Finance brokers few in West; help risk management

One of Gary McLaughlin's long-time customers once commented that when he started farming on the West Side of California's San Joaquin Valley years ago, the only thing he needed to know was how to drive a tractor.

“Bob Wood of BEWCO Farms in Firebaugh made that comment. He said today, however, he has to be a part lawyer, part chemist, part accountant, a labor relations expert, an entomologist — you name it, he has to do it,” said McLaughlin. “What he doesn't need to know is how to drive a tractor. He can get someone else to do that.”

The job of producing food and fiber gets more complicated each year, and farmers must rely on a wide array of professionals far removed from the furrows to remain successful. One of those professionals Wood and over 200 other producers in California, Oregon, Washington, Arizona and Nevada rely on is McLaughlin, who brought more than 30 years of experience in commercial banking and leasing into agriculture when he started GCA Financial Services 10 years ago.

McLaughlin works out of his home office on his ranch, perched atop an oak dotted ridge in the foothills of Madera County, Calif., near the town of Raymond, where he also breeds and raises cutting horses, and logs 60,000 miles a year in his pickup calling on customers.

One of few

McLaughlin is one of about 20 professional lease and purchase finance brokers in the West who have carved a niche in the increasing complicated world of agricultural finance.

McLaughlin places an average of $12 million to $16 million annually in equipment leases for everything from sprinkler pipe to $250,000 lettuce harvesting platforms. Every kind of equipment used in a farming operation can be, and is, financed. He works with a half dozen financial institutions nationally, placing client's transactions with the lender best suited to that specific financing.

George Fontes, partner with Butch Massa in Comgro Incorporated, a 2,000-acre contract row crop vegetable operation in Salinas, Calif., is one of McLaughlin's clients.

“I have worked with Gary for nine years. It's a business relationship like the old days when a farmer and his banker knew everything about each other's business,” said Fontes.

McLaughlin started this financial services business in 1990. “I was working in commercial leasing in the San Joaquin Valley — in the heart of agriculture. I had done a few dairy lease deals for friends and liked the idea of working in agriculture. I knew leasing and financial management. I figured I could learn agriculture.”

According to Fontes he has learned well.

Sprinkler pipe deal

“The first time we did business together was on a sprinkler pipe deal through a local dealer here in Salinas,” he said. “Bankers don't like to lease sprinkler pipe because most of them do not understand that aluminum pipe is one of the safest leases you can write. Pipe does not wear out like a tractor. It is insured against loss, and it holds it value. Gary understands that and can communicate that to lenders as he gets the best deal he can for us.

“We also rely on Gary to tell us what is and what is not a good deal. He receives our year-end financials and knows what we can do,” said the fourth generation Monterey County farmer.

“I like to think of myself of playing a role similar to their pest control advisor.” McLaughlin said. “I am not just trying to make a buck off the deals I do for the growers, but I try to provide sound advice in financial matters. To fulfill that role properly means sometimes not doing a transaction, one where either I can't offer the best deal, or honestly feel it is the wrong thing for the grower to do, based on a wide range of factors.

“Maybe it's because of something I am hearing about markets, or a particular piece or kind of equipment, or maybe advising them to hold off because I think rates will be coming down, or move now because they're going up,” he explained.

“And I will and have told growers when something they wanted was not the right deal for them,” he said. “It is not because the deal represents a bad credit risk, but it may not be the right for them.”

Risk management

And that advice comes under the heading of risk management. Advance contracting, hedging and options are what farmers typically think of when the term risk management is used, but capital preservation and proper, carefully thought out debt structuring, scheduling lease and finance payments to coincide with seasonal cash flow can also be considered risk management tools.

It is not pure risk management, McLaughlin admits. “If you default on a lease or a purchase, you remain liable for it. In that sense it is not “pure” risk management, but if capital preservation and reducing tax liability are considered risk management then I guess I do help producers reduce their risks.

“I strive to structure leases or purchases to make sure a farmer does not have to pay for borrowed money with borrowed money. I don't want a grower to use money from his operating loan to make a lease payment,” he said.

McLaughlin utilizes several computer programs to calculate leases for his clients based on their type of farming and cash stream parameters. “If my computer can calculate it — regardless of the frequency, irregularity, or size of the payments I can write it,” he said. “Lease payments must be structured to the revenue stream.

“About the only option I can't offer my clients is no payments.”

Payments structure

“An alfalfa grower who gets six or seven cuttings a season does not want to have lease payments in the off months when he does not have revenue coming in,” said McLaughlin. “A grower in the fresh vegetable deal has different cash flow requirements and capabilities than an almond grower, to make them both try to fit into some kind of ‘cookie cutter’ repayment structure does them no good, and in many cases may actually do them harm!”

The Navy submarine veteran prides himself on learning the differences between crops. “I understand the differences between an almond producer and tomato and cotton producers. I spend time in those markets and pay attention to how business is conducted,” he said.

He also personally visits each of his clients with his partner, Zeke, a nine-year-old Border Collie who has traveled with Gary since he was nine weeks old.

McLaughlin also spends time with farmers' accountants. “Farmers are savvy to managing their tax liability, but tax laws are very complicated. Accountants are paid to understand the laws, and I work closely with them to give the farmer the full advantage in reducing tax liability.” says McLaughlin, whose three decades in commercial leasing comes with a full understanding of accounting.

“Just like farmers use pest control advisors to manage insect pests, farmers rely on accountants, and people like me, to control another kind of pest, the IRS.”

McLaughlin said there is a “tremendous amount of maneuvering that goes on each year for growers to lower or avoid taxes…deferring income, prepaying expenses and those kinds of things.”

“Properly structured equipment financing is a valuable tool in the armory of weapons against tax liability,” said McLaughlin.

Cash preservation

Typically leases also offer cash preservation because they do not require as much cash up front as a purchase and payments are often less than a purchase contract, although McLaughlin offers those to his clients as well.

“Anytime you make a decision to purchase or lease anything, the bottom line is always the size of the checks you have to write,” said Fontes.

“And a short term lease typically does not show up on a balance sheet,” said Fontes. “That improves the debt to asset ratio and helps in getting operating funds.”

“The biggest misrepresentation I see in leasing is where people say growers can lease something for five years with a $1 buyout, and deduct their payments as they would on a “true” lease. That is fine if the IRS never audits but if IRS looks at it, it will be disallowed,” said McLaughlin. “There has to be a realistic approximation of the true fair market value due at the close of the lease that the lessee must exercise for the transaction to be a true lease.”

By dealing with several institutions McLaughlin can shop for rates, as well as flexibility in structure. However, he and Fontes both say that rates may not be the primary reason for closing a deal. “In the surveys you see about why people lease, rates are typically third or fourth down the list behind convenience, service and flexibility,” said McLaughlin. Fontes said he has occasionally paid a few dollars more to get the financing package that is best for his particular farm.

Vegetable base

McLaughlin has clients in all crop areas, but in recent years his base has been growing in the vegetable business. “Believe it or not, vegetable growers have done better over the past four or five years than many others,” said McLaughlin. “Where the almond, cotton and canning tomato guys have been hammered in recent years vegetable producers have done fairly well.” Part of that is because vegetable producers have more chances in a given season to make money. For producers who grow in Salinas, the San Joaquin Valley and Yuma, Ariz., they may have five or six chances a year to make money on a crop, he said. For most other growers, there is only one shot.

Secondly, there has been more stability in vegetables because of the growing trend in contract production to ensure a steady flow of produce. That includes both carton vegetables as well as the growing packaged vegetable, or pre-cut market.

Fontes and his partner were among the first to contract for the processing market. “We got into it part time in the beginning, but now we grow all our crop on a contract basis. It has been a very stable farming situation.

“We may miss some opportunities in the FOB market, but we also miss some of the losses,” said Fontes.

It has been a good business decision, just like the ones he tries to make with McLaughlin's help.

“I get a lot of calls from people who want my leasing business. They either shoot us a rate they know they cannot give in an attempt to get our business, or give us a high rate and want to see our financials,” said Fontes. “We are not going to turn over our financials to just anyone.” However, McLaughlin gets a copy as soon as Comgro finishes the season. “We trust Gary because we value not only his service, but his honesty. We often call him for advice on dealing with banks and others in areas he does not service,” said Fontes.

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