The State of Arizona remains largely dependent on agriculture and ranching, which is the second largest source of revenue for Arizona at over $10.3 billion. With more than 15,000 farms and ranches in the state and more than 94% of them family operated, it is likely that each of us knows someone who has been affected by the current rural slowdown.
Farm income is down substantially from its peak in the state in 2013. Those in the agriculture business are now facing 18 months of stagnant or decreasing commodity prices, causing rural real estate prices to flatten and decrease. Much like the residential real estate bubble that existed in 2008, banks have made loans to those in the agriculture industry based on the consistent increase in real estate values. Additionally, banks and their federal regulators do not adjust well to markets that underperform their expectations.
Debtor-Creditor relationships are always complex when economies slow, but agriculture lending has unique traits that can make these relationships even more difficult. To facilitate rural lending, the Federal Government has created several programs, most notably: Farmer Mac Loans and the Farm Credit System.
Farmer Mac loans are operating loans that allow a bank to lend to a qualifying farmer; if the loan goes 90-days delinquent it is then guaranteed by the Federal Government, and the Federal Government protocol takes effect. This either means that, once a default has occurred, either the Federal Government (a) makes direct credit decisions or (b) requires the lender to continuously jump through hoops before collecting on the guarantee. Either option greatly affects the borrower.
Farm Credit is a loosely affiliated “co-op” or “credit union” that has its own rules and regulations different from most other chartered banks. While this flexibility is important to deal with the unique aspects of lending in the agriculture industry, it also allows for potential abuse. This abuse recently resulted in the merger of Farm Credit Services Southwest into Farm Credit West.
With rising loan delinquencies in the agriculture industry as well as compliance and servicing costs, the agriculture lending institutions have looked to scale greater volumes of loans, and lender consolidation has become a trend. Some estimates suggest that in the next five years there will be 500 fewer banks maintaining an agriculture lending portfolio.
Bank consolidation and increased demand by farmers and ranchers create a situation that is ripe for abuse. Bankers know what is needed to qualify for certain federal guarantees, or to appease the regulators. They also know farmers and ranchers have relied on them for advice in the past and need access to funds going forward.
As the lenders come under stricter regulations and the banks become more bureaucratic – their advice becomes more like demands. Bankers are specialists in the agriculture industry, and that specialization plus the needs of the ranchers and farmers create a sense that the bankers know more about how to operate the business than the farmers or ranchers. Once that happens, it is no longer a traditional debtor-creditor relationship; farmers and ranchers should consult with an attorney at Mesch Clark Rothschild to determine (a) whether their banker has crossed the line and (b) their potential rights and remedies.
For questions, contact me at irothschild@mcrazlaw.com.
