GIVING CREDIT where credit is due is Rod Alt’s job. An ag lender, Alt has worked in both the production side and the financial side of agriculture, and he owns no rose-colored glasses. Still, he says agriculture will pull out of its current slump and he intends to weather the interim with as many customers as he can.

Ag Lender Promises Loyalty,
Even Through The Tough Times

LUBBOCK – In a time when all of agriculture is struggling to catch its breath, a large Wall Street-run bank might be expected to steer clear of agricultural loans. But not Wells Fargo, the nation’s largest agriculture lender among banks.

Rod Alt, Wells Fargo’s manager and senior vice president for the Agribusiness and Commodity Division in Lubbock, has been with the company going on nine years. Alt understands all too well the amount of equity that has been lost, particularly in the cattle feeding sector, over the last 10 months or so. He admits that there have been some days here recently when he’s questioned the sanity of being the holder of such loans. And yes, the losses have impacted the bank, but Alt insists their staying power hasn’t changed.

"We’re not looking for transaction-type stuff," he insists. "We’re looking for relationships. When we get into a deal, we think that it’s going to be forever. Our job is to help our customers succeed, because only if they succeed will we succeed."

For the most part, Alt says, feedyard operating loans have been fairly safe investments. The difference this time around, the reason this particular crisis is tougher than some in the past, he says, is because all of agriculture is suffering.

"It’s a new phenomenon for me. I’ve never seen it this way."

The reality of living in a global marketplace has hit home, and Alt believes it’s part of the reason agriculture is in the shape it’s in today.

"There are a lot of countries that can produce the same food and fiber cheaper than us," he points out. "Their labor costs are less, for one thing, plus, we’ve supplied the technology to them at little or no cost.

"It’s not going to change," he adds. "We have to learn how to compete on a world market, but I don’t have the answer on how to do that."

The disconnect between city dwellers and those who continue to make a living off the land has also contributed some to agriculture’s woes.

"The general population doesn’t understand where their food and fiber comes from," Alt opines. "They particularly don’t realize just how much money the American farmer and rancher contributes to the economy, the impact his business has on so many other businesses, the people he touches from the drugstore to the hardware store, from the car dealership to the clothing store. When farmers go broke, other businesses go broke along with them."

Alt admits that getting a loan is more difficult today than it was just a few years ago. In the past, a financial statement, maybe a tax return and an inspection of inventories was all it took. Today, increased banking regulations — higher standards issued by the Office of the Comptroller of the Currency — have added significant paperwork to the loan process. Loan applicants now are usually required to submit two to three years of financial statements, three years of tax returns and a complete list of inventories. And, depending upon the size of the loan, the bank may opt to do credit investigations.

"We look at the numbers a lot harder," Alt admits, "and we expect more from the customer in the way of better financial information. Before, it could be borrower-prepared. Today we’re looking for CPA-reviewed books. If the customer is a large commercial feedyard, for example, we like to see audited financial statements."

Ag operating loans, the lender notes, are mostly asset-based, whereas commercial business loans are dependent on cash flow. That’s why collateral is such an important part of the puzzle for ag lenders.

"We require our borrowers to have between 20 and 30 percent equity. It’s protection for the bank, but it’s also protection for the customer," Alt explains.

"It’s not fun when you have to pull someone’s loan," he adds. "That’s what was tough in the ‘80s. When a farmer went broke, it killed families who had been farming for two, three generations. That’s why we’re not quick to cut anyone off. We want to be better prepared, and equity allows us to do that."

It’s also why risk management is no longer an option left up to the borrower. Today, most lending institutions require that their customers use some kind of risk management.

"When the chairman of the Federal Reserve says that those who produce commodities must use more risk management, I think perhaps we should all listen.

"Borrowers have to be more market-aware," he continues, "more production cost-aware. They need to find out what their true breakevens are, and they need to develop a profit objective."

Though the risk in ag lending hasn’t changed all that much, Alt says greater media play, particularly the 24-hour cable news programs, can and have substantially impacted market volatility.

"The risk may have been there before, but not everyone knew about it or thought about it. Now a BSE or foot and mouth scare can crash the market," he notes.

Alt says most risk, however, is manageable. Crop insurance and the futures market are just two of the many tools available today for managing risk.

"Fed cattle have been losing big money for a while now, but there was opportunity to limit that loss," Alt reminds.

"If you know your commodity is only going to be worth ‘X’ at a future point in time, then back that up to a current cost, and if that says based on my production costs that I can only afford to pay 60 cents, then I can’t afford to pay 70 cents."

There are some who want to do away with futures trading on the Chicago Mercantile Exchange, but Alt isn’t so sure that’s the answer, though he does agree that some changes are due.

"It’s the one resource we have for predicting future prices. If we do away with it, what else do we have?" he asks. "The biggest problem with the futures market right now is the fund money. They can move it however they want."

Basic economics, Alt says, must come back into play before the cattle market will come back into line. Most of the problems facing the beef industry today, he insists, are about simple supply and demand.

"People keep talking about how head counts and inventory are dropping. That’s not important. Tonnage is the key," he notes. "Carcass weights are running 38 pounds heavier than they were a year ago. Couple that with what’s available in the global market, and it doesn’t take long to add up.

"It’s basic economics. We have to decrease supply," Alt reiterates.

He predicts that the beef industry of the future will be more vertically integrated, though part of him regrets that such a move likely means the loss of some independence as well as the loss of some independent and family-owned operations themselves.

"The beef industry is an abnormal industry where someone profits off someone else’s losses. Many blame the packers, but I think sometimes we tend to forget that the packer has a perishable commodity, too. He can’t sit on it, so at some point he, too, becomes a price taker.

"Somehow the producer, feeder and packer need to get together, because the retailer is really the one who has all the money.

"Look at retail prices," Alt continues. "The retail price has done nothing but increase while the price to the feeder has gone down. Somehow we need to find a way to squeeze the retail margin, but I don’t know how to do that with a perishable commodity."

Alt’s day to day activities consist of checking overdrafts, looking at borrowing bases, reading financial statements, reviewing loan write-ups, watching the market, talking to customers, talking to others in the industry and reading as much industry trade information as possible.

To be a good banker, he says, takes common sense, an understanding of numbers and an ability to rely on gut instinct. The latter, he admits, comes with time.

"I can teach someone credit, but to be in ag lending, one must understand agriculture, and probably the only way to understand it is to have grown up in it.

"Making an ag loan is different than making a commercial real estate loan. There all you look at is cash flow. That’s why we can’t just bring someone in off the street with great credit skills or an MBA to take over a feedyard account. That person has to understand breakevens and so many other things."

Alt fits the bill when it comes to being a qualified ag lender. He doesn’t have the MBA or even a business degree, but he’s no stranger to the agriculture industry, particularly the beef industry. His father worked for USDA and his family has a ranch in eastern Colorado. Alt spent his summers and holidays there, and during high school he worked in the feedyards around Greeley.

His first two years of college were spent at Northeastern Junior College in Sterling. He finished up with a B.S. in animal science from Colorado State University. Upon graduation, Alt took a job with Monfort at their Greeley plant, where he worked in quality control.

After spending a year and a half on the kill floor and in a cooler eight hours a day, Alt figured there had to be something better to do. He knew he wanted to stay in agriculture, but this time he looked in a totally different sector of the industry. He found a job as a field representative for Producer’s Livestock Credit Corporation out of Denver.

After six months in the field, the company transferred him to the lending side. It was the early 1980s and the farming sector was in a real financial crisis. With deteriorating markets, many farmers were unable to make their payments.

"I got to see the bad right away. I knew it could only go up from there."

He stayed with the company until 1986, then moved to Phoenix where he worked for the Farm Credit System. It was basically the same job, only there the farming and ranching operations were different. He dealt with a lot of cotton and dairy farmers, and on the cattle side he went from dealing with operations that ran a cow to the acre to a cow to the section.

After three years in Phoenix, Alt had an opportunity to make yet another move, this time to Hawaii. The Farm Credit Bank in California had financed a huge sugar plantation on the Big Island. The plantation, in the late 1980s, also started a beef operation in which they were totally integrated. They had their own stocker operation, feedlot and packing plant. Alt was hired to conduct a feasibility study of the beef operation.

After Alt completed the study, the company made him comptroller. Six months later he became the feedyard manager.

The yard had a capacity of 7000 head, but the owners kept another 10,000 to 15,000 turned out on pasture. They fed mostly English cross cattle.

The Big Island was a different world from Phoenix, even Colorado. The feedyard was located on the rainy side of the island, and the first April he was there it rained 110 inches. Knowing consumption was critical.

"It was important to feed only what the animals would consume, because when it rained, feed left in the mangers was wasted," he explains.

All ration ingredients were imported other than the molasses and fat. Cost of gain, Alt says, ran in the 70-cent range. Feeder cattle were purchased based on what the boxed meat was worth, Alt says.

"We knew what we could sell the meat for. We knew our costs in the plant and our costs at the feedyard, so we had "X" amount to pay for feeders.

"The ranchers didn’t have much of a choice. They could either take the price offered or put them on a boat and ship them to the mainland. The cost to ship to the mainland at that time was about $30 cwt. You might get 80 cents for your calves on the mainland, but when you back it up to include shipping it came out to about what we were offering."

At that time, the Hawaiian Islands were a huge dumping ground for mainland meat. It was Monfort’s second largest distribution point, Alt says. Only 20 to 30 percent of the beef consumed was domestic to the island.

There were other problems. The feedyard labor, for example, was unionized so labor costs were huge. After eight hours, it was overtime and double time on weekends.

In the feasibility study Alt warned that changes had to be made if the sugar company intended to stay in business. Hawaiian cattlemen did eventually make the necessary changes, but those changes came too late for the sugar company.

In July 1990, Alt found himself back in Colorado and soon after in Friona, Texas, where he rejoined the finance world, this time for Cattle Finance Company. He managed the entire loan portfolio for their cattle feeding customers.

It was the financial side, he realized, not the production side, that he loved most.

"It’s never the same, and I’m constantly learning," he remarks.

When Alt started working in the banking and financing industry, he made it a policy not to own or have any part in the production side of the livestock industry. He has that policy for one reason — objectivity.

"I need to be objective in my decision-making process and not let emotions rule. What my mind thinks and what my heart thinks might be two different things. For example, if I own cattle and they’re worth 60 cents and I think they should be worth 70 cents, I might get a customer in trouble.

"It’s hard not to become emotionally involved," he adds, "but then I remember why I’m here and what I have at risk."

Borrowing a phrase from a previous long-time Wells Fargo employee, Alt says the toughest challenge he has as a banker is "staying at the party too long" — basically not knowing when to say no to a customer.

"That’s the hardest thing to evaluate, especially when you’re in a down-turning market. It all goes back to knowing your costs and using risk management."

Besides keeping his emotions in check when it comes to making financial decisions, Alt says his job has taught him how to be patient and how not to overreact.

Despite the substantial losses in the feeding sector, Alt says there will still be players out there who want to and will be able to continue to play the game.

"The two things that run the market are greed and fear. We’re in fear now," he remarks.

"The industry will be bloody, no doubt, when it comes out of this, but there will be enough equity to rebuild. There are some who got out of the business a couple of years ago because it didn’t feel right. They took their cash and put it somewhere else, and they’re waiting to see what happens, waiting for the right time to come back.

"We have an overcapacity of feedlot space right now," he continues. "That will have to shrink. Hopefully, we have required enough equity on the front end to get us through this crisis."

"There will be some banks that have capital at risk that will suffer, but the bigger institutions will continue to finance agriculture because it’s always been good to them. I don’t see that changing," Alt says. "The losses that banks have taken have generally come from fraud and rarely ever because of market volatility."

The corporate yards, he predicts, will continue to do well.

And the independents? Alt says their days aren’t necessarily numbered.

"Everyone’s situation is different. Everyone has a different financial position.

"There will always be someone to loan the money and someone to feed the cattle," he concludes.