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April 2, 2018 Focus: Banking / Finance

As Maine agriculture evolves, farm financers aim to keep up

Photo / Tim Greenway Melissa Law, left, a co-owner of Bumbleroot Organic Farm, with Gray Harris, a senior program director at Coastal Enterprises Inc. CEI, working through Maine Farmland Trust, financed the purchase of the Windham farm.
Photo / Tim Greenway Ben Whalen, co-owner of Bumbleroot Organic Farm, picks spinach.
File Photo / Ken Lamb Jay LaJoie of LaJoie Growers worked with Farm Credit East to help fund a $1.1 million investment in cold storage, which in turn generates revenue in more months of the year.

To launch Bumbleroot Organic Farm, the four founders pooled funds to buy a tractor and things like vegetable and flower seed, setting up a modest operation on a 1.5-acre site leased in Buxton.

Bolstered by income from a community-supported agriculture program, farmers markets and sales to restaurants, they quickly sought out land to buy.

In 2016, through a Maine Farmland Trust program and with financing from Coastal Enterprises Inc., the Bumbleroot owners bought 89 acres of farmland in Windham, invested in renovation and put five acres into production. Plans are now in the works to grow production acreage, add crops and customers and increase visibility by hosting events like Outstanding in the Field, a $235-per-person farm-to-table dinner.

The farmland purchase would have been beyond their means without the Maine Farmland Trust program, combined with the financing flexibility and relationship-oriented involvement of CEI, says Bumbleroot founder Melissa Law, who founded the farm with Abby and Jeff Fisher and Ben Whalen.

“One thing that stands out for me when thinking about CEI is that they don't lend people into a corner,” says Law. “They do their due diligence in terms of making sure this is going to be okay for the business.”

Their contact at CEI, Gray Harris, senior program director of natural resources, explains that relationship-based lending is the core of the farm-finance sector.

“They have to be able to think of their lender and their business advisor as part of their team,” Harris says. “So when they come back, they know I'm going to say, 'Let's make sure you're looking at all your options.'”

Evolving industry

Maine had 8,173 farms in 2012, the most recent year the U.S. Department of Agriculture counted, about the same as five years earlier. But in those years productive land increased 8% and the average farm size grew by 7%, while the market value of products grew by 24%. Of the state's principal operators, about 29% are women.

Yet, with the average age of the principal operator of Maine's farms being 57, according to USDA figures, the industry is in transition.

The farm finance sector is evolving along with Maine's farmers. Start-up farms have been established in sync with consumer interest in locally sourced foods. Older farmers are retiring, meaning farmland is available. There are new, ever-more sophisticated technologies for farm equipment and infrastructure.

In Van Buren, Aroostook County, LaJoie Growers LLC produces 17 million pounds of vegetables a year from 1,300 acres. Jay LaJoie, a fifth-generation farmer, used Farm Credit East for a loan to help fund a $1.1 million investment in cold storage.

Farmers also need operating capital on a regular basis. As LaJoie explains, yearly operating loans, acting as bridge loans, are essential to his operation.

“An operating loan is a big-ticket item that allows us to have funding until we can harvest our crops and turn them into money,” he says. “In the spring we'll purchase seed for the year, and fertilizer, chemicals or other inputs. We have labor, fuel and equipment maintenance. In the summer, we need fungicides and other crop protectants. In the fall, we start harvesting and we have extra labor and equipment maintenance. We put our products into storage, so we have energy costs for storage. Those are all expenses we incur before we can actually turn our crops into money.”

To address the seasonal financial challenges, LaJoie has diversified his product line, offering fresh and processed products as well as seed potatoes, stretching sales to 11 months of the year. Still, market fluctuations and expenses incurred all at once make operating loans necessary. In addition to the year's usual cycles, the need for financing is also affected by uncooperative weather, market fluctuations, crop disease and inflation.

Flexibility in lending

To accommodate all the needs of farmers, there's a broad finance sector, with government, nonprofit, and cooperative and commercial banking entities. Loans and grants range from thousands to millions of dollars, serving businesses throughout the supply chain, from farms to processors, aggregators, distributors and value-added operations.

Finance programs targeted for agriculture are considered essential for the success of both the agriculture industry and the finance industry. That's because it takes a close understanding on the part of finance providers of the risks inherent in agriculture. Finance providers range from the U.S. Department of Agriculture and the Maine Department of Agriculture, Conservation and Forestry, to nonprofits like Coastal Enterprises Inc. and Finance Authority of Maine, to Maine's largest agricultural loan provider, Farm Credit East, which provided $919 million in loan commitments to Maine agriculture in 2017. Some banks, like Machias Savings, have dedicated agriculture loan programs; many do one-time farm-related loans. Programs vary in things like interest rates, approval periods and payback structures.

“Each loan program has its own criteria and definition of who they will work with,” says CEI's Harris.

Bullish on ag

Providers say borrowing is on the increase due to factors like start-ups, transitions and climbing capital expenditures.

Maine is one of the few states with growth in farming, says Farm Credit East's Presque Isle branch manager, Peter Hallowell.

“Right now, everyone's pretty bullish on agriculture,” says Hallowell. “There are people starting out from scratch. Aroostook County has a good base of younger people getting back into the family farm, so the industry is pretty strong in northern Maine.”

The number of young people without family experience in farming appears to be growing, too, he says.

Like many industries in Maine, an aging demographic will force major changes in farm ownership in the coming decade, according to CEI.

“It will be critically important that the new generation have the opportunity to purchase and/or get on the land through a number of different avenues,” Harris says. “Having access to low-cost capital is going to be pretty critical.”

Dealing with risk

Agriculture is a risky industry, weighed by factors like unpredictable weather, market fluctuations and crop disease.

Farm Credit East Vice President Matthew Senter points to the blueberry industry as an example of the impact market fluctuation can have.

“There's been somewhat of an excess of supply, so the average price has declined,” Senter says. “That can have a big impact on farmers. They might do everything right in their business and produce a high-quality crop. But if the market is oversupplied, the price can go down to a level where they can't make a profit.”

The dairy industry is going through a similar cycle.

“There's an increased amount of milk production nationally, so the price of milk is lower than necessary for many producers to generate a profit,” he says. “It's not that farmers are doing anything wrong. It's just more milk than the market is able to absorb. But you can't tell cows not to make milk.”

That unpredictability “makes it more important for farmers to work with a financial institution that understands what they're dealing with,” Senter says.

Finance strategies

Government and nonprofit programs often step in where conventional banks might hesitate, says Jessica Nixon, director of market development with the state's Agricultural Resource Development Division.

“There are certain risk factors, so traditional banks sometimes have more difficulty in terms of working with farmers,” says Nixon. “Our stance has always been to provide a venue for farms so they can access the capital they need to keep operating.”

USDA's Farm Service Agency, for example, is a lender of first opportunity, helping producers who can't get loans from traditional lenders, says Maine Executive Director David Lavway. FSA has many loan programs to purchase land, livestock and equipment, construct buildings and make farm improvements.

“If the funds under our loan programs weren't available, these producers' options would be limited,” Lavway says.

“A state like Maine has a diverse agricultural base and diverse producer base,” Lavway continues. “You have to have some idea of what agriculture is all about, and the risk that's connected with different crops.”

“There's no difference between a million bucks from Farm Credit versus a bank,” Hallowell adds. “We price our loans in the market, which means we're in the same ballpark as our competitors. So we sell service and knowledge. Because we're limited in scope, the advantage is that we're good at what we do.”

Many farmers don't qualify for conventional loans or don't have enough capital saved to make a large down payment, says Benneth Phelps, director of farm services at Dirt Capital Partners, a Hudson, N.Y.

East Forty Farm and Dairy in Waldoboro is a typical client. When Allison Lakin and Neal Foley approached Dirt Capital about acquiring 40 acres to relocate their cheese-making and sawmill businesses and boost its livestock operation, the asking price was too high. With negotiations by Dirt Capital, and the sale of an agricultural conservation easement to Maine Farmland Trust, the acquisition price was reduced from $450,000 to $300,000. The property was acquired by Dirt Capital, and Lakin and Foley received a nine-year lease with an option to buy.

“What worked best was to get us into a situation where we could make a shift from my being limited in production size to being able to boost production, gain customers, then have the rest of the plan — raising pigs, having farm space and an education program — that would contribute to the income to support the purchase from Dirt Capital a few years down the line,” says Lakin.

Dirt Capital offered a flexible payback structure, syncing payment increases with income growth.

Flexibility might include extended payback timeframes, loan modifications and interest-only payments.

“We try to match up when their highest amount of cash flow comes in with the loan payments,” says Jon Nicholson, a senior vice president at First National Bank. “We might require interest-only payments during the low time. If they can't pay, we would work with them to modify the loan payments. And we address all the risks that could happen during the underwriting of the loans.”

Hallowell of Farm Credit East may sum it up best.

“I tell people that if we only lent to customers who have made money every year for the last 20 years, we wouldn't have any customers at all,” he says.

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