Secondary market helps ag lenders improve liquidity
By: NFR Editorial Staff
Editor’s Note: Curt Covington is executive vice president of agricultural finance at Farmer Mac. We recently asked Covington to update readers on how Farmer Mac’s secondary market products can augment a community bank’s rural finance initiatives.
Q: What tools does Farmer Mac offer ag lenders to help them better serve their borrowers (farmers) in a rising interest rate environment?
Curt Covington: Rural community banks typically don’t have access to long-term fixed-rate loan products. Farmer Mac provides rural community banks more financing options including access to our competitive long-term fixed rates. In fact, we offer roughly 20 different interest rate products ranging from an interest-only variable rate product all the way to a 30-year fixed-rate, fully-amortized real estate loan. Three years ago, most farmers were looking to be on the shorter end of the yield curve — interest-only products, three- and five-year products, maybe a few seven- and 10-year products. We couldn’t give away a 30-year interest rate product. Today it’s flipped; a lot of our customers are choosing 15-, 20-, 25- and 30-year fixed-rate loans for their borrowers. The yield curve today is pretty flat and farmers are thinking, “if I can lock in a competitive interest rate for 30 years, sign me up.”
Q: The demand for Farmer Mac products has grown significantly. Can you explain recent growth and the services being used the most?
C.C.: Three or four years ago, the phones were ringing off the hook because farmers were expanding, purchasing additional real estate, consolidating vertically integrated operations, and were in need of additional financing. Today our phones continue to ring off the hook, but for a different reason — to help banks help farmers restructure their balance sheets and re-inject working capital into their business.
Rural community banks depend on us to provide a competitive advantage and the rates and terms their borrowers need both in the good times and the bad. To put it into perspective, our loan approval rate has remained relatively constant — around 80 to 85 percent over the last 10 years. I think what that tells our lenders is that we’re a pragmatic partner and we’ll be here to help them out when they need us the most.
Q: The global trade environment that has been in the news has caused concern that certain commodity prices will drop further. Can Farmer Mac offer services useful to bankers who are trying to finance financially strapped farmers?
C.C.: Farmer Mac has a long and successful relationship with the USDA Farm Service Agency. We have a product called AgAssist, which is a blended product where Farmer Mac will provide a first mortgage on a property and FSA will come in behind us with a secured second position. The reason this is so valuable is two-fold. First, we can help ag lenders assist farmers whom are experiencing stress and need to restructure their balance sheet. Second, through our AgAssist product, lenders can now provide financing beyond the FSA guaranteed loan limits.
Q: How can Farmer Mac help banks continue to finance the growing demands of operating a farm?
C.C.: Farmers’ financing needs are growing at a faster rate than many community banks can accommodate. If a bank is up against its lending limit with a borrower who has a real estate loan with the bank, Farmer Mac can purchase the loan to free up capital so the bank can continue to lend. Ag lenders often tell us they have borrowers who are outgrowing their ability to finance. Some solve the problem by going to another community bank to partner; others send customers to Farm Credit to get the real estate financing done. Neither of these is a good solution for community banks. Community banks don’t want to participate on a loan with another ag lender in their backyard. It’s a competitive environment and they run a risk by sharing a valuable relationship with another bank. We are the perfect partner. As a secondary market for U.S. agricultural credit, we can’t go out there and sell a deposit account or credit cards or other banking services. That’s not what we do.
Q: American farmers are aging, which raises the issue of generational transfers. Are there products that Farmer Mac has to help with this transition?
C.C.: Roughly 97 percent of our loans are to small or family-owned farms and we are happy to lend to next-generation farmers. Several years ago, we expanded our product line of our USDA Guaranteed Loan program, also known as Farmer Mac 2. Our 15-year reset product with a 30-year term and amortization had always been popular, but then we also added a 30-year fixed-rate product to further the benefit to new and beginning farmers. (Through the Farmer Mac 2 program, Farmer Mac is the largest purchaser of USDA guarantee loans in the country.)
Q: Farmer Mac is celebrating its 30th anniversary. How would you describe some of the major changes in the company?
C.C.: We are most proud of the fact that, despite being a secondary market lender, we view ourselves as relationship lenders. We are building relationships with these banks. It’s not just a transaction to us. I don’t think there’s anything more pleasing to this company than to be able to partner with hundreds of community banks that serve rural America. We can’t lend the money to a farmer directly, so we are more than happy to partner with banks to provide the capital they need.
Q: You said Farmer Mac works with approximately 700 lenders; did Farmer Mac recommit to the community bank marketplace 2-3 years ago?
C.C.: We’ve always been committed to rural banks across the country, but recently we’ve worked hard to make ourselves more visible. We spend countless hours traveling the countryside visiting customers, as well as attending and speaking at conferences and trade association meetings for growers and bankers alike, so they can understand the benefits of our solutions. Ultimately, we are here as a trusted and pragmatic partner to ag lenders and are committed to serving their financial needs — and the needs of their farm customers — in times of agricultural growth and just as faithfully during market downturns … and we deliver on that commitment every day.
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