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Santa Cruz lender has new row to hoe

January 28, 2011

By Eli Segall - Silicon Valley / San Jose Business Journal

The agricultural business near Silicon Valley could soon get a financial boost.

Santa Cruz County Bank announced last month that it was approved to issue government-backed loans to help farmers buy land that they currently lease or to help finance their operations. The Santa Cruz-based lender expects to close its first three deals by mid-February. Two of those deals involve farmers in Watsonville buying their properties for a combined $1.45 million.

The loans could help provide needed cash flow to farmers in the region who incur months of operating expenses before they can sell their harvested products. The program could also provide capital to farmers who do not qualify for other government-backed loans because they strictly grow crops on a parcel and do not perform other commercial activity on-site.

The U.S. Department of AgriculturebizWatch ’s Farm Service Agency, known as the FSA, oversees the loans. Under the program, borrowers can obtain up to $1.1 million from a commercial lender, with up to 95 percent of that money backed by the agency.

Lenders do not pay any fees in the transaction, but borrowers must pay the government 1 percent of the agency-backed portion of the loan.

Sue Chandler, senior vice president of Santa Cruz County Bank, said the bank has had several customers in recent years apply for a similar loan program, USDA Business and Industry, to buy cropland. However, the growers were rejected because they didn’t meet all the requirements, which include packing the crops on-site and shipping them.

According to Chandler, these borrowers would be eligible for an FSA loan, which does not require other business activity on-site beyond growing crops.

Santa Cruz County Bank already issues its own farm loans, which are not backed by the government, but Chandler said the FSA program reduces the risk of losing money should a grower default.

The FSA program is similar to U.S. Small Business Administration lending. SBA loans can finance operating expenses, equipment and the acquisition of commercial buildings, among other things. However, the loans cannot be used to buy cropland, Chandler said.

“Both of these programs complement each other really, really nicely,” she said.

Agriculture is big business in Santa Cruz County and is largely concentrated in the Pajaro Valley. Roughly $492 million worth of agricultural commodities were produced in the county in 2009, according to the most recently available data from the county agricultural commissioner’s office. That was 1.3 percent higher than 2008’s tally of $485 million.

The most valuable crop was strawberries. The county had roughly 3,170 acres of the fruit in 2009, and the crop was valued that year at about $173 million.

Santa Cruz County Bank is not a heavy agricultural lender, but it’s entering a growing line of business. There were about $71 million worth of FSA-backed loans in California during the fiscal year ending Sept. 30, 2010, up 27 percent from $56 million a year earlier.

The bank had $1.8 million worth of farm loans on its books as of Sept. 30, 2010, a sliver of its $163 million total loan portfolio, according to the most recently available data.

Melanie Fry, farm loan manager for the Farm Service Agency in Salinas, said the typical FSA borrower is someone who has been farming for up to five years or is the child of an existing farmer and wants to start their own operations.

Local farmers require heavy up-front spending — on labor, equipment, planting and other costs — before the harvest even takes place and crops are sold, said Jess Brown, executive director of the trade group Santa Cruz County Farm BureaubizWatch , which has about 930 members.

As a result, he said, having a steady cash flow throughout the year is critical.

“The more doors that are available to open and help their operations, the better,” Brown said.

Meanwhile, it’s unclear how many farmers would be able to use the FSA loans to buy property.

Lucrative crops like berries have made the county’s cropland relatively valuable, and landlords earn steady rent income and may not be willing to sell. Most of the county’s cropland is rented, and the landlords are typically families that used to grow apples on the property, according to local industry officials.

Dick Peixoto, owner of Watsonville-based vegetable grower Lakeside Organic GardensbizWatch LLC, said farmland in the county’s Pajaro Valley typically leases for up to $2,000 per acre and sells for up to $50,000 per acre. The typical size of a strawberry farm is 70 to 80 acres, he said.

Peixoto, who leases 1,200 acres in the valley and has farmed there for 35 years, said there’s “very few” parcels for sale.

Still, buying their property could bring farmers more stability and security, and help ensure their land is not turned into a shopping center or freeway, said John E. Eiskamp, owner of Watsonville berry grower J.E. Farms Inc.

“Once it’s built over, it’s gone and you won’t get it back,” he said.

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