Center for Community Self-Help
Capital Access: Creating a Continuum of Financial Services for Alternative Agriculture in North Carolina

In the executive summary presented as part of a grant request to the North Carolina Tobacco Trust Fund Commission, the Center for Community Self-Help wrote of the need for “a sympathetic and well-functioning system of debt finance” to help tobacco farmers transition to new crops and new enterprises.

“Over the years,” the summary reads, “financing institutions have evolved to serve the needs of large-scale commodity agriculture in this state. Lenders have been comfortable serving this cohort of farmers, but they are ill-prepared to serve the new challenges of a transitioning tobacco economy.”

“North Carolina is fortunate to have a number of lending institutions committed to small- and medium-scale agricultural farmers,” says Brian Schneiderman, Self-Help’s director of Real Estate and Facilities Lending. “However, through our research initiative called Funding the Harvest, Self-Help recognized that with changing agricultural business opportunities, farmers looking to more innovative and entrepreneurial products don’t always fit easily within the parameters of traditional lending.

“We saw that these lending institutions, while wanting to support these entrepreneurial farmers, don’t always have the in-house resources to make the deals happen, to do the due diligence and to help farm entrepreneurs find the technical assistance they need.

“So we came up with the idea of a thorough-going process to get everybody on the same page and to solve this problem.”

Self-Help’s proposed project – titled “Capital Access: Creating a Continuum of Financial Services for Alternative Agriculture in North Carolina” – was designed to help both farmers and lenders break through this barrier. The Tobacco Trust Fund acknowledged the urgency of such an effort, and the funds were granted.

The project steering committee has now produced two excellent documents – “The Farmer’s Guide to Agricultural Credit” and “Farmer and Lender Project: Strategies to Sustain Agriculture and Enhance Rural Development in North Carolina” – both researched and written by the Rural Advancement Foundation International (RAFI), who was enlisted as a subcontractor. These documents are testament to the worthwhile nature of this undertaking.

Defining the barriers

The mandate of this project was to examine the underlying factors limiting farmers’ access to capital for viable, new enterprises and to develop realistic strategies to address those limitations. Successful farm entrepreneurs, lenders, nonprofits, the banking commissioner and his office and North Carolina Cooperative Extension agents met regularly to explore ways to meet the needs of both the lending community and entrepreneurially inclined farmers.

As the executive summary of the “Farmer and Lender” document would later state: “Capital is as necessary a tool for farmers as a tractor or a harvester.”

“Really the most overwhelming impression I had [in planning for this project] was of the amount of anecdotal evidence that RAFI had collected over, at that point, nine years of grant-funded projects,” says RAFI’s John Bonitz, co-author of both of the aforementioned documents.           

“It became very clear that there were some real successes over that timeframe with farmers launching innovative new enterprises. But many of them – in fact, most of them – had challenges when it came time to ramp up the enterprise, either to a level where it could become a fulltime income or where it could be an enterprise where the spouse could stop working off the farm and could stay home and work – or even further expansion or growth from there.

“We hadn’t really known enough though about finance, and what ag lenders were looking for, to say precisely what the biggest barriers were and why they were being encountered.”

The project team’s initial meetings focused on gaining a better understanding of the issues and analyzing the challenges that North Carolina farmers face.

“So many farms are being lost,” says Bonitz, “and that’s an awful lot of talent that has to find something else to do.”

Keeping that talent on the farms was the bottom-line objective of this project.

Jason Roehrig is program director of RAFI’s “Tobacco Communities Reinvestment Project” (another TTFC-funded program), and was also Bonitz’s co-author of the two publications produced for this project. He says that it only cost the Tobacco Communities Reinvestment Project about $1,800 per farm job retained through development of new farm income sources.

“If North Carolina’s farmers don’t make the transition to high-value alternatives, then rural North Carolina is going to lose a bunch of jobs that we already have,” says Roehrig. “Every farmer working and earning a living on the farm is a farmer who is not competing for rural manufacturing or big-box retail jobs. Creation of those manufacturing and retail jobs at the expense of our existing industries doesn’t make sense.”

A major revelation

In the next stage of meetings, lenders on the steering committee explained how they go about evaluating loan applications received from farmers looking for financial assistance for new initiatives. The lenders explained the difference in how the financial community in general receives an application for a loan for a new farm-based enterprise as opposed to one for a proven commodity.

“It was a major revelation for me,” says Bonitz, “and I think for the majority of folks on the steering committee. It’s entirely possible that a farmer who’s been in production for a number of years with a commodity, even if it hasn’t been profitable, can get a production loan basically with a five-to-ten minute conversation. That farmer can say: ‘Here’s what I’m going to do. It’s the same thing I’ve always done. It’s a commodity for which there’s a massive database of production figures and price data that spans nationwide.’ And the lender says, ‘Okay; no problem. I understand the risks, and I can fit you into that profile, and I can lend you that money’ – knowing there are probably well-established guarantees out there for those crops.”

“But when a farmer proposes to do something different, that’s not strictly a commodity – like, say, grass-fed beef – a huge array of questions pop up in the lender’s mind: ‘Well, this is different. I don’t have any experience personally with this. There is no federal commodity database for grass-fed beef pricing. I’ve got to turn to the Chicago Board of Trade price for whatever that beef could be liquidated for.’ And that’s not going to make a very good business plan, when the farmer is fully expecting to sell that beef for an extreme premium over the Chicago Board of Trade numbers. But the lender has no assurance whatsoever that if he had to liquidate that livestock he could get that.

“So it’s a very different risk profile.”

Fortunately, the project was able to recruit a group of agricultural lenders who were invested in the project and who lent considerable time to it. Bonitz mentions Ronnie James of First Citizens as an example of someone who was particularly helpful:

“He really was a trooper. He didn’t pull any punches with us, and he was willing to engage in the dialog and help advance the learning curve. He’s from a farming family, and so while he certainly has a warm spot in his heart for the agricultural community, he also has a very realistic understanding of the business world in general and agricultural lending in particular.”

James was impressed with the cooperative nature of the committee in coming to understand a variety of perspectives.

“The committee members took great pains to set aside biases and to be open minded in preparing suggestions for individual farmers and small farm businesses looking to embark in uncharted territory,” he says.

Bonitz also notes the participation of Gene Charville of East Carolina Farm Credit.

“The [Farm Credit] institutions were very receptive to a cooperative business model,” Bonitz says, “and, by mission, are dedicated to helping young farmers, start-up farmers, women and minority business owners.”

‘How do we value their talent?’

The committee discussed at some length the question of whether or not for-profit lending institutions could profitably provide the assistance the agricultural community requires.

“There’s this obvious question,” says Bonitz, “of how we as society value these ag professionals out there who are either looking for work off the farm or are looking for a new enterprise to get into.

“How do we value their talent? How do we value their land? Do we want that land to remain in productive use? And there are land-use considerations – and those questions expand pretty quickly.”

It was determined that in order for farmers to more accurately present to lenders an evaluation of what they have to offer, those farmers needed better financial tools. Thus came the idea for the “Farmers Guide.”

“Our lenders said loud and clear that they needed something to give to farmers who come in unprepared. They don’t want to turn them away; they don’t want to discourage them. But they don’t, frankly, have the time to guide them through the business-planning process. So we developed this guide to provide them with something that they could give to farmer entrepreneurs.”

The guide includes sections titled “Understanding Agricultural Lending,” “Communicating Your Idea to a Lender” and “Where to Go for Help.” It also provides descriptions of processes that bankers and lenders use to measure business performance and a glossary of financial terms and definitions.

“It’s been very well received,” says Bonitz. “Ag outreach professionals, like Alton Thompson [dean of the School of Agriculture and Environmental and Allied Sciences at North Carolina A&T], gave it just huge rave reviews. He said it was the best document he’d seen in a long time for helping farmers.”

North Carolina Commissioner of Banks Joe Smith wrote an endorsement of the publication, in which he said:

“If this aspect of our economy and society is to prosper, farmers need to master the rudiments of finance, a skill not commonly associated with their work. Fortunately, ‘The Farmer’s Guide to Agricultural Credit’ is available to help farmers develop the financial skills they need…. ‘The Farmer’s Guide’ is a succinct compilation of the information farmers need to know to get and maintain credit.”

How to fill the gaps

Looking ahead, the steering committee now asked: “How can we further help fill these lending gaps?” Answering this question was the primary objective of the second publication, “Farmer and Lender Project: Strategies to Sustain Agriculture and Enhance Rural Development in North Carolina.”

“There was consensus on the steering committee,” Bonitz says, “that there is a need for better integrated technical assistance for farmers. That would include technical assistance on the production side, but more importantly training and hand-holding in business-plan development and marketing planning.

“That’s the first aspect of the problem. Number two is that they’re lacking the risk-management tools that are available to them for commodity crops. There’s no insurance really to speak of … neither crop insurance nor revenue insurance, and the loan guarantees don’t really apply to unusual enterprises.

“The third aspect is that the lenders themselves have a learning curve, and they’re lacking the data they need to make these investments in the rural landscape.” They need more and better information on emerging market opportunities and innovative enterprises.

Thus the committee agreed that they would propose the creation of a pilot project to address those three problems, and that it should unify and coordinate technical assistance and training.

As regards to the farmers, says Bonitz, “we’ve got to get them hooked into the entrepreneurial training they need. And the lenders side would be addressed with some type of fund. At this time, we tentatively envision that being a loan-guarantee fund, but it could be something different. There’s clearly a need for further research to pin down precisely the nature of that financial tool.”

Much has been learned in the course of this project. Among its most noteworthy achievements is the dialog it’s fostered.

“I’m really pleased with the insights we’ve gathered through this project,” says Self-Help’s Brian Schneiderman, “and I’m confident we’ve gained a better perspective of the hurdles farmers encounter in the lending process.

“I’m also excited about where this project might go next. I really appreciate the role the TTFC has played. We at Self-Help were very excited about this opportunity. It’s very much in line with our mission.”