Organic Farms’ Credit Access and Farm Lenders’ Assessment of Organic Farms’ Credit Risks
The project’s 2nd year of implementation focused on collecting the farm lenders’ perspectives or opinions on the issues raised by organic farmers in the focus group discussions conducted on the 1st year. A lenders survey that covered representatives of the major lending groups in Georgia and its surrounding states was conducted. A compilation of the survey results indicates interesting contrasts of ideas and opinions between lenders and organic farmers regarding the latter’s credit access and risk measurement issues. The 3rd year of project implementation will focus on reconciling differences of lenders’ and farmers’ opinions. Outreach activities to both parties will be conducted in the hopes of generating useful feedback from both sides that should help bring forth some understanding between these two interest groups.
1. To provide a better understanding of the sources of credit risks peculiar to organic farming systems and compile a representative collection of issues perceived by organic farms as significantly affecting their access to credit.
2. To determine lenders’ perceptions of organic farming risks, identifying whether any preconceived notions define their attitudes towards organic farm loan requests vis-à-vis their regular farm borrowers, analyze the relevance of their existing credit risk assessment models to the organic farms’ peculiar operating environments, and elicit their opinions and perspectives in improving credit access of potential organic farm borrowers.
3. To reconcile the farmers’ and agricultural lenders’ perspectives on credit risk assessment and credit access as collected in (1) and (2), and use such findings to formulate suggested strategies to resolve any credit access issues as well as any lenders’ divergent issues in credit risk assessment not properly attuned to organic farmers’ business conditions.
4. To implement a two-pronged outreach program directed towards lenders for the sake of clarifying credit risk assessment approaches more attuned to organic farmers’ conditions and towards farmers for the sake of helping them understand lenders’ credit risk assessment methods, consider strategies to improve their credit risk ratings, and realize the role of external debt in promoting business growth and expansion.
The second year focuses on the project’s second objective that involves lenders’ perceptions and attitudes towards lending to organic farm borrowers vis-à-vis conventional farm borrowers. After gathering the organic farmers’ perspectives on credit access and risk measurement issues from focus group discussions conducted on the 1st year, a survey instrument was developed to obtain the lenders’ perspectives on such issues. The survey instrument was at first cleared with the Institutional Review Board (IRB) for compliance with established guidelines for research involving human subjects.
A graduate student developed databases of lenders from different lending groups (commercial banks, farm credit associations, Farm Service Agency, among others) containing postal and electronic mailing contact information. Several survey approaches were considered and used. The graduate student developed an online survey site through Survey Monkey as an initial attempt to elicit responses from lenders. Several email announcements and invitations were sent to the lenders in the contact information database leading them to the online survey site.
After this approach yielded only about 30 responses, hard copies of the survey were sent by postal mail. Follow-up phone calls were also made to certain prospective survey respondents. This survey method produced about 45 responses. The online and mail-in survey responses were then compiled and summarized.
At this juncture, several outreach presentations have already been made that discuss the organic farmers’ views on credit access and credit risk measurement. These outreach opportunities include a workshop conducted for Certus Bank lending officers held last February 25, a lecture at an upper level Crop and Soil Sciences class (CRSS 4010: Principles of Sustainable Management), and a workshop for small, beginning and socially disadvantaged farmers by Team Agriculture Georgia held on March 14 at Fort Valley University. A press release (February 5, 2013) on USDA microloans at the local newspaper, Athens Banner Herald, also featured an interview with this project’s lead investigator that discussed the congruence of organic farms’ views and the newly proposed financing program at USDA. Tesia Sneed, a student of Fort Valley State University, also participated under the University of Georgia’s Emerging Scholars Program and wrote a research paper on this same topic.
From hereon, the lenders’ and farmers’ views on these issues will be reconciled. Outreach bulletins (at least one for each perspective) will be finalized and distributed to interested groups in the academe and industry. Outreach presentation opportunities both in the farming and lending industries as well as academic professional conferences will be tapped in the coming months. Publications will also be developed from this project’s wealth of crucial, important and useful data from farmers and lenders.
Impacts and Contributions/Outcomes
Results of the lenders’ survey present useful results that provide interesting contrasts with the organic farms’ views on credit access and credit risk measurement issues. In this survey, 57% of the respondents are commercial banks and the rest is composed of Farm Service Agency and farm credit system lenders. The following are the highlights of the survey results:
A. Lending Exposure:
a. 34% of the respondents report that over 50% of their loan portfolio is devoted to agricultural lending;
b. 82% reported lending less than 1% of their farm loan portfolio to organic farms
c. 84% reported no growth in the number of their organic farm borrowing clients during the last two years.
B. Lenders’ General Perceptions of Organic Farms
a. The most popular perceptions among the lenders are that organic farms have too small loan requests.
b. Three negative perceptions rank in the top 4 responses: Organic farmers are fussy (making big deal of trivial stuff), operating stagnant operations with very limited expansion plans, and businesses that make less optimal decisions.
c. The positive traits of organic farms, i.e. sustainable, environmentally conscious, and health conscious farm businesses rank 5th, 7th and 8th, respectively, out of 10 suggested traits.
C. Credit Scoring Models
a. 78% of the respondents declared that they do not differentiate or modify their credit scoring models for small and large borrowers as well as for small- and long-term loan requests. But 95% of the respondents do not make any distinction in their credit scoring models for organic and conventional farms.
b. The credit scoring variables that have the largest weights in the lenders’ models for conventional farms are repayment ratio, collateral coverage ratio and profitability measures. In contrast, the top three credit scoring variables for organic farms (in terms of weights) are repayment ratio, collateral coverage ratio and credit scores.
D. Organic Farms’ Product Diversification as a risk mitigating factor
a. 48% of the respondents reported that such diversification does not at all affect organic farms’ credit risk rating. However, 31% thought that diversification could have some effect.
b. 41% of the respondents reported that such diversification does not at all affect organic farms’ commodity insurance requirement in their loan applications. However, 26% thought that diversification could have some effect while 21% indicated significant effect of diversification on organic farms’ insurance requirement.
E. Organic Farms’ Soil Enhancement Investments in Farmland
a. 64% of the respondents indicated that soil enhancement investments of organic farms will not at all be taken into consideration in the appraisal of farm real estate properties.
b. 73% of the respondents think that organic farms’ soil enhancement investments will not at all affect the calculation of equity-asset ratios in credit scoring models.
These comments and opinions from the lenders present some interesting contrasts with those shared by organic farmers in earlier focus group discussions. The important goals on the 3rd year of this project’s implementation is to reconcile these contrasting ideas and strive to create some extent of mutual understanding in most, if not all, areas of contention between lenders and organic farmers. The outreach activities on the 3rd year will disseminate these information to both lenders and farmers in the hopes that useful feedback from each group would create some agreement on the issues.
Full Moon Cooperative
255 W. Washington Street
Athens, GA 30601
Office Phone: 7065494660
200-A Ottley Drive
Atlanta, GA 30324
Office Phone: 6787020400
Fort Valley State University
Department of Agricultural Sciences
Fort Valley State University, GA 31030
Office Phone: 4788256262