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Episode 23: Answering Your Questions About Credit with Holly Gates and Josh McBride

Farming costs can add up quickly. Fortunately, agricultural loans help farmers get the financing they need to start, expand or maintain their farming operations. In this episode of AgCredit Said It, our hosts get answers to frequently asked questions about credit from two of AgCredit’s pros in the industry, Holly Gates and Josh McBride. Together, they have over 45 years of experience in farm loans and bring unique expertise in lending for starting farmers.

Here are their answers and advice on common questions about credit for beginning farmers: 

Q: Does my credit score matter?
When most people think of getting a loan, they think of their credit score. However, Josh says your credit score is just one important piece of the pie when it comes to obtaining a loan.
“We’ll look at it to make sure it’s at least acceptable,” says Josh. “But I view the credit score as your history – a rearview mirror look of how you’ve managed your credit in the past.”
If you don’t have a credit score, Josh explains that “that can be a good thing because you’ve been able to operate without debt up until this point.”
What Josh says is more important: looking forward.

Q: Why are projections so important?
“We base decisions more on expected cash flows in the future,” states Josh.
Projections can be heavily weighted in a credit decision. In a credit analysis, projections show your potential earnings based on both historical earnings and any future changes you might make in the operation.

Q: What is the guarantee program?
To service starting farmers, AgCredit works with the Farm Service Agency (FSA) to offer loan programs such as the guarantee loan program. These programs are tailored to starting farmers.
“The guarantee program allows the lender to service the customer at their institution while the government guarantees the loan at a lower fixed interest rate,” explains Holly. “If there is ever a loss, the government is going to pay that loss.”
Josh relates that this is a benefit to both the farmer and AgCredit. “Any guaranteed loan we have on our books requires us to put less capital out to fund that loan,” says Josh. “In turn that lets us grow more will less capital and in the end brings us back more earnings that we can pay out in patronage.”

Q: What affects interest rates?
“At AgCredit, our rates are driven by the United States treasuries,” explains Josh. “As their rates go up, our rates are going to go up.”
Inflation is a driving force behind rate increases. “To fight inflation, the Fed can raise rates high enough that it will stop economic activity,” says Josh. “Until that happens, I think we’re going to see rates increase.”

Q: What is the Ohio Ag Link Loan Program?
As rates increase, a fixed-rate loan may be attractive to borrowers.
The State of Ohio offers a fixed-rate loan for ag producers called the Ohio Ag Link Program. AgCredit is one of the largest servicers of this loan program. Josh explains that it’s particularly beneficial as an operating line of credit for seed, fertilizer, chemicals, or any inputs.

Here’s a glance at this episode:

  • [05:39] Josh and Holly explain the structure of the credit department at AgCredit and what their day-to-day roles and responsibilities entail.
  • [09:30] As credit analysts, Josh explains that looking at a customer’s credit score is just “one piece of the pie” when it comes to obtaining credit or getting a loan.
  • [12:11] Josh explains why AgCredit is considered a cash flow lender, meaning that credit decisions are based on your expected cash flow in the future.
  • [13:09] Holly describes the loan request process and what the credit department looks for in certain scenarios.
  • [15:59] Having previously worked at the Farm Service Agency (FSA), Holly explains how AgCredit works with other farmer lending institutions and programs to offer borrowers the best solution.
  • [17:50] Holly explains what the FSA Guarantee program is and the benefits of this type of loan for young, beginning and small farmers.
  • [23:07] Holly gives insight on future government program funding in light of increasing land prices and interest rate hikes.
  • [26:01] Josh discusses the correlation between increased interest rates and inflation.
  • [28:50] Discussing fixed versus variable rates, Josh highlights the Ohio Ag Link Loan Program, which helps borrowers obtain a fixed-rate operating line of credit.
  • [32:51] Josh and Holly end with their best advice for young farmers to help set themselves up for success.

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Bios

Guest Holly Gates

Holly is a regional manager at AgCredit and has been with AgCredit for nine years. Her previous career was with the Farm Service Agency where she made farm loans for the federal government in Tiffin.

Guest Josh McBride

Josh is a regional manager for AgCredit and has been here for 12 years. He began his career with AgCredit as an account officer and worked in several different roles before becoming a regional manager. He also helps on his family farm in Hardin County.

Host Matt Adams

Matt serves Paulding County as an account officer at AgCredit. He has worked in ag lending for over four years and previously worked in farm equipment sales for 11 years. He and his wife farm in northwest Ohio with their two daughters and son. His favorite part about AgCredit is the people. From the member-borrowers to the internal team at AgCredit, every day keeps getting better. Matt hopes to bring insights into ag lending and some laughs to the AgCredit Said It podcast.

Host Brenna Finnegan

Brenna has been an account officer serving Lorain, Huron and Erie Counties for four years. She’s worked in the agricultural industry for over 17 years with experience in livestock production, specialty crop production, seed production, and processing/distribution. She grew up on a small family farm raising row crops and cattle. She currently has her own herd of beef cattle that she breeds and sells as show stock calves for 4-H and FFA members. At AgCredit, Brenna enjoys being able to work directly with the local farmers and especially helping young farmers achieve something that they didn’t think they could.

Transcription

Brenna Finnegan (00:08):Welcome to AgCredit Said It. In each episode, our hosts sit down with experts from all parts of the agriculture industry to bring you insights and must-have information on all things from farming to finances and everything in between.

Matt Adams (00:27):Welcome back to AgCredit Said It. I'm Matt Adams here today with Brenna Finnegan for today's episode.

Brenna Finnegan (00:32):Thank you everyone for joining us. We're looking forward to another good episode, aren't you?

Matt Adams (00:37):I'm always looking forward to this. I always tell people it's one of the perks of the job here is getting to do the podcast. It's been just great to get different information and topics out to our members and all the potential members out there listening.

Brenna Finnegan (00:52):Exactly. That's what we're here for, to get all that info out. So why don't you go ahead and introduce our guests?

Matt Adams (00:57):That sounds great. So today we're talking with two of AgCredit's regional managers, Holly Gates and Josh McBride. They're going to give us a little insight into the credit side of AgCredit. Welcome, Holly and Josh.

Holly Gates (01:09):Thank you, Matt. Thank you, Brenna. Happy to be here. I talked my counterpart into joining us today.

Josh McBride (01:19):Yeah, thanks a lot for having us and I've always been told since I was a little kid that I got a face for radio, so I'm looking forward to this.

Matt Adams (01:25):Well we are very delighted to have you guys here today.

Brenna Finnegan (01:29):Yes, thank you for joining us. Let's start with having you guys both introduce yourselves, your roles here at AgCredit and how you got into those roles here.

Holly Gates (01:39):So I'll start. My name again is Holly Gates. I am a regional manager. I've been here just shy of nine years at AgCredit. I came right into the role as regional manager, but for 28 years before I arrived here I worked for Farm Service Agency doing pretty much the same job that a branch manager would do here. I was a farm loan manager and made farm loans for the federal government.

Matt Adams (02:11):How many offices did you oversee when you were with FSA, Holly?

Holly Gates (02:14):So originally I was farm loan manager for Tiffin. I covered four, then six counties at that point. And then a counterpart had retired in Defiance and more or less, they asked me to take over that office as well. So before I left to come to AgCredit I was taking care of 12 counties in northwest Ohio.

Matt Adams (02:39):Oh wow. And I'm sure with that time you've seen a ton of changes in the farm loan system, where just on the FSA side, and here at AgCredit as well.

Holly Gates (02:52):Yeah, when I first got hired, I came to farm lending shortly after the crash in the eighties. I started December 1985.

Matt Adams (03:03):Right in the heat of things.

Holly Gates (03:05):Yeah, I wasn't here for the actual crash, but I was here for the cleanup. So probably for the first 10 years of my career, we worked on distressed accounts, restructuring accounts, and trying to keep customers on the farm. For the last 15 years, I was at Farm Service Agency. We worked more on beginning farmer-type loans. So we were really considered a lender of the first opportunity at that point, instead of the lender of last resort that we used to be in the eighties.

Matt Adams (03:42):And I think that's one thing to note, we'll get into that deeper here on this episode, is a lot of different programs that we utilize as AgCredit to work with those young producers and working hand in hand with the FSA.

Brenna Finnegan (03:56):So Josh, go ahead. Why don't you tell us a little bit about yourself?

Josh McBride (03:59):Yes, of course. My name's Josh McBride. I've been here at AgCredit for 12 years now. I've had a few different positions. I started as an account officer, went to a credit analyst and now I'm in my current position as regional manager. So seen a little bit of everything here at AgCredit. I was born and raised in Hardin County on a family farm, and I still live there today and help out on the farm. So it's in my blood, whether it's at my day job or my evening job.

Matt Adams (04:28):And Josh, you are recently a new parent. How old is your young one now?

Josh McBride (04:35):Yes, Spencer, he's 14 months actually here in a couple of days. So he's walking, just starting to talk, saying few a words.

Matt Adams (04:44):That means you have to have everything up about a foot above his level so he doesn't get everything off the shelves and every cabinet.

Josh McBride (04:52):He's already big enough to open doors so he's figured that out, and we got to lock everything at this point.

Brenna Finnegan (04:58):Yours is about the same, isn't he?

Matt Adams (04:59):Yep.

Brenna Finnegan (04:59):13 months.

Matt Adams (05:02):He just turned a year at the beginning of October, so he became pretty mobile. You turn your back and he was climbing the stairs, so now I got to go hunt up the gates of the stairs and it's pretty entertaining. It's also nerve-wracking, too.

Josh McBride (05:19):And I'm sure if yours is like ours, he loves combines.

Matt Adams (05:22):Oh yeah.

Josh McBride (05:23):Love riding the combines.

Matt Adams (05:24):First harvest, so he got his first combine ride and literally would not come out. Usually, he goes right to his mom's arms when he sees her, but he wasn't leaving the equipment. So it's kind of a proud dad moment. I'll say that.

Josh McBride (05:38):That's right.

Matt Adams (05:39):Well guys, so one of the big questions that I get as an account officer talking to new members, and even our current long-term members, is when we talk about where a loan request is at and we're working with our credit department, so what's all in the AgCredit department for credit? So tell us a little bit about that credit department here at AgCredit, how we're structured and what the purpose is.

Josh McBride (06:09):I can start on and handle that one. To give you an overview of the structure of our credit department. So we have our chief credit officer at the top and then below them, Holly and I, we actually have five now, but one is retiring in less than a month. So after that, we'll have four regional managers who cover all the branches.

Josh McBride (06:27):And then from there our job is to help the branches with credits over a certain size amount. So anything that gets submitted to us, we'll review the credit package to make sure we're helping the customer as much as we can help and also protecting our risk to that credit. So that's what we look for. I know Holly may want to add some.

Holly Gates (06:50):Sure. We do things by talking to the account officer about interpreting the policy that the chief credit officer has written. All credit policies do have to get approved by the board, but sometimes they're written where you have to talk through some of those situations.

Holly Gates (07:11):We also collaborate with the account officers, try and come up with some creative solutions for your customers, whether it's on a loan making, a new operation they want to get into, or maybe it's on the servicing side where they're struggling and we help to see if there's something we can do to restructure the package to make the payments easier for them to make. We’re also out at our branches pretty regularly, so we're out making farm visits, helping the offices feed the farmers. The last few days have been going out to the elevators, we're delivering lunch, and at the Tiffin offices I’ve been frying up hamburgers and hot dogs as customers come through the elevators. So those are some of the things that we do as regional managers.

Brenna Finnegan (08:02):Whenever the regional manager shows up, we all end up with food somehow. Whether it's breakfast or lunch or something.

Josh McBride (08:09):We have to stay on your good side.

Brenna Finnegan (08:11):Yeah, exactly.

Matt Adams (08:12):And I think that's one great thing Holly brought up to note. We have our regional managers, part of the credit department, they do go out and meet our members, see the operations out there, and really get to know the different operations. I am sure both of you can attest from the different areas you cover there's probably a lot of diversification in the different operations you see.

Holly Gates (08:34):Yes. So I cover Tiffin, Findlay and Van Wert and I would tell you it's night and day between the type of operations you have in the Van Wert, Paulding area. I think if you don't farm at least a thousand acres, that's a small customer. Whereas if I have a thousand-acre farmer in Seneca or Hancock County, that's a large customer. So definitely I see some variances in my offices. How about you Josh?

Josh McBride (09:03):Yeah, absolutely. I tell people that's one of the benefits of our job. One of the perks is we see a wide array of requests and operations, and we compare and contrast. It is good to see and go visit those members, whether it's livestock operations to large cash grains to ag businesses. We see it all and it is neat to see all those different types of businesses and how people manage those.

Brenna Finnegan (09:30):Now when it comes to a credit being really complicated, meaning entities involved, multiple family members or other non-family members, obviously you guys help us to completely pick it apart and go through and make sure we have everything aligned with where it should be within the package, correct?

Josh McBride (09:49):Yeah. So when most people think of credit or getting a loan, they're going to think of their credit score. If I got a good credit score, I can get a loan, which is how it works if you go buy any type of vehicle or any smaller request. The request that we're looking at, we'll look at the CBI score, but that's only one piece of the pie. We got six or seven pieces of the pie that we're trying to put this puzzle together to make the best decision for the customer and for AgCredit. Because the last thing we want to do is set the customer up for failure in the end. So we want to make sure everything's accurate and correct. So we'll take a deep dive and we'll spend quite a bit of time on large credits to make sure we're doing the best for everybody.

Brenna Finnegan (10:29):I might go off our script a little bit maybe, but if somebody looking at their credit score, a lot of banking institutions really look at that as their history of timeliness.

Matt Adams (10:43):Their timeliness and are they delinquent on a lot of stuff.

Brenna Finnegan (10:48):Correct.

Matt Adams (10:48):And I think that's one piece but yeah, I think a commercial bank probably looks at that a little more than we do. Josh, can you tell us how that looks on it when we start reviewing something?

Josh McBride (11:03):Yes, you're right. Commercial banks do look at that more than we do. I take the view of the credit score, that's your history. So that's in the rearview mirror of how you can manage credit in the past, that has nothing to do with the future. So we'll look at it to make sure it's at least acceptable, even if there's no credit score because you've had no credits, we don't look at that as a bad thing. I look at that as a good thing because you've been able to operate without debt up until this point. So from that point then we'll do our own manual underwriting, to get a good grade on credit and make sure everything's good to go.

Brenna Finnegan (11:38):Well, it's like looking forward. We take projections. We're very heavy on projections when we look at credit analysis and looking at the future of what the capability of that purchase will do for the operation. I think one thing that people neglect to comprehend or understand fully is that we are looking toward the future. When you buy a piece of land, obviously you're going to do something with it, then you make the money to make your payments and things like that, not have everything in the past support it.

Josh McBride (12:11):Correct. So we call ourselves cash flow lenders. So we base our decision more on expected cash flows in the future. We want to make sure it's going to be positive. There are some out there that are collateral lenders and they'll say if you got so much dirt, I don't care what the earnings are, we'll lend you money. But we're not that way here. As I said, we want to do what's in the best interest of everybody involved.

Matt Adams (12:32):And I think that's one thing that we take pride in as employees at AgCredit is looking deep into the credit packages for every member to make sure we're making that right decision for the operation. I've told some members, and I'm sure everybody at this table has, that just because we might be able to do something sometimes it might not always be the best decision long term for that operation. We're a relationship lender, we want to be that team member for you. Don't look at us as just the person you call when you need money. We want to be there every step of the way for you.

Matt Adams (13:09):So going in a little deeper, taking it step by step, I, as an account officer have a new member. We've got a loan request on the table. We're ready to send it to our credit analyst and up to the credit department. So when it hits your guys' desk, what are the steps then to get the answer to the member?

Holly Gates (13:34):So as Josh touched on, the account officers or the credit analysts are putting together a projection and that projection is going to be based on their historical earnings unless you're going to see a big change. So if they're taking on additional ground or if they're purchasing additional ground, we're not going to look just at the historical trend, we're going to see what that does if you add the additional farm. We do look at changes in the operation, such as if they're taking on an additional farm, if they are adding a new enterprise to the operation. We have a lot of contract livestock buildings up here. So we see those pop up periodically. We also look at what kind of capital purchases they purchased last year. Did we pay cash for those? Did we finance that? If we financed it, we want to make sure we include that in the projection.

 

Holly Gates (14:40):We also look at if they're carrying any open accounts or things that couldn't be serviced from last year. That's going to show up as an indication in your working capital if you have positive cash or not.

Matt Adams (14:56):And open accounts, Holly.

Holly Gates (14:57):Correct.

Matt Adams (14:57):We're talking more along the lines of we have a local co-op that the farmer deals with, just like an open feed line or chemicals or something like that. Nothing that's really a term loan, as much as something that's just hanging out there that usually gets paid for with the year's harvest.

Holly Gates (15:19):Correct. It can be 30 days usually, but if it’s seed they'll give you until the end of the year zero interest. So those are things that we're looking for. Usually, that's unsecured debt that's showing up as a current liability. So those are some of the things we look at. I don't know if Josh has more he wants to add to that.

Josh McBride (15:41):Yeah, I agree you covered most of it and what we'll do once we have all that information, we'll put the pie together and at the end of the day then that's where our job comes in. We'll decide one way or the other if we want to make changes, approve as is or send it back for more information.

Brenna Finnegan (15:59):Now one thing as an account officer, I think our job is, one, obviously working face to face and one-on-one with the borrowers, but also searching for other solutions to make something work or get the job done. But we also work a lot with FSA. So you mentioned that you worked there before. How do we go about working with FSA to make a deal work with somebody?

Holly Gates (16:31):So they have quite a few programs. Over the years we've utilized their guarantee program to a huge extent. We can talk about that in a minute why we use their guarantee programs. But the FSA also has some low-interest, longer-term loans for purchasing real estate, and making improvements to real estate. So we've utilized those programs as well where we're going to lend a portion of the funds and the FSA is going to loan a portion of the funds, say at one and a half or two and a half percent fixed interest rate.

Holly Gates (17:11):It's a win-win for the customer. He gets that lower fixed interest rate. Usually, we obtain a guarantee on those loans. There is no fee for those guarantees. So we try to utilize as many programs that are available under FSA, and they continue to put more opportunities out there. They've got some microloan programs, they can do down payment-only type loans on their direct as well.

Brenna Finnegan (17:42):Go ahead and explain a little bit about what a guarantee is, and why we would be focused or try to obtain one of them.

Holly Gates (17:50):Okay, so the guarantee program was probably established as a response to what was happening in the 1980s. In the eighties, we had the farm crisis. FSA was Farmer's Home Administration at that time. They had economic emergency loans and emergency loans which were at a lower interest rate, trying to bail out farmers from some of the higher interest rates that were going on at that time and keep them on the farm.

Holly Gates (18:24):But unfortunately those come at a cost to the public. It costs a lot more money to service those direct loans than it does a guarantee. So the government established the guarantee program, where the lender could keep the customer at their institution, but the government is guaranteeing it, if there's ever a loss the government's going to pay that loss.

 

Holly Gates (18:53):So it's attractive to us because we have that backing from the government, but it also helps us keep the customer here. The guarantees can also be used to offer opportunities, whereas we might not be able to do it because of the amount of funding they need it might be higher than what we can loan under our policies, but with a guarantee on that, we can offer him the higher loan amount as long as the government's guaranteeing it. So there are some good opportunities there for both lender and the customer.

Matt Adams (19:33):So Holly, with FSA guarantees really on the AgCredit side, for one, it's a tool used for that member to tailor that loan to the best we can for them, it's also mitigating the risk for the association. By mitigating that risk, how does that in turn affect the association when we start looking at, since we are a cooperative, how in a whole that reflects onto us?

Holly Gates (20:00):I'm probably going to let Josh explain this one because he's probably more the expert on the mitigating because it's helping us with our capital.

Josh McBride (20:09):Yep, sure. Yeah, so the FSA guarantees, I will put a plug in for, so we believe in them so much that we are the largest guaranteed lender in the country. So I think that's something that should be said there. We have pushed them for a lot of years now, but one of the big reasons it helps us is it helps us leverage our capital. So any guaranteed loan we have on our books requires us to put less capital out to fund that loan. So then in turn lets us grow more with less capital and in the end brings us back more earnings that we can pay out in patronage. So that's the big benefit for AgCredit as well as helping customers where we couldn't make the loans without it. It does help, especially those small YBS-type farmers.

Matt Adams (20:55):And I think that's one of the big things that we touch on. We look at us, what we call our AgStart guys, our YBS farmers, there are a lot of good programs out there to utilize. Because in today's agriculture it's a battle if you're a young producer trying to get started. So anything we can do to help them with, like Holly said, whether it be a down payment program through the FSA or even their direct partnership loans. I know I've done a good number with them, with the FSA office I work with on just helping that operation get started.

Matt Adams (21:32):One thing I always tell our AgStart guys is I hate to drain the operation of all of its cash right away just to do the first farm loan. So anything we can do to make it easier for them to get started. The programs are out there and they're out there for a reason. So, Holly, we talked a lot of this came from the 1980s and the farm crisis, when we look at today and how these programs are utilized, do you see any changes in the future, we're talking about a new Farm Bill coming up and FSA USDA gets all their funding from the Farm Bill. Do you have any insight or know anything that's going to be happening in the future with that? I mean, will the programs as far as you know still be intact for the foreseeable future?

 

Holly Gates (22:22):Yes. I don't anticipate any changes there. We have talked recently to some of Ohio's Farm Service Agency, and they're confident that those programs will continue as is. And with land prices the way they are today, as an example, the down payment farm ownership loan that you mentioned, that's a 5% down payment. 50% of the funding would come from us on the purchase we have to write that loan for a term of 30 years. Then the other 45% comes from Farm Service Agency on a fixed interest rate of one and a half percent. Theirs is a 20-year repayment.

Holly Gates (23:07):You can't get that at any other lender. Nobody's going to be able to offer you that one and a half percent, they can do all of it, but if that customer can get a portion of the funds from another lender, they have to go that direction. So it seems funding with the FSA is good these days. I know that I'm on a committee with Farm Credit Council that we're trying to continually increase, see if we can get their loan limits increased, hopefully with land prices, with farming operations where they've grown to these days, the government keeps up and increases those limits.

Matt Adams (23:53):Yeah, and I think it's when you look at our industry in the last two years where we've talked about how it's the great land grab. Now within the last eight months, we look at what our interest rates doing and I think utilizing these programs and taking advantage of that for our members is going to be something for the foreseeable future that we're going to continue to do for, and it's going to be a huge benefit to not only our members but the association as a whole.

Holly Gates (24:22):True. I did want to mention our ag business department does utilize USDA's other guarantee program, which is under role development. Josh might be able to touch on that a little bit.

Josh McBride (24:37):Well, they do use a couple of different programs without going into specifics. They're similar to FSA guarantees, they just work a little differently, with little different fees and different guarantee percentages based on the loan amount. But yeah, yeah, we'll utilize, we'll do whatever we can for the customer to help them out any way possible. So we'll look at all options.

Matt Adams (24:55):And I think one thing, and we've talked in the past on our agribusiness side, we deal with some very large, I always hate to use the term commercial operation anymore, because a lot of our operations, even though it's a family operation, commercial operation, these operations are extremely large. I know we have some large greenhouses and daires. So different programs to fit the parameter of that business. Well, that's a lot of great information. We're going to take a quick break and we'll be right back on AgCredit Said It.

Voiceover (25:31):If you are a young beginning or small farmer looking to build or purchase a contract barn, contact your local AgCredit branch about the AgStart program. We all start somewhere. Start here. Learn more at agcredit.net.

Brenna Finnegan (25:48):So welcome back, we are still here with Josh and Holly talking about... Well, right now we're going to go into rates-

Matt Adams (25:56):And the big thing that we've had, everybody's talking about I guess you could say.

Brenna Finnegan (26:01):Our favorite conversation these days –  interest rates, we all know that they are high, recently just increased again. Can you guys help explain some of the driving forces behind that?

Josh McBride (26:15):Well, that's a loaded question. How much time do we have here?

Josh McBride (26:20):No, I'll give the basics of what's driving our rates. So at AgCredit, our rates are pretty much driven by the United States Treasuries. So as they go, our rates are going to go. They won't always follow one-for-one, but they'll be close. And here this year, I know everybody's aware, the Feds seems like every month it's raising rates. So as they raise rates, our rates are going to raise pretty much, they're going to follow it pretty close I guess is what I should say.

 

Josh McBride (26:47):What's causing the Feds to raise rates? That's the trillion-dollar question. But basically, they're trying to fight inflation and the way they're going to fight inflation is to raise rates high enough that it stops the economic activity. So until that happens, I think we're going to see rates increasing here for the foreseeable future in the next year.

Brenna Finnegan (27:07):So, within our offices, the expectation, in quotes, is that traffic coming in requesting loans or funds or anything like that is going to technically decline in the foreseeable future.

Josh McBride (27:24):Yeah, I think at some point the Fed's going to get its wish and economic activity is going to slow down. Now a lot of times the ag economy works the inverse of the regular economy. So a lot of times when the regular economy goes down, the ag economy will go up or stay up. So it'll be interesting to see what happens here once if we do go into a recession. But in that case, at some point, high rates are going to take a toll on ag as well.

Brenna Finnegan (27:56):Now looking at underwriting purposes, these high rates, looking at a package that we may have closed, I guess a year ago at this time, would've been truthfully an ideal time to purchase something in comparison. So you have the same amount of funds going out the door, so just say 100,000 dollars to make it simple. In comparison, what effect does that interest payment that would be due affect the full package?

Josh McBride (28:26):It can have a large effect, depending on the size of the operation and how much they rely on credit interest rates doubling or going up 2-300% in a year. It could have a serious impact. We've been blessed the last couple of years with high commodity prices, so that'll help offset some of the cash flow issues. But in the future, if they drop down, these increased interest costs could hurt some people.

Matt Adams (28:50):So Josh, I know through a lot of the meetings you're part of within our district and within the association, we start talking about our rates and different things we're looking to do to help our members try and head off this with anything that we can do, we use two rates. Here we have our fixed rate and our variable rate program. Are there any programs out there that we're currently looking at and using to try and work on these rates?

Josh McBride (29:25):Yeah, Matt, that's a good question. The fixed rates we're at the mercy of the market. What that is, there's not much we can do. As far as variable rates though we do have a program that the State of Ohio offers, it's called the Ohio Ag Link Loan Program that we can offer members, which will help fix some of their variable rate operating lines of credit.

Matt Adams (29:48):Got you. And when we fix that line for our members, Josh, how long a term is that?

Josh McBride (29:55):Yeah, so that program, it's for 12 months. So our lenders will apply for the Ohio Ag Link Loan Program and once it's approved and funded they'll have a fixed rate for 12 months up to a maximum of $500,000 loan amount. And that program is administered by the state of Ohio and it's to help ag producers. They've done this for a number of years now. So it's a big benefit for our state.

Matt Adams (30:25):And especially, I think, in this turmoil market we're in where this is going to benefit a lot of our members. And also I think it's going to strengthen the association too by helping back off on some of these variable rates a little bit and keeping more money in the pockets of our members to keep growing.

Josh McBride (30:50):Yeah, absolutely. We've been using this link loan program now this year. They changed it from prior years where we can apply every quarter. And I know some of the ones that got locked in earlier this year, they're saving a significant amount of money.

Brenna Finnegan (31:04):2% right now.

Josh McBride (31:04):

Yeah, over two. It's probably towards three with this recent Fed hike.

Matt Adams (31:09):And I think it's one thing to note too, not all lenders utilize this program, correct?

Josh McBride (31:17):That's correct. I know we are the largest user of it this year, especially. Some commercial banks use it, but a majority do not use the program.

Matt Adams (31:26):So you get that personal invite to the governor's mansion then and stuff like that.

Josh McBride (31:31):I'll send you a copy of that once I get that invite, Matt.

Brenna Finnegan (31:34):So essentially what we're doing is taking one loan, breaking it into two loans, but shifting the funds and whatever's drawn on it from the first primary loan over to the second one and leaving the first one as it's just there, open, and waiting for it to shift right back over to the other side, right?

Josh McBride (31:57):Correct. Yes. At this point, we got no product where we can fix a member's operating line of credit that they'll use to buy seed, fertilizer, chemicals, or any kind of inputs. So this link loan program will fix that rate at a discounted rate for 12 months, and that's the benefit. So a lot of members at our institution and a lot of banks will get these every month. They'll get in the mail, your rates going up, these little flyers, and this will help alleviate some of that pain when you get that in the mail.

Brenna Finnegan (32:28):So obviously the higher the limit on the operating line, there's a lot more, I'm not going to say there's a lot more benefit, but it benefits everybody exactly the same, but it's just at a different degree, which is a representation of the operation in the first place.

Josh McBride (32:42):Yeah, correct. Even a small loan, if it's a small operation, that little bit of saving's the same as a big operation with a big loan. So yeah, we're trying to help anybody we can.

Matt Adams (32:51):Just another tool that we can add to our member's toolbox basically, just another benefit of being part of the association. So do you guys have any advice for young farmers to help set themselves up for success and put them in a position to grow in the future, especially with these times with high-interest rates?

Brenna Finnegan (33:13):I'm going to take a shot in the dark and say keep the cash.

Holly Gates (33:18):Yeah, my first comment would be patience. Opportunities will arise when things aren't quite as high as they are today. That's my first recommendation. My second recommendation would be to take advantage of some of the programs that are available at Farm Service Agency. So if you are going to purchase a farm, if you're going to put up a livestock building, do any kind of an improvement, seek out your local FSA office, and talk to one of the farm loan teams to see if you're eligible for their programs.

Holly Gates (33:52):And the other one that I had, working at FSA for years, was the recommendation to my customer I'm going to do some penciling, but it would be good if you sat down, penciled out the purchase, you do the projections, if you can afford to do it and if it makes sense to you, then approach your lender. But if penciling it out, it doesn't look like it makes sense, maybe it's best to wait.

 

Matt Adams (34:20):It's that the old gut check, write it down and if it doesn't look good to you, it's probably not going to look good to anybody.

Holly Gates (34:27):Correct. Do you have some recommendations, Josh?

Josh McBride (34:31):Yeah, I agree with the patience. It seems like a lot of times in today's world everybody wants stuff now, now, now, but…

Matt Adams (34:38):Especially in our industry where we are moving at such a fast pace in the ag industry.

Josh McBride (34:44):Correct. And so patience, I would stress that. The other thing I would stress is to don't over-leverage yourself right out of the gate. We see that quite a bit where if you strap yourself too tight it can take you years to recover, versus holding out and growing more at a steady pace than trying to grow all at once.

Brenna Finnegan (35:04):Talking about that, an example of that would be we have somebody that comes in, we do an FSA guarantee for them on our loan, but then in two years they want to put up another barn, or buy another piece of equipment or whatnot. How difficult does that make that?

Josh McBride (35:20):That makes it tough. It all depends on cash flow, but as Holly said, it'd be best if they had sat down before they bought that farm and say, "Okay, if I buy this in two or three years if something else comes up, what chances will I have of being able to do what I want to do then?" So I would challenge them to put the pen to paper themselves and make it a true budget. Everybody likes to think their budget's better than it actually is.

Matt Adams (35:47):I can remember just hearing some stories from talking to other lenders and stuff where you'd have some of the old guys say, "Well, what balance sheet do you want to see? The one with the real numbers or the one with the numbers I want to see on there?" And I think as account officers working with our members, that's I feel one key advantage that we have is sitting down and working those numbers with members, really getting that true snapshot of the operation and seeing exactly where we're at. Because like you guys said, at the end of the day, we want to make the best decision we can for that member and we want them to grow. We want to keep coming back and we want to see this operation succeed for not this generation, but then the generation after that.

Brenna Finnegan (36:41):Matt, it's all about education and that's part of our job.

Matt Adams (36:43):That is right.

Brenna Finnegan (36:45):So that would be something that we would recommend is call your AgCredit office. I mean, whether we can help you, whether we can guide you to FSA or we do a joint venture with them. That's the whole point and that's why we're here. We want to help people grow, but most of all, I think we want to educate people along the way regarding money and money management and things like that.

Matt Adams (37:09):Well, Josh, and Holly, I want to thank you guys today for being guests on Ag Credit Said It. If you guys have any questions for our guests or any questions as a whole, please don't hesitate to email us or look us up on our website, www.agcredit.net. And make sure if you got any questions, call your local office if you're close to one. And also if you have any questions on FSA programs or FSA guarantees, definitely get on their website. You can look up your local office, they'll have a number you can call and they'll be able to help you out every step of the way.

Brenna Finnegan (37:51):So, thank you for listening today. Please leave us a review if you're enjoying the podcast so that others can find us. We'll talk to you soon.

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