Farm Credit Touts Ag-Specific Business Model

As a grower-owned cooperative that only deals in the agricultural sector, Farm Credit is uniquely positioned to handle the financial needs of western farms.

Dan Clawson, executive vice president and chief lending officer of AgWest Farm Credit, a Farm Credit association active in California, said it is the specific ag focus that sets Farm Credit apart from other lenders operating in the space. “All we lend is to agriculture,” he said, noting his organization works with farmers in Northern California, the Pacific Northwest, and bordering states. “We provide a consistent, reliable source of credit, and we don’t ever exit a segment of the industry,” he said. “We are a lender that is much more patient with an ag industry that is going through a difficult time.”

Dan Clawson, Executive Vice President and Chief Lending Officer, AgWest Farm Credit

Each Farm Credit association is run by a board of its grower customers, who are also the owners of the associations, and each customer must invest $1,000 in non-negotiable stock as part of their loan package. As long as their loan remains active, the stock ownership remains in place. If a customer’s loan is retired without a new one being written, that stock is then sold back to Farm Credit for the same $1,000. 

Clawson explained that every Farm Credit loan, by regulation, has to be to an entity with farmer ownership. That can include a mortgage or any operational loan in the supply chain, from growing to marketing, as long as there is a farmer materially involved in the ownership group. 

“We provide a consistent, reliable source of credit, and we don’t ever exit a segment of the industry. We are a lender that is much more patient with an ag industry that is going through a difficult time.” - Dan Clawson

Board members are not directly involved in loan decisions, Clawson said, but the board does approve the underwriting standards. “The board makes sure we stay focused on our customers,” he said.

Clawson reiterated that it is Farm Credit's connection to agriculture that makes the difference, noting AgWest Farm Credit alone has loans covering more than 200 crops, including forestry, fishery, fruits, nuts, and row crops.

While there are no different underwriting standards that apply to borrowers involved in organic production, Clawson said growing organic is an important aspect of a loan application because it often creates different metrics when considering the viability of a loan. “We ask the question because we want to understand a borrower’s operation and how they calculated yield and the return.”

It isn’t uncommon for an organic grower to factor in lower yields and a higher per pound return. “Organic farming is much different than it was 25 years ago,” Clawson said. “We view it as an extremely important part of California agriculture. Often when we are involved with young farmers and smaller farms, they are organic operations. We consider that an important part of the future of agriculture.”

Clawson reiterated that it is Farm Credit's connection to agriculture that makes the difference, noting AgWest Farm Credit alone has loans covering more than 200 crops, including forestry, fishery, fruits, nuts, and row crops.

But he added that organic production has become an integral part of many of its operating loans as many larger farming companies grow both conventional and organic crops.

Operating in California are seven Farm Credit associations and one funding bank: American Ag Credit, Fresno Madera Farm Credit, CoBank, AgWest Farm Credit, Golden State Farm Credit, Colusa Glenn Farm Credit, and Yosemite Farm Credit. Each association has a geographic region in which they work, but there is overlap as many farmers operate in more than one area.

One of the unique features of the Farm Credit system is that it pays a dividend to its customer-owners each year. While this varies between associations, Clawson said that dividends have averaged about 1 percent of the loan payment in recent years. That means a 5 percent loan is effectively only a 4 percent loan once the 1 percent dividend or rebate is factored in.

“We are absolutely competitive on our loan rates,” he said. “And the dividend typically means we offer better value than commercial lenders.”

“Organic farming is much different than it was 25 years ago. We view it as an extremely important part of California agriculture. Often when we are involved with young farmers and smaller farms, they are organic operations. We consider that an important part of the future of agriculture.” - Dan Clawson

In general, Clawson said the lending process is not any different than a depository bank, but at Farm Credit, the farmer-borrower is dealing with a specialist that knows his or her operation and knows the role Mother Nature plays in that business. “We consider ourselves a relationship lender instead of a transactional lender,” he said.

The Farm Credit system was developed through congressional action and is under the auspices of the Farm Credit Administration. However, the individual associations are not government agencies, nor do they receive government funding or subsidies. Currently, there are about 67 associations nationwide as well as four banks that sell government securities to generate funds that are then lent to the associations, who in turn lend those dollars to farmers and ranchers across the country.  

Venturing into current events, Clawson said he has recently received questions from farmer customers wondering about the financial strength of the Farm Credit system in light of some regional bank failures. “Some customers were asking for reassurance that we are alright,” he said. “We have no issues at all.”

“We consider ourselves a relationship lender instead of a transactional lender.” - Dan Clawson

Farm Credit associations loan out about 90-95 percent of their assets in contrast to the recently failed banks who were loaning a much smaller percentage of their assets and were investing heavily in other assets and financial instruments that saw a significant downturn in value.

Clawson noted that by regulation, that is not the Farm Credit system model. All members of Farm Credit borrow money from the system specifically to lend to a very diverse portfolio of ag clients, which minimizes overall risk.