Credit Unions Dig Into Agriculture Loans

by Susan K. Davis

Credit unions have been making agriculture loans since plows were pulled by horses. Today, credit unions typically aren't the first place most farmers look for loans, but the co-ops are moving up in the race.

Today, the Farm Service Agency, Farm Credit Services, commercial lenders, private banks, and individuals make most ag loans. But from 1996 to mid-2001, ag lending by credit unions nearly doubled, according to Keith Leggett in the Journal of Agricultural Lending. Credit unions in Indiana, Minnesota, and North Dakota have the highest visibility in ag credit.

"In the last 10 to 15 years, credit unions started playing a more significant role," says Ralph Goodwin of Old West Federal Credit Union in John Day, Ore. "It's important to have credit unions in agriculture primarily because some of the traditional sources for credit seem to be drying up," says the CEO.

Seasons of change

In two short decades, the ag lending landscape looks as different as a cornfield and a shopping mall. After the 1980's farm crisis, regional and national chains bought out many small-town banks, big banks exited agriculture, and the locally owned rural bank became nearly as rare as the corner grocery.

Credit unions made inroads in ag for several reasons:

Small-town banks disappear. Nationally owned banks exit agriculture. Big banks see ag as risky.

"The big banks look at agriculture as risky," says Todd Beehler, vice president of ag and commercial lending at Beacon Credit Union, Wabash, Ind. Imagine your annual salary declined from $40,000 to $20,000 in a few years. That's the scenario northern Indiana farmers faced when a drought destroyed the corn and soybean crops one year and heavy rains washed away the plants the next.

Unless you're looking out your kitchen window at the crops across the road, the farmers' financial picture may not be clear on paper. Financial ratios are important tools, but the lender 200 miles away may not see the crops withering in the field, Beehler adds. "Ag lending is much more about building relationships, getting to know the farmers, their character, and their management," Beehler says. "History comes into play much more than with a bigger bank making decisions in some far-off city."

Down-home service

Vera Rudolph agrees that Wall Street bankers might not always comprehend what happens on Main Street. "We picked up some very good dairy farms [as clients]," says the loan officer at Farm Bureau Credit Union, Goshen, Ind. Bankers don't always understand milk price fluctuations or why a farmer can't sell a crop on Nov. 1 (when prices are the lowest following harvest). "We live with the members and see the farmers on a daily basis and understand their lifestyle," says Rudolph. The Farm Bureau Credit Union was formed during the Depression when several farmers tossed in $5--if they had it--to help each other obtain money to farm.

When Rudolph left Farm Credit Services, many of her customers came to the credit union for good rates, service, availability, and flexibility. In seven years, ag loans have doubled and make up 20% of the credit union's portfolio.

Another plus for the credit union is that members make the decisions. John Paul Unruh was looking for a lower interest rate and went to his local credit union to borrow money for his cattle ranch. That was nearly 30 years ago. Today he's manager of Peoples Credit Union in Springfield, Colo., where half the loans are ag loans. "The primary thing we offer is doing business with an institution we're part owner with," Unruh says.

Credit union benefits to rural members: Offer local service. Lenders live and work in the neighborhood. Area residents own the credit union. Fill need for small to midsized farms.

Credit unions in ag fill a hole

Many chain banks still target larger farming operations. "The big guys with 3,000 to 5,000 acres are still attractive to the big banks because they have different economies of scale," Beehler points out. "Our bread and butter is the midrange farmer, part-time or older farmer, with less than 1,000 acres," Beehler says. Beacon's ag loans range from $5,000 to buy a [small or used] tractor to $4 million to purchase farmland. Unlike federal credit unions that must limit commercial loans to 12.25% of their total assets, Beacon is regulated by the Indiana Department of Finance and not the National Credit Union Administration.

In Oregon, cattle ranchers knocked on Old West's door in the late '70s because they couldn't obtain credit elsewhere. CEO Goodwin, who also was a cattle rancher, started the ag loan program. "Small family farmers are a great opportunity for credit unions. The chains don't want to mess with $200,000 or $300,000 loans. For us it works quite well," Goodwin adds. "It's 100 miles before you come to a stop sign in any direction. We're a little out of town," Goodwin jokes. Located three hours from Boise, Idaho, a typical borrower is a family farm with 300 to 500 beef cattle.

At Heartland Credit Union in Madison, Wis., Robin Marohn also saw opportunities in ag. "In the last 10 years we've tried to fill the niche," says the vice president of marketing. With about 25% of the credit union's total portfolio in ag loans, the Madison-based co-op, with seven branches, has gone from zero to $23 million in farm loans in a decade. "As credit unions look for more opportunities, they will see ag as one area that's ripe," Marohn says.

January 10, 2005