FCW Spotlight Winter 2018

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spotlight WINTER 2018

Persistence Pays Off for Butte County Niche Crop Farmers PAGE 6

The Changing Water Risk to Agriculture PAG E 12

The Impact of the New Tax Law on Agriculture Companies PAG E 14


Spotlight

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President’s Message

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Financial Highlights

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Customer Announcements

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Persistence Pays Off for Butte County Niche Crop Farmers

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12  The Changing Water Risk

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15  16

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18 19

Community Center

Mission Statement Farm Credit West will ensure the customer comes first by providing superior service at competitive rates, in a timely, professional, and ethical manner, and by delivering a meaningful return on equity through our patronage program.

Who We Are One of the West’s leading agricultural lenders, Farm Credit West and its wholly owned subsidiaries are cooperatively-owned lending institutions providing financial services to farmers, ranchers, and agribusinesses. Our offices are located in Arizona and California’s Central Coast, Imperial Valley, South San Joaquin Valley, and Sacramento Valley.

Board of Directors

to Agriculture

Chairman of the Board Joey Airoso. . . . . . . . . . . . . . . . . . . . . . . . . Pixley, CA

The Impact of the New Tax Law on Agriculture Companies

Vice Chair of the Board Sureena B. Thiara. . . . . . . . . . . . . . . . Yuba City, CA

Recipe: Chestnut, Squash & Blue Cheese Soup

Robert Amarel, Jr. . . . . . . . . . . . . . . . Yuba City, CA Teresa Castanias. . . . . . . . . . . . . . . . . . . . Dixon, CA Mark A. Cook. . . . . . . . . . . . . . . . . . . . . . Willcox, AZ

Water Questionnaire: A Tool for Success

Catherine Fanucchi . . . . . . . . . . . . Bakersfield, CA

2018 – 2019 Holiday Schedule

Craig C. Gnos. . . . . . . . . . . . . . . . . . . . . . . Davis, CA

Inexpensive Security Tips for Businesses of All Sizes T erritory and Office Locations

Douglas C. Filipponi. . . . . . . . . . . . . . . Creston, CA

Robert N. Hansen. . . . . . . . . . . . . . . . . Hanford, CA Blake Harlan . . . . . . . . . . . . . . . . . . . Woodland, CA Tom Ikeda. . . . . . . . . . . . . . . . . . Arroyo Grande, CA Colin Mellon . . . . . . . . . . . . . . . . . . . . . . . Yuma, AZ Mark Osterkamp. . . . . . . . . . . . . . . . . . Brawley, CA Barry Powell. . . . . . . . . . . . . . . . . . . Sacramento, CA Brian Talley . . . . . . . . . . . . . . . . Arroyo Grande, CA

Spotlight is produced for the customers, employees and friends of Farm Credit West. Comments and story ideas can be submitted by email to the Marketing Department at marketing@farmcreditwest.com.

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PRESIDENT’S MESSAGE Mark Littlefield, CEO

Supporting the Agriculture Community Today — and Tomorrow As we celebrate the conclusion of another successful year, our eyes are fixed on the horizon. As 2018 draws to a close, we once again are reflecting back on a successful year. Your Association continues to thrive, remaining in a strong position to provide a consistent and reliable source of credit for your future needs. This year has been full of transitions for your Association, as we have made significant strides to further refine our business processes. Through introduction of new technology platforms, our team has made positive efforts to streamline our procedures and create opportunities for information to flow quickly and freely between internal departments. These changes have allowed us to improve overall credit delivery timeframes while continuing to provide you with the best customer service possible. While 2018 saw many successes for both your operations and our Association, we were also met with new challenges. Commodity prices continued to be stressed, interest rates have been on the rise, and access to water has been an ever-increasing concern. As SGMA regulations continue to be implemented in California, San Joaquin Valley growers in particular have felt pressure to identify a reliable and consistent source of water. However, as with any new challenge presented, the American farmer remains resilient. Creative and innovative solutions are currently being developed within our Association and throughout our grower-base to mitigate these risks.

As the old adage goes, “knowledge is power;” the more we are aware of the current risks throughout our chartered territory, the more we are able to plan for the future. Farm Credit West has embraced this philosophy as we seek to understand the current water risks present throughout our chartered service area. It was for this reason that we partnered with AQUAOSO® Technologies PBC this year, a software company that helps identify, understand and monitor water supply risk through an interactive cloud-based water risk intelligence tool. Specifically, this tool provides detailed information regarding water risks associated with individual parcels of land. Having this tool available allows our staff to better manage risk across our loan portfolio, and it allows staff to work with our customers to structure products to help them meet their needs as access to water continues to be constrained. Farm Credit West is deeply invested in the future success of agriculture. Being a cooperatively owned institution, our organization is directly influenced by our customer/ owners both through feedback we receive from individuals and through the guidance and oversight of our Board of Directors and Local Advisory Committees. Individuals that participate in these forums ensure Farm Credit West continues to meet the needs of agriculture and rural communities. It is through their dedicated service that we are able to continue providing you with the best customer service around. As we enter into a season of reflection and thanksgiving, allow me to take this opportunity to thank you, our customerowners, for your loyalty to our Association. I wish you a very happy holiday season and a successful new year.

WINTER  2018

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Financial Highlights Farm Credit West reported net income of $190 million for the first nine months of 2018. These year-to-date earnings are ahead of our business plan target. Also, during the first nine months of 2018 our average earning assets and capital levels increased and we strengthened our allowance for loan losses.

AVERAGE EARNING ASSETS* (in millions)

$9,206 $6,722

Dec. 31

2014

$9,379

MEMBERS’ EQUITY AS A % OF TOTAL ASSETS

$9,473

$7,627

Dec. 31

2015

Dec. 31

2016

Dec. 31

2017

Sept. 30

2018

Average earning assets increased $94 million, or 1.0%, during the first nine months of the year. Farm Credit West is experiencing modest levels of loan growth in 2018; this level of loan growth is expected to continue through the remainder of the year. At the end of the third quarter, average earning assets were in line with the third-quarter business plan target. NONEARNING ASSETS (in millions)

Dec. 31

2014

18.8%

19.3%

Dec. 31

Dec. 31

2015

2016

20.3%

Dec. 31

2017

22.0%

Sept. 30

2018

In the first nine months of 2018, total members’ equity increased $184 million, primarily due to net income of $190 million. Partially offsetting net income during the nine months were preferred stock dividends of $6 million.

ALLOWANCE FOR LOAN LOSSES AS A % OF LOANS

$142 $120

20.4%

$141 $117

0.53%

0.50%

Dec. 31

Dec. 31

0.58%

0.66%

0.75%

$72 Dec. 31

2014

Dec. 31

2015

Dec. 31

2016

Dec. 31

2017

Sept. 30

2018

Nonearning assets (nonaccrual loans plus other property owned) increased by $24 million or 20.0% to $141 million at September 30, 2018. The increase was primarily due to a $25 million increase in nonaccrual loan volume as a result of $43 million in transfers to nonaccrual partially offset by net repayments of $18 million during the year. The other property owned balance decreased by $1 million.

2014

2015

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2016

Dec. 31

2017

Sept. 30

2018

Our allowance for loan losses totaled $73 million (0.75% of loan principal and interest) at September 30, 2018, compared with 0.66% of loan principal and interest at December 31, 2017. The allowance is our best estimate of the amount of probable losses existing in our loan portfolio as of each balance sheet date. We determine the allowance based on a regular assessment of the loan portfolio, which generally considers recent historic charge-off experience, collateral evaluations and adjustments for other relevant economic factors.

* Average earning assets amount for 2017 was adjusted to exclude nonaccrual loan volume for comparison.

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Dec. 31


Customer Announcements Customer Appreciation

D IN N ERS

March 25 | Imperial

April 2 | Kern

March 26 | Yuma

April 3 | Ventura

STOCKMEN’S CLUB IN BRAWLEY HILTON GARDEN INN — YUMA

March 18 | Woodland / Yuba City

March 27 | Safford

March 19 | Tulare/Dinuba  /Hanford

March 28 | Tempe

HYATT — SACRAMENTO

TULARE AGEXPO CENTER

ELKS LODGE — WILLCOX

DOUBLETREE — BAKERSFIELD

VENTURA COUNTY FAIRGROUNDS (CLARK EVENT CENTER)

April 4 | Templeton/Santa Maria MADONNA INN

TEMPE CENTER FOR ARTS

2019/20 Scholarship Applications Now Available Farm Credit West is committed to supporting the role of education in agriculture’s future. Since 1994, Farm Credit West has provided scholarships to 232 scholars and committed $797,500 to this program. Scholarship recipients are provided with $1,500 scholarships which can be renewed three times for a total of $6,000 in scholarships from Farm Credit West. Scholarship applications are due

February 15, 2019.

Applicants must be an entering or current college student enrolled in agricultural programs and exhibit academic excellence by achieving a GPA of 2.7 or higher. They must also be a customer of Farm Credit West or the spouse or dependent of a Farm Credit West customer. The application and guidelines can be found at www.farmcreditwest.com under Community Support. For those who have previously received a Farm Credit West Scholarship, renewal applications will be posted in March and are due to Farm Credit West by July 1, 2019 along with final college transcripts. If you have any questions about the scholarship program please email scholarships@farmcreditwest.com.

Take Advantage of Member Benefits Present the account number 0939323856 when printing at any FedEx Office location to receive additional savings!

2018 Interest Payments To help you achieve your tax planning objectives, we would like to remind you of your Association’s year-end procedures regarding interest paid on IRS Form 1098. For payments, the date received is the determining factor. ♦♦

ayments received by the Association on or before 2:00 p.m. P on December 31, 2018 will be reported as 2018 interest paid.

♦♦

ayments received after that date and time, whether or not they P were mailed in 2018, will not be reported as 2018 interest paid.

♦♦

ayments received after 2:00 p.m. on December 31, 2018 will P be processed on the following business day.

Consult your tax advisor regarding the deductibility of payments in transit. For payments made from your Future Payment Funds account, the date applied is the determining factor. If your taxplanning objectives are better met by having the interest portion of your January 1, 2019 installment reported as 2018 interest paid, you must register an early transfer of Funds Held to pay your installment in 2018. Written requests for early transfer must be received by the Association by Wednesday, December 26, 2018.

Update Your Email Address in myFCW and Online Banking

Avoid missing important Farm Credit West notices, update your email address online! To review and update, login to your myFCW account and navigate to your profile to make any changes needed. If you are also enrolled in Online Banking, open this application once logged into myFCW, navigate to your profile, and verify the information entered is correct. If you have other changes to your contact information, you may send us a secure message through the myFCW portal with the details. If you are not enrolled in myFCW, submit your changes in writing to your local branch. We will contact you in person to confirm before we make any changes to your customer record. We appreciate your business!


F E AT U R E S T O RY

Persistence Pays Off for Butte County Niche Crop Farmers By John Frith

As a grower, it helps to be both persistent and innovative. Every growing season brings new challenges and successful farmers are the ones who can overcome these obstacles and find new ways to do things. A great example is the Wilson Family Farms south of Gridley in Butte County. While most growers in that part of California’s Sacramento Valley still specialize in traditional regional crops like walnuts and peaches, the Wilsons have succeeded over the years by investing in a series of niche crops. They were among the first growers to specialize in kiwifruit in the 1980s, later added sugar plums to the mix, and today have added chestnuts and new varieties of kiwifruit to their fields. This commitment to innovation and their stubborn persistence allowed the family to recover from bankruptcy when the kiwifruit market crashed in the early ‘90s, and under secondgeneration farmer Luke Wilson, the family looks forward to remaining prosperous for years to come. In part because of chestnuts. Chestnuts are an important crop around the world — especially in China, Japan, Korea, and Europe. They also were once one

of the most common trees in the eastern U.S., but a blight introduced from China around 1900 decimated the forests by the middle of the century. As a result, few Americans have ever tasted one, but everybody has heard of chestnuts roasting on an open fire at Christmas time. Because of that nostalgic familiarity, a U.C. Division of Agriculture and Natural Resources publication1 says people want to try them, and if they do, they usually like the taste. In fact, the publication notes that the U.S. has the greatest potential for expanding new chestnut plantings of any area in the world. While hoping to be a part of that growth, the Wilsons got into the crop by accident when a Bay Area business executive purchased a nearby property around 2000 where a test block of chestnuts had been planted and approached area kiwifruit packers to see if they could manage the property.

1 https://ecosystems.psu.edu/research/chestnut/breeding/planting/chestnut-culture-in-california

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“We had a packing house and with our sales and marketing relationships, we thought we could probably figure out a way to sell them,” he said. “After a few years we thought that we’d been making this guy some good money — maybe we should plant some ourselves.” The Wilsons now grow about 20 acres of chestnuts and sell most of the nuts to Asia and Europe. Other current markets for chestnuts include ethnic markets, health food stores, and farmers’ markets. There are a few old stands of chestnuts in the Sierra foothills, brought there by immigrant miners during the Gold Rush. In contrast, the Wilsons grow an Asian-European hybrid called the Colossal, developed in Northern California a century ago, that they have grafted onto their own trees. While the crop is profitable, Wilson said being a niche farmer can be challenging. When you’re one of the relatively few farmers growing a specialty crop — there are just over 100 members nationwide in the Chestnut Growers of America — you have to be careful not to expand too rapidly. “I’d be afraid to plant 100 acres of chestnuts because a big block could really affect the market,” said Wilson, who serves on the Association’s Board of Directors.

So the Wilsons continue growing other crops. The farm’s main commodity remains kiwifruit, which they have been growing since shortly after the family bought the farm in 1978. But even with this familiar product, they are innovating. “When I first came back, I started a kiwifruit nursery,” said Wilson, who returned to the family farm several years ago after working in other occupations in Southern California and the Bay Area for many years. “I saw there were new varieties on the horizon, and people who would be planting new blocks needed to have a local source for plants. I thought, ‘People will need plants — let’s grow some.’” Along with the standard green Hayward variety, Wilson is commercially growing two newer types — the gold Tropikiwi and the extra-large Mega Kiwi — and is conducting trials of several other varieties. When it comes to kiwifruit, Wilson is carrying on a family legacy. His father, Doug, bought the farm after serving in Vietnam and earning a plant science degree at Chico State. After a job selling kiwifruit and educating farmers about how to grow the crop came to an end, he was advised that he might consider getting a farm loan and going into the business, even though he’d never farmed before. Doug liked the Chico area and quickly found a parcel for sale between Gridley and Live Oak. Continued on next page

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The commercial bank was just a lender, but these guys (at Farm Credit West) are ag people. They know what the trends are and what it takes.”

Continued from previous page

The owner, a fellow veteran, was raising chickens and growing walnuts, peaches, and prunes and agreed to rent the 40-acre parcel to him for four years before the sale was completed. The existing orchards were in poor shape, so Doug Wilson planted five acres in kiwifruit and over time took out the peaches and added more acreage in kiwifruit, selling nursery stock to raise capital. The farm started exporting to Asia in the late 1980s and like many area farmers, Doug Wilson rode the wave, which crested in 1990 when growers produced 10 million boxes for the first time. Unfortunately, that overproduction caused prices to plummet. “We owed $1.9 million at the time and had to declare bankruptcy,” he recalled. “We worked with the commercial bank we were financed with at the time and eventually agreed to a deal that we’d have five years to pay it back  — at 17 percent, prime plus 5 percent,” he said.

Chestnuts Chestnuts are sweet with a starchy texture and have a low fat content, resembling a cereal grain. They can be consumed fresh, cooked, candied, and as a gluten-free source of flour for pastries. Extremely popular in Asia and Europe, worldwide the demand for chestnuts exceeds walnuts and almonds. The UC Division of Agriculture and Natural Resources says American consumers who taste them like them and believes the U.S. has the greatest potential for expanding new chestnut plantings of any area in the world. Luke Wilson says that because chestnuts remain hard to find in grocery stores, they can be purchased in 5-pound bags on the family’s online site, chestnutconnection.com. The harvest ended in mid-October but the nuts will store into December.

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“That’s where my combat experience came in,” he remarked wryly. “If you don’t have any money and you started with nothing, you’re not afraid of losing it. Now that we’re more successful, I’m more scared of losing it.” To generate revenue, Doug Wilson decided to also grow sweet plums to export to Asia. They marketed the varietal as sugar plums — an homage to the candy mentioned in the Night Before Christmas — and did very well. “It was such a home run that I was able to pay off the loan,” he said. The next five years he had to rely on his own cash to keep the farm running, and then was able to secure financing from Farm Credit West, which the farm has partnered with ever since. “I built everything with their loans,” he said. “The commercial bank was just a lender, but these guys (at Farm Credit West) are ag people. They know what the trends are and what it takes. The other guys got cold feet real fast.” Since taking over operations, Luke Wilson has focused on innovations to reduce labor costs and promote sustainability and organics. They have reduced applications of pesticides and fertilizers by adding compost, cover crops, and mulch in the orchards to build soil health.


Sugar Plums The “sugar plums” grown by Wilson Family Farm are a variety of self-pollinating Italian plums — the variety responsible for prunes. These plums are oval and larger than the common round or Japanese plum. The name sugar plum essentially is an indicator of its sugar content. Besides being an ideal candidate for creating prunes, it is a commercial fruit crop used for eating fresh and for processing cheeses and distilled alcohols, including brandy.

Doug Wilson, Karen Kennedy, Jake Wilson, Margaret Wilson and Luke Wilson in their chestnut orchard

Kiwifruit “We want to take what happens in nature and re-create it rather than rely on spraying,” he said. He’s also looking to the future, especially ways to reduce labor expenses as kiwifruit in particular is labor-intensive and with California’s minimum wage on the way up to $15 an hour, he noted that some growers in Europe pay their workers that much for an entire day’s work. Luke’s brother, Jake — who owns a financial planning business in Chico — also is closely involved in the business and manages the financial side of the house. He has a 3-yearold son who’s already doing chores on the farm and another child due any day. “I grew up working in the packing house and it gave me an appreciation for a good work ethic. I’m excited to see my little guy getting to experience the same thing,” he said. Luke Wilson, meanwhile, continues to look for new ideas and new ways of doing things. “The best way to exploit a niche is that you have to be open to new things and keep your eyes out for what people want. If you see a lot of demand for something and you have the ability to do it better than everyone else, you need to be able to pivot,” he said.

Originally named Chinese gooseberry, kiwifruit is the edible fruit of a woody vine native to northern China. Commercial vineyards were planted in New Zealand a century ago and were named kiwifruit because of a resemblance to the flightless kiwi bird native to the islands. One new variety grown by the Wilsons is Tropikiwi, which is marketed by Wild River and has smooth, bronze skin and an internal flesh that varies in color from light green to golden yellow. It’s sweeter than the standard Hayward variety and the lack of fuzz makes it more palatable to eat without peeling. A Canadian company uses Tropikiwi in a wine cooler. Another is the Mega Kiwi, which is about 50 percent larger than the Hayward variety and can be thinned and harvested at a significantly lower cost. The Fresno Bee reports that the fruit — a native of Greece — is the result of a natural genetic mutation.

“I know I’ll have to pivot at some point because things change and you have to be ready. Who knows what things will be like in 20 years. There are going to be ups and downs, but you can’t let the downs get you too far down, because next year you have a clean slate and another opportunity for a home run.” John Frith is a public relations consultant and writer who specializes in helping business associations and companies tell their stories. Based in Folsom, the USC graduate’s clients include Farm Credit West, the Farm Credit Alliance, and the Family Business Association. He previously was a newspaper reporter, congressional press secretary, and public affairs director for several state agencies and trade associations. For more information, visit twscommunications.com.

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COMMUNITY CENTER

KC’s Farm Up and Running at the Kern County Fairgrounds LOCATED ON TWO THIRDS OF AN ACRE within the Kern County Fairgrounds, KC’s Farm has recently been opened to the public. This community farm is currently growing 150 commodities, ranging from pistachio trees to rows of corn. While hundreds of thousands of visitors will be able to visit the farm as part of their admission to the Kern County Fair, several local classrooms will visit the site throughout the year as an edible classroom.

Construction of the farm was completed through contributions from the community, including Farm Credit West. It is the goal that this project will provide opportunity for children to learn where their food comes from in a fun, inviting environment. Phase II of the KC’s Farm project is development of a kitchen classroom where students will receive instructions on how to prepare simple, healthy meals.

The 16th Annual SLO Great AGventure is Another Success Farm Credit West staff joined more than 1,200 fourth graders from 22 schools in San Luis Obispo to participate in the 16th annual Great AGventures event this fall. This program is a free fieldtrip hosted by the San Luis Obispo County Agricultural Education Committee and is financially supported by community donors. Bethany Filter and Marlea Lyon, both Vice President — Credit staff based out of the Templeton and Paso Robles branches, worked as rotation leaders as children received a hands-on learning experience about the many facets of agriculture and the important role it plays in their lives.

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Woodland High School Greenhouse Project Farm Credit West is honored to have participated in a recent community fundraising effort in Woodland, California, focused on constructing a greenhouse classroom on the Woodland High School campus. Having secured over $200k in funding from the community, the greenhouse construction project is now well underway. The concrete and electrical work are progressing quickly, which will allow students to soon reap the benefits of the new agricultural center. This project is a wonderful addition to the high school and will provide opportunity for the next generation of farmers to engage in a practical learning experience in a safe, encouraging environment.

Volunteering to Help Women Receive a Fresh Start

Read with a Farmer Day

Earlier this fall, the Farm Credit Services Southwest Tempe branch staff spent an afternoon volunteering at Fresh Start Women’s Foundation. Fresh Start provides education, resources and support for women 18 years and older seeking ways to positively transform their lives. Fresh Start provides computer resources and training, family law support, mentoring and other services. Volunteers were tasked with sorting and organizing clothing and shoes donated to Treasures Within, Fresh Start’s clothing resource. Treasures Within helps provide women with professional wardrobe options at minimal cost.

In celebration of National Read a Book Day, Farm Credit Services Southwest staff, along with others from the local agriculture community, recently volunteered to read to young students in 14 classrooms in Imperial County. Volunteers read books focusing on agriculture such as, “Who Grew My Soup?” by Tom Darbyshire to more than 400 third graders. The goal of this program is to connect young students with local farmers, ranchers and agriculture industry professionals. By visiting with these children in the classroom, students are provided with the opportunity to learn where their food comes from and understand how large of a role agriculture plays in their community. Programs such as Read with a Farmer teach young students more than just where their food is grown, it opens the door to future career opportunities in agriculture to the next generation. Pictured above: FCSSW’s Sandy Ranson reads to a classroom full of students

Pictured above: Laura Marsh and Neva Street; Laurie Warren, Debbie Bryant and her sister Julie

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The Changing Water Risk to Agriculture By ERA Economics LLC — Duncan MacEwan, Steve Hatchett, Richard Howitt

Water is the lifeblood of California’s $50 billion farming industry. California would not be the nation’s leading food producer without our investment in water storage and delivery infrastructure, and growers’ ability to use that water efficiently. But much of this infrastructure is old, and its ability to provide water for farms has been reduced to provide water for other purposes. Maintaining our agricultural bounty has come at a cost of chronic overuse (overdraft) of groundwater in many areas, and now by law, this overdraft must be eliminated over the next twenty years. As water supplies dwindle and become more unreliable, water risk increases. Changing water risk will create new challenges and opportunities for growers in California. The challenges can be boiled down to the fact that there will be less water available, and that the cost of water is increasing. There are also opportunities to identify areas with more reliable water supplies, and develop innovative ways to use existing supplies in other areas. Staying on top of water policy can help growers anticipate challenges and identify opportunities.

Groundwater Sustainability

The Sustainable Groundwater Management Act (SGMA) is currently being implemented across the state. SGMA is a law passed in 2014 that requires most groundwater sub basins to achieve sustainable groundwater use by 2040. Within each groundwater sub basin, Groundwater Sustainability Agencies (GSAs) are tasked with developing Groundwater Sustainability Plans (GSPs) that specify, among other things, how much groundwater can be pumped within the GSA. The amount of groundwater that can be pumped is called the “safe” or “sustainable” yield, and in many sub basins is less than the amount required to grow a crop.

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GSPs are likely to include measures to reduce the amount of groundwater pumped by growers. Impacts differ widely between GSAs, depending on natural recharge from rainfall and runoff and surface water supply. A parcel in one GSA might have a safe yield of 2.8 feet per acre, and be directly across the street from a parcel in the neighboring GSA where the safe yield is only 0.4 feet per acre. As 2040 approaches, growers will have to adapt, especially in areas with the greatest overdraft. Areas with greater access to reliable surface water could increase their advantage over areas more dependent on groundwater. Over time, farm land prices will increasingly reflect access to reliable water supply.

Other Surface Water Risks

Laws and rules continue to change in ways that affect surface water supply. For example, the State Water Resources Control Board has proposed new rules for the diversion of water from San Joaquin River tributaries and is soon expected to release similar proposals for the Sacramento Valley. Limiting diversions from the San Joaquin River could result in significant  — some might say unreasonable — reductions in the amount of water available for farms in those areas. Endangered species protections also give federal and state agencies the power to curtail water diversions. Water related costs may remain relatively stable in areas with good rights to state or federal water. However, both the state and federal water projects have identified major capital needs for repair and maintenance, including costs for ongoing dam safety


fixes and subsidence repairs. In areas with more limited water supply, the general trend will likely be toward higher costs because developing new water supply is expensive, if it is even possible. On the positive side, state and local agencies are working to improve water storage and distribution. California voters have supported recent bond measures to improve or fix water infrastructure. Proposition 3 on the November ballot, if passed, would provide substantial money for such projects. The Bureau of Reclamation is exploring ways to increase water deliveries for its projects. Another promising idea is capturing flood water during the winter and diverting it to fields to recharge aquifers.

A Positive Outlook

Is changing water risk all bad news for the future of California agriculture? No. The good news is that sustainable groundwater management does provide benefits by stabilizing pumping costs, slowing replacement of wells, and preventing subsidence. More importantly, California growers produce specialty crops whose market grows as the world’s population and wealth grows. Domestic and export markets will continue to grow and support higher prices for California crops, even with increasing water costs.

ERA Economics is a consultancy specializing in the economics of water and agriculture in the west. The team at ERA works with clients to develop economic analysis for business and policy decisions.

Looking for a deeper dive? Download the Commodity and County Water Risk Assessment reports in myFCW. To access, log in to your account at FarmCreditWest.com, click on “My Industries” and select “Cultivating Yields” in the Category dropdown box. ALMONDS

Almond Market Risk Assessment

Overview

Risks faced by almond producers: 1. Market risk is defined as uncertainty in almond production and consumer demand. 2. Macroeconomic risk measures the effect of exchange rates and trade policy on almond prices. 3. Water risk results from uncertain water supply, and increasing water costs. 4. Regulation risk measures the cost of new regulations to the farm.

KINGS COUNTY

Q2

ertainty ply unc tors: water sup risk? r key fac ect of is water d by fou the eff What is define asures bility. It risk me profita Water cost. t on farm ility and cost. ilab and ava , and cos er t crops. lity face wat ility, qua permanen 1. Sur er availab the share of wat und ons, and 2. Gro t conditi 3. Marke s. ulation 4. Reg t, limits nt? porta tion cos risk im reases produc eage. water inc pped acr Why is er supply s the total cro ain wat ert reduce Unc ices, and crop cho

Region Overview

? nging face risk cha about sur risks. water ertainty Why is farming sing unc ement increases • Increa manag deliveries water water and the e ground er use tainabl ge. undwat • Sus gro shorta al er t tot e wat will limi surfac the to offset nent crops in d to ability ma to respon sing per ability the • Increa ts crops. restric tching g. region ge by swi n of decreasin rta water sho s show no sig tion ula • Reg

Regional Wate

r Risk Assessme

Q2, 2018

What is water risk? Water risk measu res the effect of water supply and cost on farm uncertainty profitability, define 1. Surface water d by four key factor availability and s: cost. 2. Groundwater availability, quality , and cost. 3. Market condit ions, and the share 4. Regulations of permanent crops. that affect water use.

agri-

Why is water risk important? Uncertain water supply increases production cost, crop choices, and reduces the limits total cropped acreage.

nt

Why is water risk changing? • Sustainable groundwater manag

ement requirements will limit the ability to use groundwater to offset cuts in dry years. • Alternative sources of water supply are limited and expen sive. • Increasing permanent crops in the region restricts the ability to respond to water shortages by switching crops. • Groundwate r quality is limited in many areas, which can limit crop choice , increased cost, and reduced yield.

ust ting a rob farm suppor res of markets, to measu er risk al export factors tive wat rnation er risk the rela ic and inte t relate wat shows tha domest ex that models crops for ical ind nomic e mix of Water Risk a statist k ng eco ers Ris into usi div a ed s on asured Water duces triction n combin This analysis covers nty pro risk is me tory res are the s have ula the Tulare Lake doe ults reg Kern Cou nomy. Water to se res Subbasin and plantings have region e of te due l eco Kettleman Plain increased in conce ion. The nty. ever, the to offset som the sta cultura Subbasins in Kings the reg ntrated areas, t. total irrigate Kern Cou ions in ation. How ions cosof bility in growing by 28% County. Perma d acreage in the tricts in ing opt lement other reg les and profita nent crop over the last 5 region. Region tive to MA imp quality, soils, and ation dis s, provid ying sca SG rela years, and curren rce irrig al water risk varies var er at risk sou , permanent crops. er across tly comprise 25% due to significant acts und These are all linked of supply oss the county models that relate rage wat variability in ground ertain imp e portfolio ve ave and interdepende acr water unc abo risk factors to tion water, water and divers into a statistical nt. Water risk measures of farm nty has sidera is measured using er supply unities and a index that shows profitability in Kern Cou under con eral wat economic are ort the the region. These fed relativ ts opp e water risk across g jec results are then state and water bankin king pro the region. combined Water risk is chang t e and ban can rag nifi ing. The region sig l sto depends on import in the south, and . Severa ed surface water, uncertain sustai this risk nable groundwater has limited ground production and permanent crops management water yield and require quality have k Index a deman ments inflexib is Ris d. However, differe across the region le water - high) Water . Local silage nt methods are the region to cope index (low used risk d er across risk fiel with surface water The of wat Bakers including water fluctuations, ranking ed on the exchanges, storag Water Risk relative ion bas e programs, local water markets, the reg Lemoore Hanford above. and groundwater across Low ntified recharge and ional tors ide banking. tive, reg Low-Medium key fac is a rela Water Risk Index en Medium y betwe Risk Since this will var Water The risk index and (low - high) is Medium-High e area, index, risk Low sam p. a relativ e ranking of water risk across in the dium this ma High the region based parcels Low-Me ected in er risk refl on identif the not key ied m factors above. Since this Kings County that is Mediu risks, wat is a relative, region igh risk will vary betwe of farming al index, Medium-H Like all en parcels in the r a period ng ove same area, and some that is hav not ereflect High is changi ed in this map. nty Like all farmin water riskriskfuture. g risks, higher water Kern Cou years. ing over a period in the is chang 1 as with of years. g costs ment – using cost. Are asured increasin Water Risk Assess ility and risk is me tistical g risk and availab ional Water risk is measu er Corcoran sin Reg Water rea wat nty red using an econo inc ng Kern Cou ic and sta ishes how statistical analys mic and result in to changi econom is that establishes ponse likely to establ s in res profitability chang how farm s that that are analysi es in response y change ditions to changing fitabilit ply con water availability farm pro n of water sup and cost. atio combin

Why is almond risk changing? 1. Almonds are an export product dependent on global consumer demand growth. 2. Uncertain trade agreements and a stronger U.S. dollar affect demand for almonds in export countries. 3. California production is increasing with expanding acreage and higher yields. 4. Dry year water costs are increasing. 5. Labor and air regulations increase production costs.

Overview Almond acreage grew rapidly over the last decade, expanding by over 66% to more than 1.3 million acres across the state. What drove these trends and what risks can the industry expect over the next several years? Almonds are an export commodity. California exports around 70% of total production. Over the last 20 years, total exports grew by 180% and now average around 1.4 billion lbs annually. European and Asian countries have driven this increasing demand. As an export commodity, prices are sensitive to macroeconomic conditions such as the strength of the dollar. Tariffs in key export markets, such as China, can have effect farm-gate price. The almond market is cyclical: prices increase, acreage expands, total production increases, and prices eventually soften. This cycle is further driven by consumers eating fewer almonds when prices are high. The industry appears to be just past the peak of the most recent cycle. Since the peak prices of $3.50/lb in 2015, average prices have fallen by 16% to $2.90/lb. As the 330,000 nonbearing acres of almonds come into production there is likely to be continued downward pressure on price. Our economic analysis estimates that prices could settle between $1.95 and $2.40/lb over the next five years. Almond Price and Acreage Cycles 1,400

$4.00 $3.50

1,200

$3.00

1,000

$2.50

800

$2.00

600

$1.50

400

$1.00

200

$0.50

Kings County Regiona

l Water Risk Assess

ment – 1

$-

2000

2002

2004

Acres

2006

2008

2010

2012

2014

2016

Acreage (1000's)

Risk As l Water , 2018

Regiona

Region

Price ($/lb)

nt sessme

TY COUN iew KERN al Overv

Q2, 2018

0

$/lb (In 2016 dollars) Almond Market Risk Assessment – 1

WINTER  2018

13


GUEST ARTICLE

The Impact of the New Tax Law on Agriculture Companies By Ann Braun

The tax reform law introduced as the Tax Cuts and Jobs Act (TCJA) provides significant tax benefits for the agriculture industry. There are complexities in the new regulations, however, that require careful consideration. Pass-Through Benefits Among the most significant TCJA provisions is a 20 percent deduction against Qualified Business Income (QBI) for passthrough entities (PTEs), which is good news for the PTEsaturated agriculture sector. QBI is typically ordinary income, less ordinary deductions, of a qualifying trade or business (TOB), which includes agriculture. Interest, dividends and capital gains are generally not considered QBI. The QBI deduction is limited to the lesser of: (a) 20 percent of QBI, or (b) the amount that is the greater of (i) 50 percent of the TOB’s W-2 wages or (ii) 25 percent of W-2 wages paid plus 2.5 percent of the unadjusted basis of the TOB’s qualified depreciable property. Taxpayers with taxable income below $157,500 ($315,000 for married taxpayers filing a joint return (MFJ)) are not subject to the limitation. This limitation phases in and applies wholly when taxable income exceeds $207,500 ($415,000 for MFJ). Farmers should focus on tax planning to maximize the QBI deduction. They may be able to make changes to avoid the limitations imposed. This deduction expires at the end of 2025, but an extension is currently being discussed. Farmers should monitor the “Tax Reform 2.0” developments closely.

Depreciation Benefits Conventional wisdom recommends expensing over capitalization, but capitalizing eligible property purchases will favorably affect the limitation on the QBI deduction. Another factor that makes capitalizing purchases more desirable is the enhanced bonus depreciation deduction. Agriculture companies

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can take a 100 percent deduction for capitalized purchases of qualifying property placed in service after September 27, 2017, and before December 31, 2022. Most agriculture assets, both new and used are eligible for bonus depreciation. The TCJA also provides benefits for expensing assets; the tax reform law increased the Code Section 179 expensing election to $1 million, which will be especially significant once the 100 percent bonus depreciation is phased out. Additionally, the TCJA changed the recovery period to five years for new farming machinery or equipment (other than those involving grain bins, cotton gins, fences or land improvements). Farmers are also no longer required to use the 150 percent balance depreciation method for these types of farming assets.

Business Interest Limitations For farms with taxable income over $25 million, the TCJA limits business interest deductions to the sum of business interest income plus 30 percent of adjusted taxable income (essentially EBITDA through 2021, and EBIT thereafter). Surplus unused business interest can be carried forward. Farmers can forgo the limitation, but they must depreciate property using the ADS rules, making their property ineligible for bonus depreciation. With careful tax planning, farmers can minimize the impact of these limitations. The TCJA limits business losses for non-corporate taxpayers to $500,000 annually for MFJ ($250,000 single). Aggregated net losses passed through partnership and S corporation holdings are included, and any additional loss is carried forward indefinitely as a net operating loss (NOL). NOLs can no longer be carried back, but can be carried forward indefinitely. The NOL deduction is limited to 80 percent of taxable income for losses incurred after December 31, 2017; therefore, NOLs can no longer completely eliminate taxable income.

Estate Planning The TCJA significantly increased the lifetime death, gift, and GST exemptions to approximately $11.2 million per person. The enhanced exemption expires at the end of 2025, so farmers with a significant estate may want to make larger gifts before then.


Entity Restructuring

Start Planning Now

Farmers may consider converting their PTE to a C corporation, which benefits from a 21 percent tax rate. This will be especially important to consider if dividends are small and there are no imminent plans to sell the farm. A tax provider can model the projected benefits of converting to a C corporation versus the benefits of staying a PTE.

The TCJA upends much of the agriculture industry’s traditional tax planning wisdom. To navigate the TCJA’s opportunities and pitfalls, consider enlisting the help of a tax advisor.

Ann Braun is a Managing Director in the Bakersfield office of CBIZ and MHM, one of the nation’s top ten accounting providers. She is experienced with tax consulting and tax return preparation as well as succession planning and estate planning for the agriculture industry. She can be reached at abraun@cbiz.com.

F R O M T H E FA R M E R’ S K I T C H E N

Chestnut, Squash & Blue Cheese Soup Serves 4 INGREDIENTS

P R E PA R AT I O N

8 ounces chestnuts

Preheat the oven to 375 degrees. Roast or boil the chestnuts and peel. Put your diced squash on a cookie sheet, add enough olive oil to coat each piece and drizzle with the honey. Season with salt and put on the top shelf of the oven. Cook the squash for about 30 minutes or until the squash begins to color. Remove from the oven and allow to cool.

1 pound butternut squash, peeled and diced 3 ounces blue cheese, roughly chopped 2 cups vegetable stock 1 small onion, finely sliced 2 sticks of celery, finely chopped 2 cloves of garlic, crushed 1 tablespoon honey 1 teaspoon butter 2 slices of pancetta 1 slice of bread, diced 2 tablespoons rosemary olive oil salt and pepper

In a saucepan heat a drizzle of olive oil and the butter, then add the garlic, onions and celery. Sauté for about 5 minutes or until they become soft and begin to brown. Add the peeled chestnuts to the pan, then add the squash and continue to cook for 5 minutes. Add the stock and allow to simmer for 20 minutes. Remove the pan from the heat, crumble in the blue cheese and blend the soup with a hand blender until smooth. To top the soup simply fry the pancetta in a little olive oil until crispy and cut into small pieces. In the remaining fat in the pan fry the diced bread and rosemary with a little salt until crisp. Sprinkle them over the soup just before eating with a dash of cream.

Republished from Chestnut Growers of America | chestnutgrowers.org

WINTER  2018

15


C A N D I D C O N V E R S AT I O N S

Water Questionnaire A TOOL FOR SUCCESS By Randy Dhindsa, Regional Vice President — Credit

N

OT TOO LONG AGO, consideration of access to water was not the most critical component of a grower’s business plan. However with the prolonged droughts of recent years and the introduction of California’s Sustainable Groundwater Management Act (SGMA) in 2014, access to water has become the topic of most conversations surrounding agriculture in California and extending to Arizona due to the 2004 Arizona Water Settlement Act. Through SGMA, local governments and water agencies overseeing high and medium priority basins are required to halt overdraft in an effort to bring groundwater basins into a balanced level of pumping and recharge. Through this Act, it is expected that these targeted basins will reach sustainability within 20 years of implementing their sustainability plans. For critically over-drafted basins, that will be 2040. For the remaining high and medium priority basins, 2042 is the deadline. Now that SGMA is being implemented, many growers are left wondering about the reliability of water sources that can be accessed during periods of drought. With this change in government policy, it’s now critical that growers actively identify current and future opportunities to access to water, and prepare contingency plans if these sources are compromised. Similar to preparing a budget that outlines anticipated expenses and receivables, growers must now anticipate future water sources to be successful. Farm Credit West is here to help. Through our financial review analysis, we work with our customers to complete a Water Questionnaire. Through this process, available water resources are identified, as well as anticipated acre-feet required to service current plantings. This document serves as a useful tool not only to analyze the current situation, but also plan for the future. Why Do I Need to Report on My Water Situation? Through our credit approval process, we work with our customers to understand their operation and unique needs. Not only are we motivated to understand individual situations, but equally important — we provide tools that allow our customers to better

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understand their own water plan. Our primary objective is to avoid placing our customers in a situation where they will fail by providing financing when there are unexplored risks in their operation. Through completion of the Water Questionnaire, our customers are essentially creating a water source plan covering how they are farming today as well as into the future. Going forward our customers are going to be confronted with difficult questions regarding their operations in many parts of our lending territory. For example, if you are only able to service 75% of your pistachio plantings, we want you to consider how you are going to make up the difference to service the remainder of your acres. Are you going to the secondary market? Are you purchasing rights? Are you going to need to pull acreage and fallow some property? Good, bad, or ugly, water has become part of customer’s budgeting process. Estimating increases in water costs, knowing how much water is needed to finish out a crop, and increasing budgets accordingly are critical components to a well written business plan. By taking these steps, no interested party is surprised if something negative were to occur. Rather, your lender knows what to expect profit margins to look like during periods of drought. Understanding your current water situation also allows customers to be proactive, building infrastructure, etc. now so that the operation will be in a better situation in the future. Farm Credit West’s Irrigation Stewardship Loan and Lease program provides low-cost ways to finance these improvements. What are we looking for? If you have applied for a loan with Farm Credit West and completed the Water Questionnaire, you’ve likely asked yourself the question, “What are they looking for?” While each application is unique, there are a few common themes that lenders look at, which are listed below. What is the water requirement for your operation in acre feet? How many acre feet do you need to finish your crop each year? Where are you getting your water source (surface water, wells, or purchased rights)? If you are relying 100% on wells, will your


well support this, both now and in the future? If you are planning on a combination between surface (district) water and wells, how reliable is your district water? How are you going to overcome a difference if things take a turn? At the end of the day, Farm Credit West is only as successful as our owner/customer base. What should you look for? When SIGMA is fully executed, customers in the “Critical Drought” areas are going to be the most heavily impacted. Good, bad, or indifferent, we all have to be mindful of each individuals’ current and future water situation. When considering your water source options, identify two sources if possible. If only one is available, provide justification for yourself on how you will find water in short surface water supply years. Below are a few ideas how to accomplish this: ♦♦ P ut water into “Water Banks.” (Can you bank excess surface water with your water agency for future use during dry times?) ♦♦ A s SIGMA formalizes, there’s potential for a formal secondary water market to form. Pay close attention to how this unfolds. ♦♦ Larger growers have looked at creating their own water storage. ♦♦ Identify alternate ways to store water. Regardless of the political tensions surrounding SGMA, the reality remains that Californians are living on a system that was built for half the population of what exists today. As your lender, we need to (1) be aware of your situation and (2) help you plan appropriately.

Not only do we have a vested interest in our customers’ success, but ultimately, each Farm Credit West customer’s performance impacts one another. As a cooperatively owned lending institute, we want to avoid placing our stockholders at risk because we didn’t properly plan with individual growers on their water sources. It’s all part of the diligence our lending team exhibits every day to provide the best return on your investment, as customer-owners.

2018 – 2019 HOLIDAY SCHEDULE (Farm Credit West and Farm Credit Services Southwest offices are closed.)

Christmas Day

Memorial Day

Veterans Day

New Year’s Day

Independence Day

Thanksgiving Day

Martin Luther King, Jr. Day

Labor Day

Christmas Day

President’s Day

Columbus Day

TUESDAY, DECEMBER 25, 2018 TUESDAY, JANUARY 1, 2019 MONDAY, JANUARY 21, 2019

MONDAY, FEBRUARY 18, 2019

MONDAY, MAY 27, 2019 THURSDAY, JULY 4, 2019 MONDAY, SEPTEMBER 2, 2019

MONDAY, NOVEMBER 11, 2019 THURSDAY, NOVEMBER 28, 2019 WEDNESDAY, DECEMBER 25, 2019

MONDAY, OCTOBER 14, 2019

WINTER  2018

17


T E C H WAT C H

Inexpensive Security Tips for Businesses of All Sizes By Michael Levin, CEO/Founder of the Center for Information Security Awareness | cfisa.com

S

ecurity best practices for businesses of all sizes are more important now than ever. Cybersecurity breaches are in the news every day and having a plan in place is now a required business practice. Most security professionals will tell you there are only two types of businesses; those that have been hacked and those that have been hacked but don’t know it yet. Many companies believe they will not be a target of an attack. The truth is that all companies must prepare for a cyber-attack and physical security risk by having an individual or team in place to protect from such an attack. Below are some tips to protect your business: Create a Security Plan with Policies and Procedures Creating a Security Plan covering all aspects of security for the business — including physical and cybersecurity risk — is now critical for businesses of all sizes. Employees also need to understand what they can and cannot do with company resources including laptops, cellphones and networks. Employee participation and support of cyber and physical security policies and procedures will help make the work environment safer. All companies should have an incident response plan with crucial information such as whom to contact when an incident occurs; what to do to secure the business data or assets and when to contact law enforcement. All businesses must have an “acceptable use policy statement” in place that is signed by all employees on a yearly basis. Security Awareness Training for All Employees Physical and cyber security risk also continues to increase on a daily basis. Human error is best mitigated through ongoing training. Employee awareness is the best way to ensure that your workforce follows best practices. This will limit the threat to your organization and help to create a culture of security awareness. Employee security awareness training not only demonstrates that your business takes the confidentiality of its client’s data seriously, it helps to serve as an important reminder of the day to day risk to everyone. Training can be the difference between keeping your business up and running, or seeing it crippled by a cyber-attack due to a lapse in security.

Background Checks for Employees How well do you know your employees? As a business executive you may or may not have a good working knowledge of your employees and their true background. Hiring a service to conduct a basic background check of all current and prospective employees is an important security practice that will pay dividends. Cyber Security Basics All Businesses Should Have in Place: 1. O perating system and software updates; Windows or Apple updates are required best practices. Are you using old or outdated operating systems? Microsoft and Apple are constantly updating their operating systems and Office software for vulnerabilities, so you need to insure all computers are updated. This also is required for all other software you might be using including Adobe for PDFs. 2. B ackups; to ensure the continuity of your business, businesses must require that all computers and systems are being backed up daily. If any of your employees click on a “ransomware” email you will immediately understand why you need a backup. Put daily backups in place and verify them on a regular basis. 3. W i-Fi Security; make sure all router “out of the box” default settings have been removed and changed. Make sure the highest level of encryption is turned on and that you are using a very strong password. Make sure your router firmware is updated on a regular basis. Use a virtual private network (VPN) whenever possible. Setup a guest Wi-Fi network for visitors at your business. Physically secure your router in a locked location that is not accessible to everyone. Final Thoughts Security can no longer be an afterthought to your business. You must make it part of your business acumen and consider it just as important as anything else you do to make your business successful. If you don’t have an employee that can successfully make security part of their daily work duties, consider hiring a well-qualified vendor to serve this role.

Michael Levin is a nationally known cyber security professional who spent over twenty-two years in the U.S. Secret Service protecting Presidents and Heads of State. Michael retired from the U.S. Department of Homeland Security — as the Deputy Director of the National Cyber Security Division in Washington DC. He enjoyed a distinguished thirty-year career in public service and law enforcement.

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Territory and Office Locations Yuba City Woodland

« Rocklin

Farm Credit West Administrative Office

Hanford

Dinuba

Tulare Paso Robles Templeton Kern County Santa Maria Ventura

Tempe Imperial Valley

ADMINISTRATIVE OFFICE 3755 Atherton Road Rocklin, CA 95765 916.780.1166

Yuma

Rural Arizona/ Safford

PASO ROBLES 1446 Spring Street Suite 201 Paso Robles, CA 93446 805.237.0998

KERN COUNTY 19628 Industry Parkway Drive Bakersfield, CA 93308 661.399.7360

DINUBA 940 W. El Monte Way Dinuba, CA 93618 559.591.9378

RURAL ARIZONA / SAFFORD 1120 S. 20th Avenue Safford, AZ 85546 928.348.9571

TEMPLETON 175 Cow Meadow Place Paso Robles, CA 93446 805.434.3665

WOODLAND 440 Pioneer Avenue Woodland, CA 95776 530.666.3333

HANFORD 1111 W. Lacey Boulevard Hanford, CA 93230 559.584.2681

SANTA MARIA 1178 Tama Lane Santa Maria, CA 93455 805.922.7991

TULARE 200 E. Cartmill Avenue Tulare, CA 93274 559.684.1478

YUBA CITY 1800 Lassen Boulevard Yuba City, CA 95993 530.671.1420

IMPERIAL VALLEY 485 Business Park Way Imperial, CA 92251 760.355.0291

TEMPE 3003 S. Fair Lane Tempe, AZ 85282 602.431.4100

VENTURA 2031 Knoll Drive Ventura, CA 93003 805.477.1020

YUMA 2490 S. 5th Avenue Yuma, AZ 85364 928.344.3200

WINTER  2018

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3755 Atherton Road Rocklin, CA 95677

y Happ s y a d i l o H st Credit We m r a F t a f us o u th w es t ! S from all o s e ic v r e Credit S and Farm


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