Good time for renewal or expansion
Interest rates are at historic lows.
Honeycrisp apples flow through the new three-lane Compac packing line at Lake Ontario Fruit Company. The company expanded last summer, and found funding available at a good interest rate.
The United States fruit industry—especially the apple portion—is continuing its renewal program, replacing old varieties with new ones and revamping storage and packing facilities, in many cases to meet the needs of the new varieties.
And in this renewal process, growers and packers are getting strong support from the Farm Credit System, which has money to lend and is lending it at interest rates that are at historic lows. Well-qualified borrowers are getting funds as low as around 4 percent for short-term operating credit and 5 to 6 percent for long-term loans.
While other lenders are suffering in varying degrees from the collapse of the housing bubble they financed during the expansion, or are unwilling to lend because of uncertainty in the general economy, agricultural lenders are looking at a different reality.
“Apple growers have had a couple of good years here in western New York,” said Ed Urbanik, vice president and portfolio manager for the Farm Credit East office in Batavia, New York. “Growers have had good financial success and are showing good financial strength with good yields of high-quality fruit.
“They’re going to more intensive planting systems and are focused on new fresh-market varieties, and their overall debt levels are not too high. In fact, many of them are not borrowing. They’re self-financing.”
Urbanik expressed concern about the “one apple too many” phenomenon, in which extra apples kill the price. Honeycrisp is worrisome because so many have been planted, but so far the concern has been hypothetical.
Last fall, Farm Credit East lent money to fund the expansion of Lake Ontario Fruit Company in Albion, New York. The seven-entity partnership, which packs just over a million boxes of apples a year for 30 western New York growers, added a second packing line and a 23,000-square-foot, eight-room cold storage.
John Russell, general manager of the storage and packing facility and the nongrower member of the partnership, said the extra capacity was needed to handle the growing volume of newer varieties, especially Honeycrisp and SweeTango. These varieties have “special needs,” he said.
“We don’t yet have a good storage protocol for Honeycrisp,” he said, “and we don’t know too much yet about SweeTango.”
Right now, demand for these two varieties is strong and packers like Lake Ontario Fruit need to be geared to pack them all in three months, or less, in the fall. “We pack a lot of Honeycrisp and have a short marketing window,” he said. “We need to get them through it quickly.
“We added a second packing line to complement our existing packing line,” Russell said.
The new three-lane Compac sorter and sizer leads into a commit-to-pack tray-pack system and a single-lane bagger. It is state-of-the-art, meaning its cameras and scanners and computers sort for color and defects, including internal defects, that can be a problem with Honeycrisp. The existing packing line is a six-lane MAF system.
“I think it’s great,” Russell said, looking at the future of New York apple business. “Our grower partners are putting a lot of new orchards in the ground, and, of course, we’re guessing at planting the right varieties. We ran our first SweeTango this year, and we’ll see what happens as volume increases.”
Looking at cost of money, the expansion seems to be coming at a great time for the industry. Urbanik said he had just returned from New York City, where the Farm Credit System had issued a billion dollars in new five-year notes. The issue was gobbled up by investors, he said, who committed $770 million within two hours. By the next day, the issue was oversubscribed by a billion in bids.
“There is good demand for Farm Credit debt,” he said. Investors are looking for places to put their money, and Farm Credit, which was not big into home mortgage lending, is strong.
In Michigan, GreenStone Farm Credit Services financed a similar, even larger, storage and packing system for Riveridge Packing in Sparta, Michigan, and for similar reasons.
“We sell a fair amount of Honeycrisp, which can have problems with internal browning, rots, and watercore,” said Don Armock, company president. “By being able to detect these internal defects, we can sell customers a product they can feel confident in.”
“At the same time, we can get a better packout for growers from lots that have these issues. We can sort them cost-effectively and pack the good apples. We can pack as good a pack as anybody in the industry.”
Tom Urban, vice president of credit for GreenStone’s west region located in Grand Rapids, Michigan, is optimistic about agriculture, including the fruit industry. But price volatility has increased, he said, meaning that producers and lenders need to focus on risk management. Market risk is hard to cover in specialty crops, where there are no futures markets and few contracts. But there are insurable risks, and apple growers can purchase crop insurance for protection against hail and freezes. GreenStone also sells crop insurance and can make it part of a loan package.
Is it a good time to invest? Because of low interest rates and a general availability of money through the Farm Credit System, the answer is yes, but Urban says lenders are looking for financial results on a farm-by-farm basis, and a good business plan is important.
“Most of our customers are not new to us,” he said. “We are able to monitor their financial progress over time. Most of their credit needs are incremental. They want to plant a new block of trees, or invest in wind machines. Availability of money is not a problem for good customers.”
In the Pacific Northwest, the story is much the same. Jeff Fagg, vice president of agribusiness for Northwest Farm Credit Services located in Moses Lake, Washington, said the Farm Credit System is in an enviable position, providing more than half the credit for fruit-related warehouse operations there.
“We hold our fruit customers in high regard and spend a lot of time staying current with the industry,” he said. “We’re optimistic and bullish on the industry. There are some excellent opportunities out there, but you need to be very good at what you do. There’s not a lot of room for error with potential for overproduction in some years.”
Fagg notes, for example, the wide range in prices of a bin of apples, from $75 on the low end up to $600 for organic Honeycrisp, a variety in demand but in short supply. For growers with the wrong varieties but the right management skills, it’s a good time to reposition themselves. Interest rates are at historic lows.
Growers need to focus on their cost of production, he said. “They need to drill down and know their cost per bin, by variety,” he said. “We like our customers to have a good handle on their expenses and have good cost-accounting systems in place.”
The Farm Credit System was largely unaffected by the housing bubble and by new, tighter regulations for the financial industry. “We did not need to change our lending standards, and our capital position is good,” Fagg said.