The Organic Broadcaster

Published by MOSES—the Midwest Organic and Sustainable Education Service

November-December 2004; Volume 12 Number 6
http://www.mosesorganic.org/ob/needaloan.htm

Need a loan? Help your banker say 'yes' to organics

by Caroline van Schaik

"Going organic comes with a change in how you do your business. And we are business people," said organic dairyman, John Bedtke during a field day he and his wife, Donna, hosted this past summer near Plainview, Minnesota. Backed by blue sky and fields of grass, Bedtke gave a characteristic pause, then added, "We have to learn to make decisions about what's really profitable. And it's not just measured by money but by the family as well."

Does this tone resonate in a bank, where a farm is business and profit the sole bottom line? It begins to sum up what 260 farmers said in a survey coordinated by the Land Stewardship Project (LSP) in 2002 on the subject of credit. As to the bank, a companion survey of agriculture lenders in Minnesota and Wisconsin found an undertone of skepticism backed by a poor level of understanding of organic and sustainable farming.

In fact, while surveyed lenders recognized the potential especially in organic production with a professed open-mindedness to financing it, the welcoming attitude isn't getting across to six in 10 farmers. Furthermore, a closer look at the comments of 195 responding lenders showed a conflicting outlook on the future of farming, different loan criteria for new farming practices, a bleak or uninformed sense of the profitability of such methods, the strong likelihood of unhelpful loan thresholds, and little hope in the future of new farmers.

But if a trip to the bank is in store for you, also be prepared for some interest, maybe even a little enthusiasm. Most of the responding lenders were raised on farms and said they were open to financing beyond the world of corn and confinement hogs. Most have an academic sense of what sustainable farming is about, though one in three lenders acknowledged they don't actually know enough to have an opinion about its potential for profit. Depending on how you ask, 95% of them will tell you that this type of farming is here to stay and grow. About half indicated good relationships with sustainable farmers and a third said that conventional and sustainable farming were competitive, dollar-wise.

The Survey
No magic wand, these glimpses into what agriculture lenders think and know about farming with multiple bottom lines nevertheless highlight strategic points of entry for the next time you need to pay one of them a visit. They come as a result of three targeted surveys sent by mail and email to 1,550 sustainable farmers, agriculture educators, and agriculture lenders (www.landstewardshipproject.org/pdf/edsurvey.pdf). Each survey had 27 to 37 pointed questions about record keeping and record requirements, loan thresholds, bank and farm terminology, banking and farming practices, the future of farming, and demographics. The goal, then, was to unveil and substantiate some of the ideas these groups have about farming and lending as each relates to sustainable production.

Major partners in this work included Extension, Farm Business Management/Production (FBM/P), and the Farm Service Agency in Minnesota and Wisconsin, Independent Community Bankers of Minnesota, Wisconsin dairy farmer-members of the Coulee Region Organic Produce Pool, and Minnesota farmer-members of Pride of the Prairie and LSP. Follow-up round table discussions were held in both states.

LSP and partners are now pursuing a host of education and outreach activities to address the quantified needs of 567 survey respondents for 1) exposure to sustainable farmers and enterprises; 2) record-keeping and written business plans; 3) databases of sustainable farming/marketing financial numbers; and 4) common ground on the topic of profitability.

What now?
What have we learned from the surveys, which presented themselves as the obvious route by which to quantify the anecdotes, complaints, and accusations that plague so many conversations related to credit within the sustainable agriculture community? Or more to the point, what can farmers do more or less or differently if a fruitful relationship with a banker is the goal? With the usual caveat that past performance is no guarantee of the future, here are some of the common (but worth repeating) and uncommon lessons from the surveys to ponder as you mull over next year:

• Write business and marketing plans - Lenders told us that just one in six agriculture loan applicants supplies a business plan and one in seven comes armed with a market plan. You can be that one. A lender will look twice at these very comforting documents, even if you are proposing something well out of his/her realm of experience. And yes, "they are worse than doing taxes!" as one beginning vegetable grower put it before she marched into a bank with her plans and out again with her loan.

• Keep records to substantiate your convictions - Lenders want balance sheets, income statements, and cash flows for at least a year down the road and two, often three years back. While the majority of responding farmers attested to the profitability of their endeavors, just 21% kept whole farm and enterprise records to prove it and a full third of them only kept records for tax purposes - lenders said these count, but just for starters!

• Enroll in a record-keeping course - It shows good faith effort especially in the face of poor records on your part, and in some cases (with Farm Service Agency, for example), it may be required. There are state grants and scholarship opportunities to defray the cost but no amount of free money could compensate for the learning of a good ledger system for your farm. Note that as factual a subject as this might seem, it is riddled with the complications of farm philosophy; shop around for a program and instructor that suits you.

• Bring a sales contract - More than half the lenders said this is especially critical for an unconventional enterprise, as it helps allay fears of new or uncertain markets.

• Proof of management skills - Get comfortable talking about your ability to manage what you propose doing. Provide documentation, no matter how seemingly inconsequential - what you have accomplished in a related enterprise (herd health report, books kept, staff overseen, pounds of cheese sold, brochures designed, paddocks designed, problems solved, etc.), the research you have done to learn about this new endeavor, internships and mentoring situations, etc. It may feel boastful, but lenders can't read your mind; you have to convince them you know what you are doing. Evidence of management skills (along with marketing/business plans and confirmed markets) were additionally required by more than half the lenders. These are unfamiliar enterprises and therefore a risk, much like livestock or sugar beet enterprises, lenders explained at the round tables. "Lenders don't discriminate against sustainable farmers," said one banker, "but if it's new, we need to know a little more." Of course, the standard cash flow, equity, and credit concerns have to be satisfied by all applicants, lenders said.

• Bring case studies with the numbers - This appeals to some lenders. They can help you if you don't have much of a track record
yourself because you are new, transitioning, or didn't catch on to record keeping until recently.

• Market prices, input costs, enterprise productivity - components of a business plan, these documents were deemed "very useful" by lenders reckoning with an unfamiliar enterprise. Only 2% of responding farmers said they kept enterprise budgets. There is a small but growing pool of data to support unconventional production and marketing systems; bring some along to build your case or be prepared with a reference to help educate your would-be lender.

• Invite a lender to a field event - Lenders considered themselves simply uninformed rather than biased against sustainable and organic production. Given that 75% of them hadn't been to a sustainable agriculture field event or workshop in the past five years; that a principle source of information for them is Extension, half of whom also were not current with sustainable and organic practices up close; and that most responding farmers were not satisfied with the relevant knowledge of their lenders, this indeed rings true even if it is not the whole truth.

• Broaden their horizons - Most lenders said that farming publications serve as a major source of information on sustainable agriculture is. Provide your banker with a subscription to your favorite one(s); the odds are high s/he is not reading the Organic Broadcaster, Acres USA, Graze, or the Organic Farming Research Foundation, for example.

Clearly, a mixed sense of optimism prevailed among surveyed lenders and some gray area persists in whether or not what sounds like bias is a fixable lack of education. Lenders say it is their responsibility to learn about what their customers want to do. Not all farmers are seeking credit but those who are can put this willingness to the test. Regardless of your motive, records, research, and articulation of your goals are sound strategies for better delineating what and why you are farming. This, then, is your window of opportunity—hardly flung wide but enough to walk on through!

Caroline van Schaik is a program organizer for the Minnesota-based Land Stewardship Project, having coordinated the initial "Surveying the Gaps" project and presently heading up the followup "Smarter Farmers, Smarter Lenders" work in which business planning and outreach to the lender community are being pursued. She can be reached at LSP's Lewiston office, 507-523-3366, or caroline@landstewardshipproject.org.

©2004 Midwest Organic and Sustainable Education Service

 

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