We appreciate this opportunity to provide comments on the farm Credit Administration (FCA) Proposed Rule to amend its regulations to require Farm Credit System (FCS) lending institutions to emphasize borrower diversity as part of their business plan, including young and beginning farmers, small and mid-size farms serving local and regional food markets, and socially disadvantaged and limited resource farmers. Furthermore, we comment FCA in taking on this issue at this time and support the implementation of the amended regulation.
The Rural Advancement Foundation International – USA (RAFI-USA) is a non-profit organization based in Pittsboro, NC that cultivates markets, policies and communities that support thriving, socially just and environmentally sound family farms. We work nationally and internationally, focusing on North Carolina and the southeastern United States. The RAFI-USA farm advocacy program provides credit counseling to over 120 farmers per year. Our Tobacco Communities Reinvestment Fund has provided cost-share grants to over 500 farmers and communities to develop innovative farm enterprises to replace lost tobacco income, resulting in the creation of over 4,100 jobs.
In recent years, RAFI-USA has documented a “credit gap.” Farmers have found ways to keep small and mid-scale farms prosperous by following emerging market demand for high value local and sustainable products, increasing the viability of their farms and often increasing their capacity to pay back loans. But the lending community has often seen these enterprises as too risky, pushing farmers instead toward the narrow margins of commodity agriculture and contract livestock production. While markets tell farmers to move in one direction – carrying their products further into the marketplace to garner more of the retail food dollar, their banker often insists that they move in the other – toward the perceived safety of commodities and contracts.
In 2005, RAFI-USA convened the Farmer Lender Project, a year-long focus group on access to credit for entrepreneurial and beginning farmers that brought together innovative farmers, bankers and credit advisors. These comments are based on the recommendations that resulted from this conversation, and from our experience assisting young and beginning farmers, small and mid-size farms serving local and regional food markets, and socially disadvantaged and limited resource farmers.
No doubt many of the comments that the FCA will receive will highlight the need for training both for farmers and for bankers. Loans for innovative farm enterprises often resemble small business loans more than traditional agriculture loans, and farmers making the transition require technical assistance to reach the higher expectations of business plans and documentation. Agricultural lenders also often need additional training to understand the emerging specialty markets and their potential to evaluate loan applications effectively. The need for training and outreach on both sides is especially acute when addressing the needs of historically underserved populations where trust between farmers and lenders may be low.
In addition, FCS needs to establish specific goals and report on the progress toward achieving these goals.
While these are important parts of the solution, we must address the fact that existing loan programs frequently do not work for entrepreneurial farmers even when training and technical assistance are present for both sides. In our experience, this is because the risk profile for innovative farm enterprises, whether real or perceived risk, does not fit with current lending risk tolerance.
Agriculture and agricultural lending has benefitted from a series of programs that mitigate the great risk associated with agricultural production. These programs include crop insurance, disaster assistance programs, commodity programs and conservation programs. Together, these programs provide a safety net that has become a prerequisite for agricultural lending. This safety net is largely non-existent or insufficient for innovative farm entrepreneurs. For instance, disaster assistance programs provide payments based on the wholesale conventional price of a product. For a farmer who sells into specialty markets, this price can be a quarter of their expected price, leaving them at a significant economic disadvantage to their conventional neighbors, and far less likely to receive a loan.
On the other hand, innovative small and mid-scale farmers do manage risks through farming systems. They are likely to diversify crops and markets, manage water through irrigation and rain exclusion, spread their harvest throughout the season to reduce the impact of a single weather event, maintain high soil quality to mitigate both moderate drought and flood and other management practices. But because the risk impacts of these practices have not been sufficiently quantified, they are not recognized by the banking community in lending devisions.
Because of the safety net of federal programs – crop insurance, commodity programs, disaster assistance programs, etc. – a farm producing mono-crop corn which is highly weather susceptible, has a single harvest window and significant periods of weather vulnerability and is sold at highly volatile prices that are out of the farmers’ control is seen as less risky than a specialty crop farm that is highly diversified in products grown, harvest windows and markets, uses production practices that mitigate weather risks and where the farmer has control of the price.
If we carry existing standards and quantification of risk in agricultural lending into programs targeted for local and direct markets and beginning farmers, no amount of technical assistance or outreach will make these programs effective. The risk profile does not fit.
We therefore have three options to address risk. First, we can increase the reach of the safety net by moving aggressively to extend risk management and disaster assistance to cover emerging markets. This could take the form of increased crop insurance development or inclusion of specialty market prices in disaster assistance programs or other program changes. While this is largely a task that falls outside of the purview of the Farm Credit Administration, there is a significant role for the FCA to play in advocating for the necessity of these changes.
The second option is to change how we quantify risk. Farm Credit should act aggressively to work with researchers to harvest existing research to quantify the amount that specific production and marketing practices mitigate risk, and integrate this information into the evaluation of lending applications.
The third option is to provide pools of funds with a different risk tolerance to address the need for lending into emerging markets. This can be achieved either through specific lending pools with a different risk tolerance, or through loan guarantees or other risk mitigation strategies that support the loan.
In addition to risk, the scale of lending is a significant barrier to effective lending into emerging markets. Small and mid-scale farms often have smaller financing needs than their large-scale counterparts. Our Tobacco Communities Reinvestment Fund has shown that investment of just $10,000 in innovative farm enterprises can yield significant job creation and income generation results. But because of economies of scale, banks are often unwilling to make the small loans that are the appropriate scale for the growth of the enterprise. During our Farmer Lender Project, the head of agricultural lending for one of the major NC banks, when asked about $20,000 to $50,000 loans for farm entrepreneurs commented, “We have a loan program for them. It is called credit cards.” In fact, in our experience a large percentage of innovative farmers finance their farming operations using credit cards, increasing the cost of financing and the likelihood of bankruptcy.
In order for FCS institutions to reach small and mid-scale farmers effectively, they must have the ability to lend at levels that are appropriate for the enterprise. If this is not cost-effective for the institution, the origination costs should be underwritten to allow the loan to be made. This could be similar to the current underwriting of the costs of crop insurance implementation for private insurance companies.
Innovative farm entrepreneurship is a strong potential driver of economic development and jobs creation for rural areas that have been hit hard. The FCS has an important role to play in providing appropriate capital to fuel this growth. We appreciate the opportunity to comment on this proposed rule, and support its rapid implementation once amended.
Thank you very much for your consideration.
Scott Marlow, Interim Executive Director The Rural Advancement Foundation International - USA