Farmers Also Face a Loan Drought

Agricultural lenders are tightly linking water availability to operating loans for the first time this planting season, making California farmers pass stiff water tests to get money to plant their crops.

With state water deliveries to agriculture cut out entirely and federal deliveries trimmed 75%--reductions that are still in place regardless of recent rains--agricultural lenders are cutting back on their loan portfolios as farmers are forced to idle acreage.

Banks and other financial institutions that lend money to farmers contend that the drought will not affect their stability. They also say that agricultural credit has not tightened. But since the farm crisis of the early 1980s, total farm lending has indeed dropped: from $12.8 billion in California in 1984 to $9.8 billion in 1989.

“Just the promise of impending drought has made farm creditors retrench,” Herbert Aarons, president of California Coastal Rural Development Corp. in Salinas, said during a recent congressional hearing on the health of farm credit nationwide.

In fact, the California drought highlights the problems of agricultural lending throughout the country, a system dating from the 1930s and based on the belief that keeping family farmers in business is in the best interests of the nation, said Rep. Glenn English (D-Okla.), chairman of the House Agriculture subcommittee on conservation, credit and rural development.

“If farmers can’t get credit and are forced out of business, that defeats the overall national objective,” English said in an interview. “Still, a person can say that we have bad weather conditions from time to time, that farmers in California should take that into consideration, and if they go out of business, it’s bad management.”

The drought’s effects are evident in financial institutions throughout the state, as lenders take measures to reduce delinquent loans and brace for cutbacks in lending. Longtime lenders--and longtime farmers--say the current drought is the first time that they have seen the following:

* Bank of America is demanding a full accounting of how much water growers need, where it will come from and whether they can get it in time to use it. Although planting season began this month, the bank asked for this information last August. The institution has already turned down a few farmers because of a lack of water.

* At the Bakersfield Production Credit Assn. and Federal Land Bank, loan volume is down between 8% and 10%, Chief Executive Mark Carlton said. The reduction is directly related to the drought, he said.

* The Fresno-Madera Production Credit Assn. recently began demanding well tests for farmers with marginal water supplies. All farmers must fill out complicated water questionnaires before loans are granted.

“The drought is going to reduce our loan volume, and if it continues, we’ll have to initiate collections actions,” said Rod Stark, vice president and branch manager at the Fresno-Madera Production Credit Assn in Kerman. “I really have not turned people down because of water, but we’ve put more controls on loans.”

The rains have not changed the agricultural lending situation, Stark said, even though reservoirs are now half full and some cities are considering cutting back on their strict rationing plans.

“Even though there’s been additional rainfall, it doesn’t mean additional water for agriculture,” Stark said. “Most of the politicians feel that the water should go to the cities.”

Agricultural loans are granted by a broad spectrum of financial institutions, with the biggest chunk of farm money coming from the Farm Credit System, a nationwide network of farmer-owned lending institutions created by Congress more than 70 years ago.

Production credit associations such as Stark’s are one of the system’s three main branches; they offer operating loans for planting and intermediate-term loans for equipment, livestock and other large items. Federal land banks are the system’s mortgage lenders, and the Co-Bank offers loans to growers’ cooperatives.

The Western Farm Credit Bank in Sacramento is the Farm Credit System’s hub serving California, Utah, Arizona, Nevada and Hawaii. As of 1989, it had $4.2 billion in loans outstanding in California alone and was the top agricultural lender here.

All commercial banks combined weigh in as the No. 2 agricultural lender, with $3.3 billion in farm loans outstanding in 1989. Commercial banks give both operating and real estate loans to farmers. Wells Fargo has the largest agricultural portfolio of any commercial bank in the state, followed by Security Pacific, Bank of America and Sanwa Bank of California.

Bank of America decided last April that the fifth year of drought would require drastic measures to minimize risk in its farm loans, so it designed a detailed water questionnaire for its farm customers and then sent loan representatives out to visit each customer personally.

The questionnaires were due back in August, because planting decisions--and loan requests--for the 1991 season were made in the final quarter of the year. The bank did not require third-party tests of wells and pumps, but it was very interested in such information if it was available, said Terry W. Scranton, senior vice president for commercial banking in Fresno.

“We did a very thorough quantitative analysis of the water delivery, not just how deep is your well and how good is your water table,” Scranton said. “If your growing period is 150 days, you have to get the necessary amount of water on your crops in 150 days. If you get it in 210 days, you’ve got a problem.”

Although most of the bank’s farm customers are managing to stay in business and receive some operating money, Scranton said that in his 22 years with Bank of America, 1991 is the first time he has seen farmers’ loan requests turned down for lack of water.

At Sanwa and Wells Fargo, loan departments are not requiring written water questionnaires. But Wells Fargo is scrutinizing each of its 900 customers individually with an eye to water availability. That has not changed because of the March rains. Sanwa is doing much the same.

“In 1991, everyone’s focusing on water for obvious reasons,” said William Scarborough, vice president and loan supervisor in agribusiness banking at Sanwa. “It becomes a key element. . . . And if they don’t borrow as much, we don’t make as much interest income. What degree over last year is too early to tell.”

What this means for growers is a double drought--less water and less money with which to plant crops. It also means less money to pay fixed costs such as insurance, mortgages and equipment loans. Only two things are on the increase--headaches and paperwork.

George C. Papangellin is assistant general manager of Stamoules Packing Co. and S&S; Ranch in Mendota. In his nine years in farming, Papangellin said, he has never had a banker ask outright if he had enough water to grow his crops.

Until now. Today, bankers are asking how many wells farmers have, whether those wells are on owned or leased property, how deep they are, whether they’re up and running. “If you’re in dire straights,” Papangellin said, “they may get into even more detailed questioning.”

“We used to have cash-flow budgets,” said Rod Cardella, co-owner of Cardella Ranch in Firebaugh, Calif. “Now the banks are requiring us to have water budgets. They want to know how well your pump’s working, what water district you’re in, and they want a water budget.”

So Cardella gave them a detailed spreadsheet, whose most telling figure is a tiny “-2,234.” That number stands for how many acre feet of water he’ll probably be short. And it translates into no cotton, fewer tomatoes, fewer onions, about 1,400 idle acres, a much smaller loan from his bank and about $250,000 that he’ll be in the red.

“I think the banks will take advantage of this,” Cardella said. “They know it isn’t a year to shop around (for loans). Maybe they’re justified. The risks are so great.”

MAJOR U.S. AGRICULTURAL LENDERS Because agricultural banking is much more centralized in California than in other parts of the country, the state’s Top Five farm lenders are also the nation’s.

Rank Bank Location Dollars 1 Western Farm Credit Bank Sacramento $4.3 billion 2 Wells Fargo Bank San Francisco $885 million 3 Security Pacific Los Angeles $881 million 4 Bank of America San Francisco $830 million 5 Sanwa Bank of California San Francisco $363 million 6 Seattle-First Seattle $338 million 7 Security Pacific Seattle $336 million 8 Valley National of Arizona Phoenix $311 million 9 West One Bank Boise, Ida. $280 million 10 US Bank of Washington Seattle $238 million 11 United States National Bank Portland, Ore. $224 million

Source: Sheshunoff Bank Quarterly, June, 1990, ratings, and the Western Farm Credit Bank

Changes in Agricultural Lending in California Although the Farm Credit System is California’s top agricultural lender, life insurance companies and major commerical banks are also big players in farm finance. Farm Credit System Commerical Banks Life Insurance Companies *Life insurance companies only give long-term loans for large purchases such as farms. The Farm Credit System and commerical banks grant farmers short-term operating loans and long-term real estate loans. Source: U.S. Department of Agriculture Economic Research Service Total Agricultural Lending Although major agricultural lenders insist that farm credit is not tightening, farm lending has dropped significantly since 1984. Source: U.S. Department of Agriculture Economic Research Service