating line off at the end of this, this season. And with that. The largest lender in the country is farm credit, so in in 22 they had about 46% of all US agricultural loans, and this is followed by commercial banks that had about 35%.
[:[00:08:11] You have equipment lenders like Mahindra or John Deere. You got private lenders that are out there, and that kind of composes what you would see as the. The world, so to speak of, of farm lending. And then Farmer Mac that you mentioned is a secondary market for farm loans on farm ground and farm facilities.
[:[00:09:02] It's one of the secondary markets we work with.
[:[00:09:26] But how can credit unions and what opportunities are there? Just because, especially, you know, I'm not talking the center city. Philadelphia and New York and Los Angeles, most of credit unions are touching the ag related businesses and they're part of their community. What, what's available to them?
[:[00:09:48] Phil Love - Guest: Well. I think that if you have a credit union that's in a rural area, they're gonna be impacted by agricultural lending or the ag economy, whether or not they're in ag lending or [00:10:00] not. Our original start that we had at at r QSO was up in the Dakotas and Nebraska, and if you take the Dakotas, Minnesota, Nebraska, and Texas, those traditionally have been the five largest states of credit union ag loans that you would see there in the country.
[:[00:10:43] In some cases, some of the credit unions we're working with, they are the only financial institution in that community. So they have to know how to do stuff with ag. And I think as that continues, as that trend continues, because we continually see [00:11:00] more community banks that get sold and merge into the larger ones, I think there'll be more opportunities for credit unions.
[:[00:11:41] 'cause it, it, I can name one QSO that helps people out with this and it's you and I can't name a second. So, so what, what, what can people use you for or, or what roadblocks do you hear about this? Sure.
[:[00:12:08] What's my debt service coverage? What's my loan to value and what's my guarantor support? You get those three done, you're pretty much understanding. But to understand risk and ag lending, it has to look at a lot more things. For instance, you need to understand the balance sheet composition of your producer and your guarantors.
[:[00:12:45] Does he have a long-term budget for upcoming capital expenditures? What's the plan for succession when the farmer retires? This is a huge thing because the average age of the family farmer in the United States is about 58 right now. These guys are gonna [00:13:00] retire at some time. And one of the things on our website, we've actually created some tools to try to help quantify these things into, uh, that's available for anybody to look at if they wanted to help try to judge their producer.
[:[00:13:44] All those come back to impacting the local family farmer. So I think that's one thing that anybody getting into ag lending, they need to just understand that those are risks that you have to be able to come, come over with. Fear of the unknown's [00:14:00] huge. I mean, you probably are very well aware in credit unions, they don't like doing what they're not comfortable with, and.
[:[00:14:18] Mark Ritter - Host: your, your community. Many times the success and failure is the success and failure of your ag businesses and that those small business owners, because they're members of your community and you want 'em to succeed,
[:[00:14:33] Another obstacle is they don't have qualified staff. Who understand ag lending, and that's tough, you know, that you, you have, especially if you're want to get into ag lending, you don't, you don't have that now. We support a lot of these efforts because we will under help underwrite structure and work with, you know, the field lenders we work with FSA guarantees [00:15:00] or other things like that that help reduce the risk of the credit union, as well as the stuff on Farmer Mac as well as.
[:[00:15:34] Mark Ritter - Host: You know, and, and from what I see is, you know, I, I don't live too far from where Cargill was formed, and I see the United States as a trend reverting back to more local production. Local food, it's healthier, it's sustainable, and it's, you know, it's quite frankly, [00:16:00] it tastes better as you know, and I know too.
[:[00:16:25] And it's so, and that's one of the reasons I wanted you on to bring these issues up. And there is support in our industry and there's people who advocate for it, and there's people who can do it.
[:[00:16:53] And th there needs to be, that needs to expand greatly. 'cause part of it is, it's a national [00:17:00] security issue to make sure that you can have. Access to food and the ability to have food to feed your, feed, your, your country. Those are important things.
[:[00:17:26] I love steak. I love good steak. Can't eat enough. Can't eat enough steak. Now, when I go try, when I buy my beef, let me just say it's a little higher than it used to be. What the heck is going on with the beef?
[:[00:17:54] Right now the National Beef Herd is as low as it's been since [00:18:00] 1951, and we over, over twice the population. Since that time, we've seen beef imports shoot up to over 4 billion pounds with an average price shooting around $6 a pound for ground beef, dairy calf prices, dairy craft calf, newborn bulls. You know, in 22 they were setting around $200 ahead, and now they're close to a thousand dollars.
[:[00:18:46] They're still eating pasture grass, so we got input costs that are low. We've got a shrinking herd. You know, that's nationally and, you know, throw in The other threat that we have, we're dealing with down here is the [00:19:00] possibility of the new world screw worm, which is a horrible little critter that bores into a, into, you know, a, a wound or something like that, that you would have on a cow lays its larvae in which basically eats the flesh.
[:[00:19:36] You'd reduce the supply of that demand is staying the high up and prices go up.
[:[00:20:04] If the rain doesn't fall, what do you do and is there any way you can hedge your bet or get insurance or as a lender, what do you do if you, you know, you, you, the corn doesn't grow because of the lack of rain. Like what? That's, that's the billion dollar question.
[:[00:20:27] If I looked at a seven year period of a farmer, he's probably hit a home run two years. He's got losses two years, and he's got the other three years that are just kind of so-so, so it's a thing first off, that you, you gotta be used to and expect that that's gonna happen. Sometimes
[:[00:20:50] Phil Love - Guest: Exactly. So it's part of an issue. And, and when we do an operating line, and typically what we're wanting is we want to get a good budget that we're gonna [00:21:00] verify, you know, what their prices are with what the USDA has, USDA sets kind of commodity prices when we're looking at, you know, the budget for a certain area and looking at his historic operating, his historic production, historic expenses.
[:[00:21:41] Eventually the farmer, if you can get the farmer to where they can rely a lot more on their cash that they have on hand for their operating expenses, it greatly reduces the risk. And one other thing we do to try to reduce the risk is we typically are gonna be leveraged a lot less [00:22:00] than what you would see.
[:[00:22:27] So we, that's another thing we check on. And we also want to see what's his marketing strategy. So has he forward contracted, you know, his crop? He can get it out there and he's got a, a guaranteed price, you know, there at the, you know, at the grain bin, wherever he's selling this to, or does he use the commodities market to try to put some hedges in there?
[:[00:23:00] Mark Ritter - Host: Now recently signed into law was the one big, beautiful bill, did a lot of taxes. It was one of these massive omnibus bills that was passed. How has that affected good or bad, the ag uh, industry?
[:[00:23:45] Immediately when you buy something and then you see these farmers that toward the end of the year, you know, they're buying or incurring more debt to get more equipment or something like that, so they can reduce their tax liability. By having that permanent, it makes it [00:24:00] easier to have a longer term capital improvement plan and capital replacement plan that the farm would need.
[:[00:24:28] And a big thing too is estate tax relief. So that lowered that. And that's a big thing that we see with farms right now that a lot of these are gonna have to be in the next decade or so, are gonna have to transfer from one generation to another.
[:[00:24:54] So farmers were able to sell their products for [00:25:00] significantly more. But the inputs and costs have sky have skyrocketed on the backend. How, what was it like during the inflation runup and, and and, and what do you see? How has, how has that impacted the farmers today?
[:[00:25:19] That's impacted cattle producers quite nicely in some other areas. But grains are, are really bearish right now. And there's kind of a bifurcation that we're seeing in terms of. How you know exactly how these two markets are going on the grain side. You know, a challenge that we have is, for instance, soybeans.
[:[00:26:01] Soybean crop and soybeans are huge in China because they feed it to, to their, to their, their swine. And pork is a huge part of the Chinese diet that you have. Corn's like it too because, you know, corn and other grains peaked had a, a commodity supercycle that peaked in about 22, and since then we've seen prices down 50% from that peak.
[:[00:26:50] Because that has a major impact on, you know, the farm costs that they have and oil prices. You could probably trace somewhere around 70% of all the [00:27:00] costs on a farm somewhat tied to, impacted in oil prices, whether it's straight fuel, trucking, fertilizer, anything like that. So as you see those prices and stuff come down, it makes it a lot more manageable for the farmer, and I think we're seeing that come down more with headline inflation today setting at around 2.9%.
[:[00:27:27] Mark Ritter - Host: loves food, as you could tell, loves to buy local, natural, high quality food. This has been great. And I can't encourage credit unions enough that you need to s, we need to serve our community and the bigger net that we can put out there in serving and helping the community, it's better for all the credit unions and it's better for America.
[:[00:28:00] Phil Love - Guest: I agree.
[:[00:28:13] Phil Love - Guest: Sure. So our website is www. Pac Tola, P-A-C-T-O-L a.com. You can email me@phil.love at pac tola.com, or you can call my office, which is (605) 223-5154.
[:[00:28:43] Mark Ritter - Host: If there isn't a credit union out there that isn't looking for more business or more relationships that you can help out in your community. This is a great opportunity for credit unions to build those deposits, build those relationships, [00:29:00] and be a part of your community.
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