In a July 13 article that appeared in American Banker, writer Ken McCarthy talks about “how credit unions can steal ag lending share from banks.”
The article begins: “For credit unions interested in agricultural lending, their lack of experience is a major barrier. Some of those institutions are looking at bank acquisitions to fill their knowledge gap, while others are establishing deeper roots with local farmers. Which path a credit union chooses depends on how aggressively it wants to build its ag-lending portfolio, and how stiff the competition is locally.”
To understand the state of agricultural lending from a local perspective, I spoke with Brian Gilbert, CEO of Members Trust of the Southwest FCU.
Gilbert has a degree from Texas A&M and a background in agriculture. In making agriculture loans, a lender needs to understand the business cycle of the type of loans they are making and be able to project margins to make good lending decisions. Under the current economic and draught conditions, there is more risk than normal and a good borrower may have to weather a bad year by living off the equity they’ve built up previously.
Getting into the agricultural lending should not be done unless you have knowledge and expertise, “otherwise, you could grow your market share, but you could also grow your losses,” he said. “Whether it’s the stock market or the cow market, you need to be in it for the long haul.”
“Inflation has definitely hit agriculture, like it has most businesses,” he added. “Specifically, there is a lot of energy used in transportation and production of ag products.” Also, resources used in production such as fertilizer have increased substantially. Gilbert noted that one of the main components of fertilizer is nitrogen, and the prices for nitrogen and natural gas are highly correlated.
Despite the inflationary pressures, Gilbert said the margins on many ag products have maintained well for now, but they will tighten in the next 6–12 months if there aren’t some reductions in the costs of production.
The current drought on farmland bears a big impact on the industry as well.
“Drought is causing a problem across parts of the United States, including much of Texas,” Gilbert said. “We are seeing crops maturing earlier, livestock owners running out of grass, and therefore some herd liquidation and calf crops coming off earlier than normal.” Hay and forage crops are under stress and not being produced and therefore, there will be a shortage of feed for cattle going into next winter which will cause a significant impact on production costs.
“We are seeing some downward pressure on beef cattle prices based on supply and demand, as many cattle are going to market early, but the futures markets for live cattle in the fall and going into next spring are higher,” he said. “And what does this mean for the average consumer? Higher food costs.”
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