Agricultural bankers are bracing for challenges following several strong years, and banking veteran Steve Apodaca is eager to offer his expertise.

Apodaca, 56, recently joined the American Bankers Association as senior vice president of the trade group's center for agricultural and rural banking. He succeeded John Blanchfield, who left the organization in January after 25 years.

Apodaca's career has spanned more than 25 years, taking him from agricultural lending on palm trees, avocados, limes and mangos in Florida to working with farmers of onion, chili, cotton and pecan while at Wells Fargo in New Mexico. As a banker, Apodaca spent those years implementing regulations he had little say over.

"I had always, as a banker, been the recipient of the policy and whatever changes occurred," he said in wide-ranging interview.

"It became frustrating," Apodaca added. "The best thing I could do was write a letter to my Congressman. When I was approached by the ABA for this particular position, the light bulb went on and I said this is my chance to set policy, not just be a recipient of policy."

Apodaca is joining the organization at a critical time as agricultural farmers and their lenders deal with lower commodity prices, a severe drought in California and the implementation of new technology. The following is an edited transcript of a discussion on those topics.

What are ag bankers' biggest concerns?
STEVE APODACA: Commodity prices are one of several priorities we're looking at. When we lend on the crop we try to maximize the farmer's hedging capability. We try to be conservative when we think the commodity prices will hurt the farmer. We try to make sure our advances on working capital lines are conservative. You try to minimize the risk as much as you can.

Something else bankers will have a dilemma with is if a farmer comes to me and says they want to install the latest technology — such as drip irrigation systems like they have in Israel where the water is fed to each individual plant and it is measured. It's very expensive and the payback won't be for 10 years. As a banker, will I finance that? A lot of bankers will tell you no.

But the customer is telling me the technology is critical for them to succeed because of the water situation. That's where we need to work with the USDA and other governmental agencies to find programs to either guarantee or subsidize the efforts to help farmers do this new technology, whatever that may be.

How is the California draught going to affect ag bankers?
You may recall a few years ago that Georgia had a very severe drought. There's something going on. I don't know if you're in favor or not of the theory of climate change. A lot of scientists are saying it is real. There are people that still dispute it. But something is happening in weather at this current time that is putting a stress on farming, specifically in the Western states. In New Mexico, the farmers that I worked with are cutting back on production because they don't have enough water allocations. A lot of them are saying, "I can no longer do pecans or pistachios because they are too water intensive. I'll have to do cotton."

Go to California, the Imperial Valley, it's sad. If I'm going to be lending money to a farmer that is having water stresses and may not get a future water allocation and I advance on a crop or I help him buy a piece of land and he can't farm it, he won't be able to pay me back.

If global warming exists, will it permanently change how ag lenders do their jobs?
I wouldn't say they have to change how they do business. They are going to have to change to whom they lend. They'll have to change formulas on minimizing risk. I don't think there has been enough discussion yet. If you recall the Dust Bowl, if we have another situation like that, it would make a lot of ag lenders suffer. I believe that California has raised the alarm bell to its highest pitch. We will have more discussion going forward.

Are there some advantages that ag bankers have right now?
Ag lenders, along with ag bankers, have been benefiting from the boom we've had in agriculture for the last few years, notwithstanding that it might slow. That is minimized with the Farm Credit System, which has a tax advantage. They can outprice a local community bank. That advantage also is being felt as they have been straying from their mission and lending to companies like Verizon. What does that have to do with agriculture? Ag bankers are saying stick to farm credit. That's the mission of this government-sponsored enterprise and don't allow them to be unfairly competitive.

[Farm Credit's mission is to "support rural communities and agriculture with reliable, consistent credit and financial services" and its infrastructure loans help support rural communities and diversify its institutions' portfolios, Ken Auer, president and chief executive of the Farm Credit Council, said in response. Farm Credit institutions have specific tax provisions that "enable them to better serve their mission," while local associations pay taxes, and borrower-owners pay taxes on the dividends they receive from the profits Farm Credit earns, Auer added.]

You mentioned Farm Credit affecting smaller banks. Does it also present a challenge to megabanks?
When I look at a loan, I have to abide by a pricing model. Many of the large banks are heavily regulated, much more so than a small or midsize bank, though that is filtering down. When I price a loan, I have to say what are my regulatory costs and my overhead costs, and then I have to add in taxes on top of that. My access to capital is cheaper than a community bank. But I'm still taxed. Farm Credit has the same access that the large banks have to capital markets but they don't have to pay taxes on loans that are tax-exempt.

The trade groups increased their focus on the Farm Credit System. Is there hope Congress will address those concerns?
Everything just takes time. You're talking about an institution that has been around for over 100 years. [Farm Credit does] a lot of good for farmers. In my capacity as an ag banker, I would say there were particular clients or loans that didn't fit within the parameters of what a commercial bank does. Those really do fit under Farm Credit. I'd call my local Farm Credit representative and say, "I've got someone for you." I never got anything back but I did send them there. It is not about saying that they are the bad guys. It's all about this is an entity that has strayed from its mission that needs some oversight.

Do large banks have ag lending advantages over small banks?
The larger banks do have pricing power. There's no doubt about that. However, not all large banks can do all types of loans. If you're a large bank you put in credit risk parameters that everyone has to follow. A community bank can tailor a product very specifically to the needs of a small business and have an advantage in terms of relationships. They're very actively involved in their small communities. A large bank may not even have a branch or a location there.

A lot of ag banks tend to be smaller banks. Will we see more consolidation of these institutions?
I don't think there will be consolidation. I think there will be bifurcation. If you're a large agribusiness, your needs won't be met by a small community bank with $150 million of assets. You're going to go to a mid-tier bank or one of the large banks. But there are more small farms than there are large farms. Those will be the bread and butter of all of these ag lenders.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.