spotlight WINTER 2021
Progressively Traditional
Fifth-Generation Farmers Preserve Their Way of Life While Adapting to an Ever-Changing World PAGE 6
COMMUNITY CENTER
DR. KOHL’S CORNER
Farm Credit West Donates over $50,000 to Food Banks
Who Cares, Wins
PAG E 12
PAG E 14
Spotlight WINTER 2021
3 President’s Message
4 Financial Highlights
5 Customer Announcements
5 2021– 2 022 Holiday Calendar
6 Feature Story: Progressively Traditional
11 F rom the Farmer’s Kitchen: Gilda’s Smothered Burritos
12 Community Center
14 Dr. Kohl’s Corner: Who Cares, Wins
16 Guest Article: Tax Changes to Note for Your 2021 Strategy
18 F inancing All Aspects of Agriculture
20 Guest Article: Leveraging Data to Tell Your Story
22 Tech Watch: The State of Ag Security
23 Territory and Office Locations ON THE COVER Stefanie and Andy Smallhouse are carving out new paths to success in Redington, Arizona. Read more about the Smallhouses on page 6.
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 Chair of the Board Sureena S. Bains Thiara . . . . . . Yuba City, CA Vice Chair of the Board Douglas C. Filipponi. . . . . . . . . . . . Creston, CA Joey Airoso . . . . . . . . . . . . . . . . . . . . . Pixley, CA Robert Amarel, Jr. . . . . . . . . . . . . Yuba City, CA Teresa Castanias. . . . . . . . . . . . . . . . . Ivins, UT Mark A. Cook. . . . . . . . . . . . . . . . . . Willcox, AZ Catherine Fanucchi . . . . . . . . . Bakersfield, CA Craig C. Gnos. . . . . . . . . . . . . . . . . . . . Davis, 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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Spotlight WINTER 2021
PRESIDENT’S MESSAGE Mark Littlefield, CEO
Staying Current in a Rapidly Changing World This summer, Farm Credit celebrated 105 years of providing the agricultural industry with reliable and consistent access to credit. Equally impressive is that several of you have been customers with our Association for multiple generations, with your grandparents and great-grandparents obtaining credit from their local Production Credit Association and Federal Land Bank years before merging into what is today Farm Credit West. While our Association’s commitment to local agriculture and rural communities is unwavering, the way in which we deliver credit to our customers continues to be dynamic. The introduction of technology and specifically the internet has only accelerated the change around us. Today we live in a deeply integrated world, introducing new opportunities and markets while also presenting unwelcome threats and challenges. The extent to which our world is becoming increasingly complicated is all too apparent as we conclude a second year of living during a global pandemic. Drastic and nearly overnight changes in global consumer demand triggered by orders to shelter in place as communities around the world shut down to slow the spread
of COVID-19 continue to have lingering impacts. Labor shortages have been exacerbated, the supply chain is unpredictable and constantly evolving state and federal regulations continue to be implemented. These challenges are difficult enough to manage, but add trying to mitigate the impacts of an extended period of drought while the threat of wildfires looms and there is potential to be overwhelmed. As your lender, we are fully aware that your needs, concerns and desires change with the social, economic and political environments. Our team of highly dedicated staff listen to your feedback and collaborate with you to identify ways in which we can continue providing you with excellent service in a way that meets your evolving needs as you guide your businesses through extraordinary challenges. And yet, changes — particularly those we have experienced in the last two years — can come so rapidly it is difficult to anticipate tomorrow’s needs. To combat this uncertainty, Farm Credit West is focusing more on your experience with our Association, as we look to reinforce those benefits that are most important to you. The relationships we build with you, our dynamic product offerings and our
commitment to agriculture are the pillars we stand on as we work to anticipate your needs in the future. To further strengthen these pillars Farm Credit West established a work group of 22 staff members to examine our customers’ experience and to explore opportunities to streamline processes and eliminate pain points for you. By focusing on you, our customer, and evolving our business processes and procedures around your changing needs, we are building an Association that is ready and able to serve your needs for another 105 years. While the world constantly changes around us, Farm Credit West remains grounded. We are focused on our mission as we continually look for ways to do what we have always done — 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. Thank you for your loyalty to our Association in 2021 and we wish you a very happy holiday season. ■
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Financial Highlights Farm Credit West reported net income of $243.1 million for the first nine months of 2021. These year-to-date earnings are ahead of our business plan target for the third quarter. Also, during the first nine months of 2021 our average earning assets and capital levels increased while our allowance for loan losses decreased.
DEC 31
2020
2021
Average earning assets increased $863 million, or 7.9%, during the first nine months of the year. Farm Credit West is experiencing modest levels of loan growth during 2021; loan growth is expected to increase through the remainder of the year. At the end of the third quarter, average earning assets exceeded the third-quarter business plan target.
2017
DEC 31
DEC 31
2018
2019
DEC 31
2020
19.8 %
DEC 31
18.9 % SEPT 30
20.4 %
2019
20.5 %
DEC 31
2018
20.3 %
$ 10,034
DEC 31
2017
MEMBERS’ EQUITY AS A % OF TOTAL ASSETS $ 11,751
$ 9,478
DEC 31
$ 10,888
$ 9,276
AVERAGE EARNING ASSETS* (in millions)
SEPT 30
2021
In the first nine months of 2021, total members’ equity increased $164.1 million, primarily due to net income of $243.1 million, partially offset by a decrease of $79 million in preferred stock.
DEC 31
2017
DEC 31
2017
DEC 31
2018
DEC 31
2019
DEC 31
2020
SEPT 30
2021
Nonearning assets (nonaccrual loans plus other property owned) decreased by $14.4 million from December 31, 2020, or 14.4%, to $85.2 million at September 30, 2021. The decrease was a result of $14.4 million in net repayments on nonaccrual loans during the first nine months of 2021. The other property owned balance has remained unchanged during 2021.
0.66 %
DEC 31
2018
0.59 %
0.61%
0.66 % $ 85
$ 100
$ 126
$ 113
$ 117
NONEARNING ASSETS (in millions)
0.68 %
ALLOWANCE FOR LOAN LOSSES AS A % OF LOANS
DEC 31
2019
DEC 31
2020
Spotlight WINTER 2021
2021
Our allowance for loan losses totaled $70.5 million. This was 0.59% of loan principal and interest at September 30, 2021, compared with 0.66% of loan principal and interest at December 31, 2020. 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 to subsequent years.
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SEPT 30
CUSTOMER ANNOUNCEMENTS
Customer Appreciation Dinners
The Farm Credit West Board of Directors is actively planning appreciation dinners for next year. Customers will be notified of details in early 2022.
2021 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 P or before 2:00 p.m. on December 31, 2021, will be reported as 2021 interest paid.
♦
ayments received after that date and time, P whether or not they were mailed in 2021, will not be reported as 2021 interest paid.
♦
ayments received after 2:00 p.m. on P December 31, 2021, will be processed on the following business day.
2022 – 2023 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 249 scholars and committed $899,500 to this program. Recipients are awarded $1,500, and scholarships can be renewed three times for a total of $6,000 in scholarships from Farm Credit West. Scholarship applications are due February 15, 2022.
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 tax-planning objectives are better met by having the interest portion of your January 1 2022 installment reported as 2021 interest paid, you must register an early transfer of Funds Held to pay your installment in 2021. Written requests for early transfer must be received by the Association by Tuesday, December 28, 2021.
Applicants must be an entering or current college student enrolled in agricultural programs and maintain 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 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, 2022, along with final college transcripts. If you have any questions about the scholarship program, please email: scholarships@farmcreditwest.com.
2021 – 2022 HOLIDAY CALENDAR (Farm Credit West offices are closed)
Christmas Eve Day
Friday, December 24, 2021
Martin Luther King Jr. Day Monday, January 17, 2022
President’s Day
Monday, February 21, 2022
Memorial Day
Monday, May 30, 2022
Juneteenth National Independence Day
Monday, October 10, 2022
Independence Day
Friday, November 11, 2022
Labor Day
Thursday, November 24, 2022
Monday, June 20, 2022 Monday, July 4, 2022
Monday, September 5, 2022
Columbus Day Veterans Day
Thanksgiving Day
Christmas Day Observance Monday, December 26, 2022
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F E AT U R E S T O RY
PROGRESSIVELY TRADITIONAL Fifth-Generation Farmers Preserve Their Way of Life While Adapting to an Ever-Changing World BY SARAH K EARB EY
Like their pioneering ancestors who came before them, Andy and Stefanie Smallhouse are carving out new paths toward success while maintaining their family’s proud history of farming and ranching in southeast Arizona.
The couple’s business, the Carlink Ranch, is nestled along the San Pedro River in Redington, northeast of Tucson, where desert terrain meets small mountain ranges rising gracefully all around. There, Andy and Stefanie run a cowcalf operation and grow a unique crop of cactus, among other endeavors. One of the oldest ranches in Arizona, and named for the original link-and-pin style of railway coupling, Carlink Ranch currently has about 800 mother cows running on 100,000 acres. The Smallhouses own about 10% of their land; the rest is leased from the state. Andy hails from a long line of cattlemen. Andy’s greatgreat-great-grandfather, William Bayless, settled in the area in 1884 (after a brief stint in nearby Cochise), moving his cattle operation from Highlands, Kansas, to Arizona to fulfill a beef contract with the local military fort. Under Andy’s great-great-grandfather, Stuart Bayless, the cattle operation grew, more land was acquired and the ranch eventually stretched from Redington to Oracle, Arizona, and included land in Tucson. Long farmed by Native Americans and Spanish settlers prior to the Baylesses, land along the San Pedro River soon became overgrazed, and Andy’s forefathers lobbied hard for the federal Taylor Grazing Act of 1934, which regulated grazing on public lands to improve rangeland conditions. With the
law in place, the native mesquite tree became invasive, so much so that Andy’s father, Jack, started a charcoal business and worked to clear 800 acres of farmland as a way of resting the range during the summer growing season. “Most of our desirable and dominant grasses are summer grasses,” Andy explained. “The idea was, if we could pull all the cattle down, we could let all that range grass go to seed. We’ve received national awards on range management because we treat it like a crop: If you re-seed every year, you’re going to have a better yield.” Sadly, Andy’s father passed away when Andy was 25, in the midst of water and labor shortages. The farm was in transition, and Andy had to act strategically. He needed to update his irrigation equipment, fencing and tractors. Things got so tight that, to save money, Andy started building and installing his own center pivot sprinkler systems on the ranch and selling them to other farmers. “I saw my dad work really hard, but he could never get ahead,” Andy recalled. “If he needed something, he had to sell cattle, even if prices were low. That’s why we started using Farm Credit West and using loans to help.” Andy and Stefanie opened a line of credit through the Association, which has provided the breathing room Continued on next page
We’ve received national awards on range management because we treat it like a crop: If you re-seed every year, you’re going to have a better yield. ANDY SMALLHOUSE | CO-OWNER, CARLINK RANCH
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they needed to respond to ever-changing market and environmental conditions. As a recent example, things got challenging in spring 2021 when they needed to bring 400 cattle off the range before the start of Arizona’s monsoon season. The lack of natural feed meant the cows weren’t ready for sale, and in April prices dropped to $0.20 a pound for some of his cows as many operations looked to downsize. Instead of being forced to sell thin cows at low prices, the Smallhouses used their line of credit to buy 15 truckloads of hay. The hay sustained their animals until they were ready to sell a few months later, when the market had come back up and the cows were better quality. “We got $0.65 per pound instead of $0.20,” Andy said. “That’s a big difference. Having that flexibility helps a huge amount.” When they first took over Carlink Ranch, Andy and Stefanie diversified their business to keep things going. A decades-long drought forced them to reduce their herd from 800 to 200, and they watched as electric and fuel costs skyrocketed. With plenty of invasive mesquite trees on the land, they started a lumber business, milling the wood on site and selling to homebuilders in the area. They sold hay and firewood, and started a guest program in which they rented out several of their ranch houses.
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Andy also “backgrounded” cattle for other ranches, raising replacement heifers and breeding stock for customers, including the University of Arizona. At one point he was running about 1,100 calves belonging to other farmers. “That was a tough way to diversify,” Stefanie recalled. “You’re taking on a big responsibility. Others’ animals are very important to them, so it was stressful.” In 2010, they began experimenting with growing saguaro cactus. Unique to their region of Arizona, the iconic saguaro are a protected species and, as such, can only be cultivated on privately owned land. Highly sought after by homebuilders, landscapers and nurseries, they are difficult to come by and yield a high return. When the Great Recession hit around 2008 and most of their businesses ground to a halt, the couple saw the writing on the wall and once again pivoted toward a new business opportunity. In 2013, with help from Farm Credit West, they purchased an additional 630 acres and harvested the naturally growing saguaro from that land. They used the proceeds from that first harvest to establish their own saguaro crop. Eventually, they partnered with a botanist, Russ
While saguaro is a high-profit crop, the cactus is extremely slow-growing... The seedlings start off in greenhouses, but it can take up to five years for a saguaro to reach a height of one foot. Once it has, it’s transplanted to a row crop outside, where it may grow about a foot a year.
Buhrow, and established an exclusive contract with Civano Nursery in Tucson. While saguaro is a high-profit crop, the cactus is extremely slow-growing. To mitigate risk, the couple also grow several varieties of barrel cactus — golden and fish hook — and hedgehog cactus. The saguaro is their largest crop, however, with 150,000 plants established on the farm. “I could sell about 10,000 5- to 6-footers a year if I had them,” Andy said. “I can’t keep up with demand.” “It makes pistachios and Christmas trees look like shortterm businesses,” Stefanie joked. The seedlings start off in greenhouses, but it can take up to five years for a saguaro to reach a height of 1 foot. Once it has, it’s transplanted to a row crop outside, where it may grow about a foot a year, depending on the variety and genetics. Not much is known about cultivating them, so Andy and Russ are experimenting with soil nutrients and watering to maximize their growth rate. According to Stefanie, whose background is in biology, one of the challenges of being trailblazers in the business is a lack of certainty about what they’re growing.
“Because we’re the only ones doing it at this scale and we’re harvesting our own seeds, we can’t go out and buy certified seed,” she said. “So we don’t know what we’re going to get. Some plants grow fast, some seem like they barely grow. It’s hard to know what you have until you’re years into it.” She added that for a hardy desert plant, saguaro is surprisingly fickle. In the wrong conditions, the cactus is susceptible to mealybugs, root rot, sunburn and freezing. On the upside, however, they produce a sweet, red fruit, are an extremely low-water crop and evoke a nostalgia for the Southwestern lifestyle few other plants can touch. After years of trying their hand at many different businesses, the Smallhouses are focusing their efforts where they can be successful. But for this progressive couple, that doesn’t mean they’re done innovating. Always staying ahead of the curve, Andy and Stefanie have recently entered into a partnership with a local artisan butcher to supply beef to his private boutique slaughterhouse. The investment will allow them to avoid constant uncertainty in the beef market and gain control over pricing and other factors. “Selling direct, the prices will fluctuate a little, but not a lot,” Andy said. “We’ll know what we’re going to get. And we’ll Continued on next page
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have contracts from restaurants and stores. It’ll create more sustainability for myself and my kids.” To control quality and ensure a steady supply chain, the couple plans to work with a handful of other ranchers producing the same kind of cattle they do. They’re aiming to differentiate themselves from the big processors, like JBS and Tyson, by offering a higher quality, longer-aged product that is difficult to find elsewhere. “We know in order to be successful you have to integrate into a consistent and loyal supply,” Stefanie said. “If you build something similar to a co-op, where supply chains are built around relationships and loyalties, you’ll be able to continue it. We’re looking at becoming an artisan beef supplier.” Stefanie knows a thing or two about breaking the mold and standing up for change. A longtime member of the Arizona Farm Bureau, for the last four years she has served as president of the organization. She is also on the American Farm Bureau’s Board of Directors for the Western Region, and travels frequently to Washington, D.C., speaking at congressional hearings and advocating on behalf of farmers in her state and region. Her advocacy involvement started years ago when Pima County was looking to use the Smallhouses’ land for owl habitat as mitigation for a housing development going in on farmland. Stefanie used her knowledge and skills in the public forum to eventually emerge victorious, but the gap in the public’s understanding of farming became glaring.
…I realized [the public doesn’t] get agriculture, and the people who are farming and ranching don’t have a lot of time to get out there and explain it. I knew we had to be involved. STEFANIE SMALLHOUSE | CO - OWNER , CARLINK RANCH
“That’s when I realized people don’t get agriculture, and the people who are farming and ranching don’t have a lot of time to get out there and explain it,” she said. “I knew we had to be involved.” Today, she focuses much of her efforts on labor and water issues, both of which have affected the Smallhouses in recent months. The family has surface water rights for their farm, but just learned that the state will count any groundwater they pump as surface water, significantly reducing the amount of their effective allocation.
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“They’re preservationists and we’re conservationists,” Andy said of the agencies that administer environmental regulations. “If we can’t water two-thirds of our farmland, it affects everything, because we can’t rest the other third. But they only care about how many acres you’re watering, not what you are growing and how efficiently you are applying that water.” Despite the issues and challenges they’ve faced over the years, for the Smallhouses, there is nothing more rewarding than seeing the fruits of their labor resulting from consistent hard work and innovation. Be it improving agricultural policy at the state or national level, or harvesting the first large-scale crop of a treasured native tree, it’s a feeling Andy’s father and his forefathers were surely familiar with. “It’s a little addicting,” he mused, gazing over his cactus crop. “In farming, everything you do, you can see results; you don’t get that with a lot of jobs.” He adds, with a laugh: “Although with the cactus, it does take a little longer.” ■
Andy Smallhouse (right) explains the unique growing process for suguaro cactus to Farm Credit West’s Rural Arizona Portfolio Manager, Mark Brawley (left).
F R O M T H E FA R M E R’ S K I T C H E N
Gilda’s Smothered Burritos Andrew & Stefanie Smallhouse • Farm Bureau • fillyourplate.org
ING RED IENTS
D I R ECT I O N S
2 ½ c. beans prepared with salt pork
Beef and bean filling: Cook your beans with salt pork (⅓ lb). Depending upon method allow 2–4 hours. Do not drain beans; you will need bean broth for later. Cook hamburger over medium high heat adding seasoning and salt and pepper to taste. Drain off the fat, leaving a little for flavor. To this add the salsa and simmer for about 15 minutes. While the beef simmers with salsa, prepare your bean sauce. In a blender puree about 1 cup of the prepared beans with ⅓ cup of the bean broth and 3 tbsp. of red chili sauce. Blend until smooth and creamy with an easy to pour consistency. This makes about 2 cups of sauce to pour over the burrito once filled with your burrito goodies. Continue your beef filling by adding the remaining beans. Simmer the mixture mashing slightly, for another 15 minutes. If a little dry, add more salsa or bean broth. Turn to low and keep warm. Red chili sauce: Add all seasoning to enchilada sauce and bring to a boil. Add 1 cup of water with 1 ½ tbsp. flour to thicken sauce. Simmer for 30 minutes. Burrito toppings: shredded cheese (Pepper Jack or Colby Jack), avocado, sour cream, lettuce, tomato, olives, and green onions.
1 lb. hamburger
½ tsp. garlic powder
1 c. salsa
Tortillas Salt & pepper 10.5 oz. prepared red enchilada sauce
1 tbsp. chili powder
½ tsp. garlic powder
½ tsp. pepper
3 tsp. onion powder
1 ½ tsp. salt
1 c. water
1 ½ tbsp. flour
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COMMUNITY CENTER
Farm Credit West Donates over $50,000 to Food Banks THIS FALL, Farm Credit West distributed over $50,000 to support local food banks throughout California and Arizona. Each organization received a donation to help fight food insecurity in the regions where our customers and staff live and work. Year after year, Farm Credit West prioritizes giving to food banks who are providing quality foods to struggling individuals and families. We recognize that our customers are growing the most nutritious food in the world, and it is imperative that families in our communities have access to these products in times of need. Our Association will continue to prioritize generous giving to these organizations, helping to ensure those facing difficult situations do not go hungry.
TOP: Sara Griffin, Executive Director for Imperial Valley Food Bank and Daniela Soto, Loan Officer Trainee, Imperial Valley Branch. BOTTOM: Q Nielsen, Director of Operations, Arizona Division, Midwest Food Bank; Merilee Baptiste, Executive Director, Arizona Division, Midwest Food Bank; and Doug Norton, Senior Vice President and Portfolio Manager of Farm Credit West’s Tempe, Arizona location.
Arizona Foundation for Agricultural Literacy Hosts 31st Annual Summer Ag Institute For years, Farm Credit West has supported Arizona Foundation for Agricultural Literacy (AFAL), an organization dedicated to teaching the public, as well as students and educators, about the value of agriculture in Arizona. An important component of this organization is the annual Summer Ag Institute (SAI), which hosts 30 teachers from rural and urban communities throughout Arizona. This group of educators spends five days traveling to different areas of Arizona learning from farmers and agriculturalists about the impact of ag statewide and in the local communities.
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Due to the pandemic, SAI was hosted virtually in 2020 and moved to a hybrid model for 2021. Attendees of the institute find the experience to be extremely impactful and are typically amazed by what they learn over the five days. They then take the information back to their classrooms and infuse their new knowledge about agriculture into lesson plans for the next school year. In the past, Farm Credit West has offered sponsorship and staff have volunteered to speak about agricultural financing. We look forward to supporting this
important organization and its impact on teachers and the next generation for many years to come.
Teachers attending the Summer Ag Institute receive hands-on agricultural experience sweeping for insects.
Farm Credit West Supports 3rd Annual Farm Day In September, Farm Credit West sponsored Students for Eco-Education & Agriculture (SEEAG)’s 3rd Annual Farm Day in Santa Barbara County. More than 10 Santa Barbara County farms, ranches and agricultural organizations opened their facilities for tours and invited neighbors to experience the importance of agriculture in their community. Not only did our Association offer a sponsorship, but many members of our staff also attended the event. Farm Credit West is proud to support SEEAG and events like Farm Day. Educating the public about agriculture’s contribution to our communities is vital to the continued strength of our industry. Farm Credit West Staff Member Karen Gamboa spends Farm Day with her daughter. Farm Credit West staff member Brian Boersma enjoys a tour at Bonipak Produce.
Imperial Valley Branch Receives Philanthropic Corporation of the Year Award The Imperial Valley Community Foundation (IVCF) awarded Farm Credit West’s Imperial Valley branch with the 2021 Philanthropic Corporation of the Year award during their National Philanthropy Day luncheon in November. During the event, IVCF recognized Farm Credit West for generously giving each year to local organizations and youth programs such as the FFA, 4-H, the local food bank, the Boys and Girls Club. Imperial branch staff members were thanked for actively volunteering their time for the benefit of the Imperial Valley community through agriculture career awareness, mentorship and participation in charitable events. Investment in our local communities is a longstanding core belief at our Association. As a member-owned lending institution, we care deeply about the communities in which our customers and employees live and work. Our Association is honored to be presented this award.
FROM LEFT TO RIGHT: Bill Collins, Farm Credit West Imperial Branch Portfolio Manager; Stephanie Collins and Stacy Amparano, both employees of Farm Smart, a beneficiary of Farm Credit West’s annual giving.
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D R . KO H L’ S C O R N E R
WHO CARES,
WINS By Dr. David M. Kohl
A
ccording to the Financial Times, ESG is a general term used in capital markets and by investors to evaluate corporate behavior and to determine the future financial performance of companies. ESG (environmental, social and governance) is a new measure of success for corporations, nonprofits and, more broadly, individual countries. Globally, trillions of dollars are being funneled into this area to ensure the continuation of ESG principles. To prosper over time, every company must not only discuss financial performance, but show how it makes a positive contribution to society. From the corporate level to the individual producer, all levels of the agriculture industry will have decisions influenced by these broad ESG components. More outside investors and consumers are holding corporations accountable for transparent and accountable production and distribution throughout the system.
AGRICULTURE: THE SOLUTION One of the benefits of being engaged with all levels of the agriculture industry over the decades is the ability to connect the dots and identify emerging trends. Whether I am delivering speeches, seminars, conducting strategic planning with businesses, or making plans as a part owner of a creamery, these trends come to the forefront of decision-making, sometimes in a fast and furious manner. In recent years, environmental, social and governance (ESG) principles have become more prominent on the radar screen in the agriculture industry.
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In recent years, the agriculture industry has been observed by some as the problem, related to environmental issues. However, by following positive environmental practices, the switch can be flipped to a solution. For example, extreme weather such as flash floods and extended droughts are being observed across the globe. Improved soil health can be a solution to counter these extremes. A recent young farmer panelist gave a testimonial explaining practices that encourage soil and water health. This producer transformed his farm and ranch over a five-year period. Instead of harvesting 10,000 round bales a year, he now uses livestock to harvest the grass about 95% of the time. Investments were made into pasture management, watering systems and other practices that lead to soil health. He mentioned that his soil practices have resulted in more drought tolerance and the ability to handle occasional blizzards, with extra pounds on the cattle going to market. He has generated greater bottom-line profits by reducing his overhead costs with less machinery and equipment. He and his family are now investing back into the community, part of the social component, by purchasing a local grocery store and processing plant with some other young farmers and ranchers. Through technology they are marketing their products throughout the U.S. using carefully designed packaging aligned with consumer values. Now, there has been interest by larger grocery chains seeking some of their products that meet the ESG metrics. His comment to the group of participants was, “Who cares, wins.” From the farmer and rancher to the consumer’s plate, this is just the beginning of the ESG trend and the intensification of the information age and data management. Transparency regarding an ESG mindset will be a strategic trend in the industry, whether it is food, fiber or fuel.
POSITIONING AGRICULTURE During a recent interview with a television station, I was asked, “Is the green movement, or the carbon-based movement, positive or negative for agriculture?” My response was neither, but it is inevitable. The momentum in the U.S. and around the globe will intensify the green movement by the year 2025. Each business must evaluate the pros and cons and complete a cost-benefit analysis as there will not be a boilerplate answer. The green movement will require intense record-keeping and documentation with the theme of doing well by doing good.
The green movement will require intense record-keeping and documentation with the theme of doing well by doing good. Our creamery has historically sold a majority of our milk in glass bottles. A discussion during a local taxi ride led to an interesting story. The taxi driver’s family was from Iraq, where he was a military interpreter with the United States Army. I was pleasantly surprised to find out that his family purchases our creamery’s milk because it is in a returnable, reusable glass bottle, and they indicated that it tastes better. When he took his family to Iraq, his teenage daughter asked, “Where is the creamery’s milk?” Wow! We never know how our business practices, in this case environmental and social, can result in bottom-line profits and a sense of doing good for the consumer. In conclusion, whether your product is crops, produce or livestock, awareness of the ESG trend and how it is being examined throughout the agricultural system will be critical as we navigate the decade of the 2020s. ■
Dr. David Kohl energizes agricultural lenders, producers and business professionals with his keen insight into the agricultural industry through extensive travel, research and networking around the globe. He is a Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship at Virginia Tech, Blacksburg, VA. Dr. Kohl has traveled nearly 10 million miles in his career and conducted over 7,000 workshops and seminars for a variety of agricultural audiences. Additionally, Dr. Kohl’s personal involvement with agriculture provides a unique perspective into the future trends of the agricultural industry and economy.
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GUEST ARTICLE
Tax Changes to Note for Your 2021 Strategy By Ann Braun
As a farmer, you wear many hats. Scientist. Businessperson. Veterinarian. Weather forecaster. With all the hard work you do year-round, adding “accountant” to your resume during tax season may seem overwhelming. Keeping up with the latest tax incentives and farming-specific tax rules is no easy feat, especially with the constant flow of changes. This year alone, proposed legislative changes could drastically impact your filings, and there are tax benefits up for grabs that could save you thousands. With tax season looming, let’s take a look at these proposed changes and incentive programs so you can minimize your tax liability.
Hedge Your Bets with Tax Rates by Considering Timing of Income and Deductions
One of the most challenging parts of planning for 2021 taxes has been anticipating where the tide may turn when it comes to tax changes. President Biden’s tax plan supports raising federal income tax rates to pre-tax reform levels, but whether the Democrats’ slim majority in Congress is enough to turn that plan into law remains to be seen, as of the time of this publication. A strategy that can help farmers hedge their bets with this uncertainty involves taking a look at the timing of income and deductions. Farmers often qualify to use the cash method of accounting, which enables you to deduct your expenses as they’re paid and report income when it’s collected. You may want to consider accelerating income collections into 2021 (when possible) or delaying payments for expenses into 2022, in the event that 2022 tax rates are higher.
Tax Incentives and Deductions Available to the Farming Industry
Even an experienced agricultural leader may not know all of the tax incentive programs and resources available. Determining eligibility and deciphering the rules for each one is a manageable process, especially with the help of a trusted tax expert.
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Let’s break down four tax incentives readily available for agribusiness: Opportunity Zone Investments Created as part of the tax reform law commonly known as the Tax Cut and Jobs Act (TCJA), opportunity zones are tracts in economically depressed areas where reinvestment of previous capital gains may be eligible for preferential federal tax treatment. There are currently 8,700 designated opportunity zones across the United States, providing ample room for agricultural businesses to grow. California contains the most opportunity zones, with 879 designated tracts in 57 counties. Net Operating Losses (NOLs) A useful tool to help businesses reduce their taxes, a net operating loss is a tax attribute that arises when tax deductions are higher than taxable income in a year. If you have appropriate levels of income in 2021, you’ll want to be sure that NOLs are properly categorized to support a maximum deduction (worth up to 80% of your taxable income). Earned Income Tax Credit (EITC) This tax credit, available to workers with low to moderate income, may give you money back at tax time or reduce the federal taxes you owe. Employee Retention Tax Credit (ERTC) A significant number of businesses — including farms — are likely eligible for the ERTC, but not all businesses are aware of it. This difficult-to-navigate incentive is available to employers that have lost business or had their operations partially suspended due to the pandemic. Determining eligibility — with tax expert guidance — could save you a surprising amount of money.
PPP LOAN FORGIVENESS IS NOT TAX-FREE FOR EVERYONE
One of the most popular pandemic aids to spring out of the CARES Act was the Paycheck Protection Program (PPP), a forgivable loan program to help struggling businesses with utilities, rent and payroll costs. However, PPP loan forgiveness is not tax-free for everyone.
The State of California taxes loan forgiveness unless the business can prove at least a 25% reduction in profits for at least one quarter due to the pandemic. Arizona, on the other hand, is conforming to the federal tax code.
Next Steps to Consider
As agribusiness continues to face pandemic-related roadblocks and uncertainty, taking advantage of tax incentives is crucial. Determining eligibility and deciphering the regulations of each one is complex and time-consuming. Working with an experienced tax advisor allows farmers to make sure no money is left on the table. ■
Ann Braun is a Managing Director in the Bakersfield office of CBIZ and MHM, one of the nation’s top 10 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.
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Financing All Aspects of Agriculture Farm Credit West’s Capital Market Team Builds Stability Through Diversification
When you seek financing from Farm Credit West, you receive so much more than a loan — you are joining a community. As a member-owned cooperative focusing exclusively on agriculture, our business begins and ends with you, the grower. Farm Credit West invests in all aspects of farming, from the 10-acre pistachio orchard in rural Arizona, to capital intense projects such as construction of bio-methane digesters located throughout the South San Joaquin Valley in California. Supporting all facets of agriculture continues to be what sets Farm Credit West apart from the competition. And yet, within this specialized arena, our customer needs are highly diverse. To meet each customer’s unique set of requirements, we pull from a variety of tools available to us. The Farm Credit West Capital Markets group is one of these resources. Overseen by Rob Stornetta, Senior Vice President and Portfolio Manager, this group supports the Association and branch staff by helping manage the balance sheet and
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risk tolerance, resulting in a stronger, more financially sound organization that will be here to serve your businesses for many years to come. “Our job is to create a more diversified portfolio [at Farm Credit West]. An increase in diversification equals a more stable balance sheet. We work closely with our branch staff to support the relationships they have built and mitigate potential risks that are inherent in larger loans,” Stornetta said. To achieve this stability, the Capital Market group operates within the boundaries of our congressionally backed mission to purchase and sell loans with other Farm Credit entities and industry partners. In a nutshell, Farm Credit West’s Capital Markets team has two functions: (1) sell loans to reduce risk and increase our ability to grow with customers and (2) purchase eligible loans from other entities as they work to diversify the Association’s portfolio.
“We work with other Farm Credit associations across the country,” Stornetta explained. “Our deep network with similarminded organizations creates unique and timely opportunities to help diversify our portfolio — and the risk that comes with it.” Even though Farm Credit West sell portions of loans to other Farm Credit participants, we always continue to service them — and the relationship manager remains the same. This gives customers the best of both worlds: our Association continues to meet their large financing needs and grow with their operations while not sacrificing a relationship built on trust and reliability.
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Our deep network with similarminded organizations creates unique and timely opportunities to help diversify our portfolio — and the risk that comes with it. Rob Stornetta Senior Vice President— Capital Markets
The unique work of the Capital Markets team has brought several interesting opportunities to the Association over the years. More recently, Farm Credit West has purchased loans financing the latest in technology in agriculture and sustainability practices across the United States. Just like our customers, our Association is active in managing risk at all levels of the organization. Our team of dedicated staff work together to proactively identify areas where we can diversify our portfolio and identify new opportunities to serve our customer base, resulting in a highly stable organization. Farm Credit West is here for you, ready to provide you with a consistent and reliable source of credit for your agricultural business both today and tomorrow. ■
Rob Stornetta has served as Senior Vice President — Capital Markets at Farm Credit West since December 2017. Rob was previously a lender in Farm Credit West’s Capital Markets, Agribusiness and Winery Portfolios. Rob earned a Bachelor of Science in Agribusiness from Cal Poly, San Luis Obispo and is a graduate of the Pacific Coast Banking School at the University of Washington.
DID YOU KNOW? Farm Credit West’s Capital Markets group recently participated with other Farm Credit associations to finance several innovative and environmentally conscious development projects. A 600-Acre Solar Field
Methane Digesters & Upgraders
4,000 Acres for Wind Turbines
Earlier this year, Farm Credit West collaborated with other institutions to finance the construction of a 600-acre solar field for an electric company that supplies energy to growers in our chartered service area. Funds for this project were used to create new battery storage, balancing high energy demand with sustainable production.
After nearly two years of planning, Farm Credit West came together with seven other industry leaders to finance three clusters of methane digesters and upgraders across California’s southern Central Valley. The digesters and upgraders, built by CalBio, repurpose methane released from dairy manure by first capturing and then converting it to renewable natural gas.
Located in the high desert of Southern California, Farm Credit West recently helped finance the development of 4,000 acres to construct wind turbines in partnership with a number of other financing organizations. This project will produce clean power supplying several local energy providers, directly benefiting our customers.
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GUEST ARTICLE
Leveraging Data to Tell Your Story
By Michael Gomes | Vice President, Strategic Business Development, Topcon Agriculture
Data: friend or foe
What is data?
Increasingly, farmers of the West are faced with the challenge of adopting more automation and mechanization as regulations increase around employees’ hours of work, overtime, COVID precautions and health/wellness. With automation comes sensors on machines and an increased ability to capture, visualize and use better data for operational decision-making. No one likes the idea of volunteering for a challenge, and we have all seen situations of “paralysis for analysis”; where data makes decision-making more complicated rather than streamlined.
In the simplest definition, data is nothing more than a “documentation of practice” or a record of what we are doing. This should be no problem for most people of agriculture as they are often already doing “the right thing,” both for the environment and their business. This is apparent in a recent study published by the Association of Equipment Manufacturers (AEM) where they documented the environmental benefits of precision agriculture. Specifically, this study looked at benefits created through adoption of the some relatively well-known technologies, satellite based guidance, variable rate application and section control.
With automation comes sensors on machines and an increased ability to capture, visualize and use better data for operational decision-making.
Despite some skepticism, we most often give change a chance when we see it as progress with the promise of benefit. Our understanding of the benefits of change, be they operational or economic, and how they fit our business is critical to convince ourselves and our stakeholders that the change is worth the hurdle of implementation. Furthermore, as our industry is becoming more automated, it is also becoming more Digital. We now can use Data to help aid our decisionmaking and the inevitability represents some strong opportunities for our businesses.
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As cited in the study, these technologies have created a productivity benefit estimated at 4% with the potential of an additional 6%. It also cites pesticide use has reduced by an estimated 9% or 30 million pounds with the potential for an additional 15% reduction equating to an additional 48 million pounds. In summary, AEM believes the technologies used in the study could further increase production by 6% with benefits of 14% improved fertilizer efficiency, 15% reduction in herbicides and 16% fewer fossil fuels. The study can be found at newsroom.aem. org/precision-agriculture-improves-environmentalstewardship-while-increasing-yields and is a persuasive argument toward adoption to further drive these well recognized technologies.
Using data to improve profitability But let’s get back to that data and its ability to improve operations and profitability. Our urban neighbors and voters are disconnected from where their food comes from and what it takes to grow and deliver it to them. Some businesses are beginning to use data and documentation of practice to create value and get more from their product, whether it be labeling products as “sustainably sourced,” “all natural” or even “grass fed” when referencing beef. Additional examples include “ethically farmed” for Starbucks Coffee or “environmentally friendly practices” used to bottle your wine. Savvy marketers are finding (and branding) their way into the consumer mindshare and they are doing it, or proving it, using data often collected by sensors on machines.
Savvy marketers are finding (and branding) their way into the consumer mindshare and they are doing it, or proving it, using data often collected by sensors on machines.
What about you? Is this a path for your business, or could it be a fit? What is most important is that you can begin to identify the data that drives your business. In the manufacturing world they call these KPIs or key productivity indicators. Most farmers and contractors I know have them and can cite them, because they are the metrics from which they run their business, (i.e., costs per hour of machines or operations, yield to inch of irrigation or units of N for fertilizing). Each operation and operator, maintains slightly different KPIs, based upon their experience and key drivers for their business and its profitability. If these measures and metrics aren’t beginning to have a digital component, are you doing the best for you, your shareholders and your next generation? ■
Michael Gomes has been active in the Digital / Precision Agriculture industry for 27 years, employing various sensors and technologies to agriculture field challenges. As VP of Strategic Business Development for Topcon Agriculture, a leading provider of hardware to the industry, he actively collaborates with other companies and organizations to employ technology, streamline workflow and help make farmers’ work easier. He is frequently a speaker or guest at various conferences and podcasts around the globe. For additional comments or follow-up, he can be reached at mgomes@topcon.com.
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T E C H WAT C H
The State of Ag Security Agriculture Is Not Immune to Cybersecurity Threats
By David Guilmette | Farm Credit West Chief Information Security Officer
Agriculture has increased its use of information and operational technology (IOT) devices over the past several years, with crop sensors, drones and self-driving tractors being used by more agriculture businesses. With automation having the benefits of reducing costs and maximizing yields, this adoption has become a necessity. Insider Intelligence projects there to be nearly 12 million agricultural sensors installed globally by 20231. This is all very exciting as it will allow agricultural producers to be more efficient, but it comes with a risk. That risk has recently been recognized by the White House with the president signing an executive order that calls for the modernization and implementation of stronger cybersecurity standards for IOT. The intent of the order is to strengthen the protection of computer networks and systems while also stating the federal government and the private sector must adapt to the continuously changing threat environment to ensure its products are built and operate securely. While we continue to depend on technology more and more as a core component of business, we must look at the threats that can cause major disruption. Some of the most recent examples are JBS Foods and Crystal Valley Cooperative. These organizations were attacked with ransomware and subsequently were forced to take their operations offline until they were able to eradicate the problem and restore their data. With data being so important to business these days, can you afford to lose yours or have it compromised?
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Three mitigation efforts to keep your organization safe:
1⃞■ KEEP YOUR SYSTEMS PATCHED. There is a lot of technical hardware and software that goes into making any business work and vulnerabilities within that technology are being discovered all the time. Make certain your systems are kept up to date with the latest security patches released by the manufacturer to keep your organization protected. 2⃞■ TRAIN YOUR STAFF. Training and awareness are important. The end user continues to be the preferred target of cyber criminals. Build an awareness program to educate staff about the dangers of social engineering attacks, such as phishing and vishing. An errant click by an employee could be the pathway into your organization for a cyber criminal. 3⃞■ BACK UP YOUR DATA. Determine how much of your data you’re willing to lose and then make sure that you are conducting backups at regular intervals to meet your goals. Also, ensure that your backups are kept in a safe location so that your business doesn’t get impacted should your data become compromised. Lastly, make sure that you test the restore process. Be confident your information is safe and can be restored if a problem ever arises. ■
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businessinsider.com/smart-farming-iot-agriculture
Territory and Office Locations Yuba City Woodland
« Rocklin
Farm Credit West Administrative Office
Hanford
Dinuba Tulare
Templeton Kern County Santa Maria Ventura
Tempe Imperial Valley Yuma
Rural Arizona/ Safford
ADMINISTRATIVE OFFICE 3755 Atherton Road Rocklin, CA 95765 916.780.1166
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
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3755 Atherton Road Rocklin, CA 95765
Happy Holidays from your friends at Farm Credit West