Bankers mobilize against SBA proposal on poultry lending

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Lenders are up in arms over a move that could limit their dealings with poultry farmers.

The Small Business Administration is considering a rule change that could classify more farmers as affiliates of bigger companies that buy their chickens. As affiliates, farmers would be deemed too big to participate in the agency’s flagship 7(a) loan guarantee program.

The SBA unveiled the revisions to its affiliation rule in late September as part of a larger package of amendments that included changes to its SBA Express and Export Express lending programs and a new schedule of allowable 7(a) fees.

Increased awareness of the provision has spurred concern and opposition among lenders.

“It’ll be devastating to the industry and small farmers who have relied on the SBA for needed capital," said Chris Hegi, CEO of the $1 billion-asset First Financial Bank in El Dorado, Ark.

"If it goes through as written, it would kill poultry lending with the SBA," Hegi added. "I’d say it will take 99% of the deals off the table.”

Taking increased opposition into account, the SBA on Friday extended the comment period for the proposed rule by 15 days, through Dec. 18.

The proposed change would deem loan applicants as affiliates if they derive more than 85% of their revenue from another business over three prior fiscal years. As things stand, the SBA defines affiliation narrowly, occurring when firms are operated by “close relatives with identical or substantially identical business or economic interests.”

Poultry lending has been on an upswing for several years, with SBA financing playing a critical role in the increase.

The volume of 7(a) poultry loans made in fiscal 2016 was $534 million, an amount that more than doubled what was produced in fiscal 2012, according to the most recent data from the SBA. Those loans accounted for more than three-fourths of all 7(a) agricultural lending in fiscal 2016.

Ag lenders said they’re frequently unable to close poultry deals without government backing, largely due to high loan-to-value ratios and the substantial amount of capital required.

The possibility of an amended affiliation standard was first raised about seven months ago, when Inspector General Mike Ware released a report questioning the independent status of chicken farmers. The report concluded that, given their close ties with integrators, growers operated like subsidiaries.

Poultry lenders and growers pushed back against the findings in the weeks after the report was made public, particularly during August forums that the SBA organized in Gainesville, Ga., and Little Rock, Ark.

As late as Aug. 17, the agency’s reaction to the OIG report was unclear. At that time, the SBA would only say that it would continue to honor its guarantees for poultry loans while it reviewed its policies and procedures.

The SBA will not comment on reaction to the proposed rule until the comment period has passed, said spokeswoman Shannon Giles.

“After the deadline, all submitted comments will be thoroughly reviewed before we can make a statement,” Giles said.

The SBA acknowledged in the text of the proposed rule that “lenders may need assistance in applying the rule to certain agricultural business relationships. … In particular, the agreement between a poultry farmer and a large poultry producer ... may be critical to the determination of whether a the farmer is an independent small business.”

The agency offered to review agreements between farmers and integrators to help lenders determine whether a deal would be valid. Still, critics, including a large number of community bankers, said it will make obtaining 7(a) guarantees for poultry loans all but impossible.

They’d prefer to see the proposal scrapped.

In contrast to the OIG’s narrative highlighting close ties between growers and integrators, David Melchert, SBA loan manager at the $18.7 billion-asset Arvest Bank Group in Bentonville Ark., noted that growers are responsible for repaying loans, paying all the taxes on their businesses and overseeing day-to-day operations — all hallmarks of an independent business.

“If these proposed regulatory changes are approved … a significant source of capital supporting agriculture and rural America will be lost,” Melchert wrote in a comment letter.

Melchert declined a request for additional comment.

Ramifications from the proposal could extend far beyond poultry, given a wave of consolidation that has affected virtually all food processing sectors, said John Blanchfield, a longtime agricultural lending consultant and a principal at Agricultural Banking Advisory Service. It could even affect corn growers that sell to ethanol manufacturers, since many sell to a single fuel producer, he added.

“Under the proposed rule, virtually every farm and ranch in the U.S. that raises and markets proteins derived from meat would be ineligible for a loan guaranteed by the SBA,” Blanchfield wrote in a comment letter.

“The proposed rule is ill informed, short sighted, unworkable, and harmful to small businesses that are engaged in agricultural production. It should be withdrawn,” Blanchfield concluded.

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