Farm Credit Services Southwest
Growing Potential.
The
BottomLine
The
BottomLine
SUMMER 2010
Pistachio Orchards - a Thriving Commodity
Arizona grows the best pistachios in the
world, but you won’t find them on supermarket shelves here in the U.S.
“Arizona quality is so superior that
Europeans pay a premium price,” says
Dr. Bart Heuler, a grower from Irvine,
Calif., who recently expanded into
southeastern Arizona. “We can produce
better quality pistachios, with higher
production per acre, at a lower cost in
Arizona. We have the water, the organization and the mechanization to make it
work, and we’ll have the most productive trees in the world.”
At 81, Dr. Bart Heuler keeps his finger
on the pulse of the pistachio business.
His family’s company, A&P Ranch
grows more than 4,000 acres of pistachios and almonds in California. A retired dentist, Heuler and other ranchers
formed a producer-owned cooperative,
A&P Growers, to farm and process the
nuts.
Three years ago, A&P Growers bought
out Pistachio Corporation of Arizona,
which farmed and processed 1,000 acres
of nuts near Bowie, a small town near
the New Mexico border. Heuler recently
initiated the purchase of another 2,600
acres in the Bowie—San Simon area to
be planted with high producing pistachio trees. The new orchards will take
10 years to reach full production. A&P
Ranch will be one of three local farms
using A&P Growers’ services.
“Do you know how much fun it is to
create a viable, thriving industry in Arizona?” Heuler asks.
In 2009, Arizona produced just one percent of the nation’s pistachio crop, or
four million out of 358 million pounds.
Heuler plans to double Arizona’s output.
“The California industry’s in crisis,”
Heuler says. “Hundreds of thousands of
acres are being taken out of production
in California as a result of the state’s
mismanagement of water. Arizona’s the
only place left to expand.”
The Bowie area provides the groundwater needed to grow the orchards, along
with the right climate and soil. Heuler
believes that 10,000 acres would be
suitable for pistachios in Arizona, compared to 200,000 in California. And he
finds Arizona more farmer-friendly.
The pistachio industry was born about
6,000 years ago in a part of Persia that’s
now Iran. Heuler was on the front lines
four decades ago when California
started growing pistachios. Today,
America produces more pistachios than
any other nation, and Heuler claims that
his operations represent the cream of the
crop.
Pistachio Fun Facts:
Pistachios have been cultivated for over 6,000 yrs.
A pistachio tree takes 7-10
years to mature and produce nuts but then will produce a profitable crop for
more than 100 years.
Per serving, pistachios have
more antioxidants than
green tea.
Lowest in calories of all the
nuts; 160 cal per serving
One of the highest in protein—6 g per ounce
Dr. OZ suggests incorporating foods in your diet that
are known to reduce stress,
which includes pistachios.
Just a handful can help
lower your blood pressure.
Mark your calendar...
February 26th is National
Pistachio Day!
Pistachio Orchards - a Thriving Commodity
“Our ranches produce 40 percent more per
acre than the U.S. average, and the U.S. is
four times more productive than Iran,” he
says.
It is a time-sensitive, capitalintensive business, and Heuler depends on
high-tech plant science to make it pay.
Heuler’s farms have been planting a genetically superior rootstock developed by
university scientists and a nursery in California. “I have the oldest orchard in the
world of these super trees, and they are
vastly superior to anything out there,” he
says. “That’s all we’re planting in Arizona.” This spring, his team inserted buds
from other pistachio varieties into these
super trees, a process similar to grafting.
“If you’re farming with yesterday’s technology, you won’t be farming in the future,” Heuler warns.
This business requires highly skilled employees and A&P Growers retained the
Arizona operation’s workers.
Future
growth should lead to more jobs related to
seasonal labor, new construction, and
equipment sales and repairs with wellpaying job opportunities for people who
know the industry.
The Arizona company owned a 20-yearold hulling plant. A&P Growers is invest-
ing millions of dollars to bring the plant
up to today’s stringent national and international food safety standards. Beyond
hulling, processing involves drying and
pasteurization.
In the three years since it began operating
in Arizona, A&P Growers has segregated
its product and differentiated its quality
with European customers such as Intersnack, one of the largest nut companies
in Europe. European buyers sign longterm contracts for every Arizona pistachio
the co-op can produce, and they’d like
even more.
“Arizona pistachios
look a little greener,
their flavor’s a little
better, and they’re
free of aflatoxin.”
Including output from his California orchards, Heuler sells 30 million pounds of
nuts annually, with standing orders to supply 100 million. In the U.S., he sells to
top-tier customers including Kraft Foods
and Kroger.
“Arizona pistachios look a little greener,
their flavor’s a little better, and they’re
free of aflatoxin,” Heuler says, referring
to a mold that affects pistachios grown in
other areas. The University of Arizona
conducts research in Heuler’s orchards to
optimize the aflatoxin-free trait, which
buyers find highly desirable.
Page 2
Dr. Bart Heuler
Pistachio Orchards - a Thriving Commodity
By shipping through the Port of
Houston rather than from California via the Panama Canal, the Arizona nuts reach European markets
two weeks earlier than their California counterparts.
But Arizona comes with challenges. The growing season runs
two months shorter than in California, making production extremely
time sensitive. “The timing of
planting and harvesting is critical,”
Heuler says. “And you must hull
and dry the nuts within eight hours
of harvest.”
The processing plant operates for a
few weeks in early fall and sits
empty the rest of the year, making
the business capital-intensive. But
it’s also highly profitable. As
Heuler explains, new Arizona
super trees could average 4,000
pounds per acre annually. Ten
thousand acres would yield 40
million pounds. This year, growers should receive $2.05 to $2.30
per pound, depending upon quality and processing costs. At that
rate, growers in Cochise County,
Arizona could bring in $80 million a year.
Heuler encourages other producers to raise pistachios, which generate more profit than crops like
alfalfa. Pistachios may take more
upfront time and capital, but the
trees can produce nuts for more
than 100 years, giving you a long
time to reap rewards from your
investment. By Nancy Jorgensen
Pizzeria Bianco’s Rosa Pizza (a Tasty Pistachio Recipe)
This pizza requires the absolute freshest Parmigiano-Reggiano cheese you can find. When it is cooked
correctly, the cheese will melt to form a lightly golden, oily crust that encapsulates red onion, pistachios
and just the right amount of rosemary. Watch closely, as too much time in the oven will quickly turn this
pie into a cracker. The dough needs to rise twice, for a total of 2 hours. Makes two 12-inch pizzas (8
servings)
Ingredients:
1¼ cup tepid water (105 degrees)
2¼ tsp (¼ oz packet) active dry instant yeast
3 ¾ cups flour, plus more for the work surface
1 ½ to 2 tsp salt
3 tbs olive oil, plus more for greasing the bowl
5 oz freshly grated Parmigiano-Reggiano cheese (a generous 1 cup)
½ large red onion, thinly sliced (about 1 cup)
½ cup roasted unsalted pistachio nuts, finely chopped
¼ tsp finely chopped Rosemary leaves
Directions:
Whisk together the water and yeast in a liquid measuring cup; let sit 5 minutes, until the mixture is
frothy. Combine the flour, salt to taste and 1 tablespoon of the oil in the bowl of a stand mixer fitted
with a dough hook. Add the yeast mixture; beat on low speed just until a ball of dough forms that pulls
away from the sides of the bowl. Lightly flour a work surface. Place the dough on it and knead for 10
minutes; the dough should become smooth and elastic. Use just enough of the oil to coat the inside of a
large bowl. Transfer the dough to the bowl and cover with plastic wrap. Leave in a warm location to rise
for about 1 hour or until doubled in bulk. Lightly flour a large baking sheet. Punch down the dough,
then lightly knead it for a few minutes before dividing into 2 equal portions. Place them spaced well
apart on the baking sheet and cover with plastic wrap. Let rise for 1 hour. Place a pizza stone in the
oven; preheat to 450 degrees. (If you do not have a pizza stone, the pizza can be formed and baked on a
large inverted baking sheet.) Press or roll one portion of dough into a round about 12 inches in diameter.
If you are using a pizza peel (wide paddle) to transfer the pie to the oven, first sprinkle it lightly with
flour and transfer the round of dough to the peel. (Alternatively, the pie stays on its inverted baking
sheet, or can be placed on a piece of parchment paper for easier transfer to the oven.) Top the round of
dough with half of the cheese, onion and pistachios, leaving a 1/2-inch margin around the edges. Sprinkle the pizza with 1/8 teaspoon of the rosemary, then drizzle with 1 tablespoon of the oil. Slide the pie
onto the pizza stone (if not using a stone, place the baking sheet in the oven) and bake for about 10 minutes, until the cheese has melted and the crust is lightly golden. Serve hot. Build a second pie with remaining dough, toppings and remaining tablespoon of oil; repeat the baking process.
Page 3
Message from our President
In a More Global Market,
Agriculture Learns to Survive and Thrive
A new environment in the financial arena is emerging. In 2000, the world had 431 million middle-class persons. By 2030, the International Monetary Fund (IMF) predicts the world will have
950 million middle-class persons with 70% of the increase coming from China and India. This
transformation from third-world countries to first-world countries will create a huge opportunity
and demand for our commodities as the new middle class upgrade their diet. The implications for
us as agriculturalists are far-reaching.
Gary Dyer, President and CEO,
Farm Credit Services Southwest
In the meantime, we’re currently in the thick of a credit downturn cycle. Understanding the
stages of the cycle and adjusting for business success is more critical than ever before.
The diagram depicts the four stages of a typical
credit cycle such as the one we are now experiencing. Stage #1, the crash phase, occurred in the fall
of 2008 to the spring of 2009 with a 50% drop in
some commodity prices like dairy and hay. This
drop in commodity prices was compounded by
many of our dairies’ forward contracting high feed
prices for the year, but not hedging the milk
price. We locked in a $17 cwt breakeven for the
year and then milk prices collapsed to the $10-$12
cwt range. Our typical Arizona dairy lost $800$1,000 per cow during 2009. This means a 3,000
cow dairy would have lost up to $3 million and
deteriorated from well-capitalized to having very
little loan margin or capacity for additional borrowing. We also experienced the "Great Recession" and a complete collapse of the real estate
market in central Arizona with up to an 80% drop
in land values from the peak.
During the balance of 2009, we entered Stage #2,
the risk identification and mitigation phase. During this phase, lenders work with borrowers to
update values and financial information, obtain
additional collateral or guarantees if needed, and
implement all available self help actions such as
reducing expenses, implementing hedging risk
management programs, and selling non-earning
assets.
We are now entering Stage #3, what I call the up or out phase. This phase can be the most difficult because both lenders and borrowers have to address the critical question of future viability and can I survive this? If the answer is no, all involved are better off to
make the difficult decision to exit the industry and preserve as much equity as possible. A big factor in making this decision is the
commodity price outlook, how much equity and staying power is available, and other sources of financial strength that could be accessed if needed.
We are cautiously optimistic that we will see improved commodity prices and economic conditions in 2010 and have seen the worst
of this cycle. If this prediction proves to be correct, then most of our borrowers will survive this down cycle and live to fight another
day. Continued on next page
Page 4
The Lessons of the “Great Recession” and More
So what have we learned and what does all this mean to lenders and borrowers as we go forward into Stage 4, the stabilization and
recovery phase? Increased globalization has resulted in increased economic and commodity volatility as compared to historic
norms. We are now in a world market versus a domestic market for many of our commodities. What happens in China directly
impacts what happens here in the U.S. Protectionism, trade issues, political stability, economic stability, and new markets with a
growing middle class all impact this increased volatility. For example, per the World Trade Organization, we saw a 12% reduction
in world trade in 2009 and 9.5% rebound so far in 2010. We also have fewer marginal operators so it takes longer to correct demand/supply imbalances which also contributes to the increased volatility.
I believe we may be entering a major game changing paradigm shift with this increased volatility. In the past, the largest operator
with the lowest cost and highest production/yield was the winner. In this new world, we should ask ourselves if the operator with
the strongest balance sheet, liquidity, and best risk management program will be the winner?
One of our Farm Credit System economists, Terry Barr, suggests that future successful managers will need to develop strategies to
address this new emerging business environment with:
Greater price, cost, and cash flow variability requiring increased working capital.
Increasing cost structure from regulatory compliance (taxes, energy, environment, health care etc.)
Deflation followed by higher inflation and interest rates.
De-leveraging: lower acceptable levels of leverage.
More limited and costly access to capital markets.
Weak dollar (favoring exports but increasing input costs.)
Greater vulnerability to global trade and economic policy actions as export dependency increases, and
A return to more diversified business strategies and risk management programs (contracts, hedging, and crop insurance.)
Operators who can manage in this new emerging environment will be able to capture significant future opportunities. In conclusion, we have survived challenging times like this in the past and we will survive this cycle. The key is to learn from the cycle and
adjust our strategies to be successful in the future!
Managing Risk in a Risky Business
Now, more than ever, risk management is a key element in every farm and ranch operation. Agriculture is facing new challenges
everyday with new technologies, global competition, free trade and legislation, and more. Defining risk and developing a plan to
handle the risk ultimately produces confidence needed to seize opportunities in this rapidly changing environment. There are five
primary sources of risk: Marketing, Financial, Production, Human Resources, and Legal. Take a look to see how your business
rates.
Marketing Risk
Marketing risk describes the risk a producer takes in either purchasing or selling a good or service. In agriculture, we observe and
evaluate these risks on a daily basis. It is often one of our top concerns. But, it’s usually not until something dramatic occurs that we
really take a closer look at our risk management strategies.
Not every producer views risk in the same way, so it is important to assess your individual risk-bearing capacity with regard to market or price risk. What is viewed as a very risky inventory position for one producer, might be comfortable for another.
Your individual liquidity and equity position also plays an important roll in your risk management strategy. Someone with solid
equity in their balance sheet has more risk-bearing capacity than someone whose equity is very thin. Your own risk management
strategy may need to change over time, as your balance sheet changes. However, it is generally accepted that because of the volatility in ag markets, some type of risk management strategy is vital.
Risk management, as it relates to marketing risk, can take many forms. But, some type of price protection is the goal. Forward contracts, hedges through futures and options, inventory management, government price programs, marketing/pooling coops could all be
parts of your risk management strategy. For a dairy/cattle producer, even growing a portion of your own feed can be considered part
of your risk management strategy by taking some unknowns out of your feed costs.
Page 5
Managing Risk in a Risky Business
Marketing Risk
continued
You may have a strategy of
being a low-cost producer,
which can be a very valid
strategy. But that may not be
enough in volatile markets.
You may end up producing
for less, but a higher-cost producer may net more profit,
due to their marketing risk
management, and at the end
of the day be in a better financial position.
One thing to keep in mind
when constructing your risk
management strategy is to
avoid introducing more risk
into your operation. Sounds
obvious, but the implications
of a partial strategy can do
just that if not thoroughly
thought out. An example of
this could be not properly
evaluating both sides of the
risk equation. It is not uncommon for a farmer to contract his grain months or up to
a year out and leave the inputs
(fuel, fertilizer, etc) completely open to the market. In
the same, but opposite side of
that transaction, a dairyman
could lock in 60-70% of the
dairy’s feed needs from that
farmer and leave the milk
fully exposed to price fluctuations. In both examples, the
producer may have introduced
more risk by only partially
implementing a marketing
strategy.
Your risk management strategy will require you to know
your business and your fi-
nancial goals. What are your
breakevens? What margins
are acceptable to you? What
are the strengths and weaknesses in your operation?
Last, but not least, do you proactively communicate and
discuss these strategies with
your lender? In today’s volatile environment, lenders will
value borrowers who manage
their risk well.
Financial Risk
There are three major elements of financial risk: the
cost and availability of debt
capital; the ability to meet
cash flow needs; and the ability to maintain and grow equity. The objective is to manage these risks through sound
planning and financial control
by continually monitoring
your ability to bear financial
risk.
Complete farm records are a
necessity in maintaining control of your farm or ranch.
This includes the balance
sheet and statement of
owner’s equity, income state-
ment, and projected and actual cash flows.
These records provide historical data
to help you calculate financial
performance measures and
guidelines for future decisions.
Strategic expansion
should be considered with
adequate capital and financial
reserves in order to weather
short or long-term adversity.
Liquidity and adequate cash
flow is essential in a farm’s
survival during production
disasters or poor market conditions.
During the last
downturn, we have seen how
counterparty risk and evaluat-
ing the financial wherewithal
of people you do business
with can impact liquidity and
cash flow.
With proper planning of expenses, cash flow needs can
be known with reasonable
certainty. This allows you to
plan marketing decisions in
advance and to take advantage of attractive pricing opportunities. Improving liquidity includes areas such as reducing family living expenses, using resources efficiently, leasing assets, and
utilizing appropriate insurance programs.
Financial software packages designed specifically
for Farmers and Ranchers
are available.
If you
would like more information, be sure to ask one of
our loan officers.
Production Risk
Crop Insurance is a great way
to manage your risk and
maintain your income stream.
Insurance companies offer a
wide variety of crop insurance
protection and coverage levels. MPCI (Multiple Peril
Crop Insurance) is the basic
program which protects
against yield shortage by providing coverage against most
natural disasters. The level of
protection can be determined
by the percentage of your
historic yield.
CRC (Crop Revenue Coverage) protects against yield and
price losses. This ensures
producers will earn a minimum revenue.
The yield
guarantee is also determined
by using the producer’s actual
production history.
MPCI
and CRC premiums are subsidized by the Federal government. Subsidies tend to bene-
fit those producers who have uninsurable or in areas where
insurance is unavailable, prohigher levels of coverage.
ducers can apply for the NonNon-subsidized crop insur- insured Assistance Program.
ance programs include crop
hail and grain fire. MPCI
policies protect against losses
severe enough to significantly
drop the entire farm’s yield
average. Crop-hail, however,
gives acre by acre protection
that reflects the actual cash
value of damage from hail.
For those crops which are
Managing Risk in a Risky Business
Human Resource Risk
One important area of business risk management is the
risk that the business may
have to go forward without
you, the key man.
Farm Credit can help you
determine the right life insurance policy for your unique
situation. But, managing this
risk does not always require a
new policy or additional coverage and higher premium
expense. Sometimes, a reorganization of the coverage
you already have can result in
more coverage, lower premiums or both! How can this
be?
One myth to dispel is that life
insurance always goes up the
older you get. While this may
be generally true, there are
many situations where coverage you purchased years ago
is available today for less than
what you are paying now.
The insurance industry like
most things is constantly
changing and insurers battle
to remain competitive. Mortality tables show we are living longer lives on average so
insurers can offer lower premiums and still book a policy
that makes financial sense on
their end. Some of us may
have quit using tobacco, lost
substantial weight, gained
control of a health issue or in
some other way improved our
health profile since we last
applied for coverage. All of
these things lead to a replacement policy that can be much
more beneficial than what we
are now paying on.
If you now own a policy that
has built up a cash value over
the years, a 1035 exchange
can be used in most cases to
avoid the taxation that would
come with a policy surrender
for cash. The value of the old
policy is exchanged into a
new policy and your risk
management program moves
forward uninterrupted with
more value and benefit for
your survivors. If you have
enough exchange value in
your existing policy, it may
be possible to maintain or
even increase the benefit to
survivors and stop paying
premiums altogether.
Of course these great reorganizational results don’t
happen for every program.
But, the best way to find out
if improvements are possible
is to get those old policy
statements out and let us help
you research the possibilities.
If you are concerned about
future estate taxation for your
heirs, we can help with that
too. An Irrevocable Life Insurance Trust (ILIT) can be
arranged for you and we can
help you with the transfer or
gift of policy ownership to
your new trust.
So managing your risk in this
area does not always mean
“buying” more coverage.
Sometimes just better use of
what you have can result in
greatly increased benefits.
Legal Risk
Many of the day-to-day activities of farmers and ranchers involve commitments that have legal
implications. Legal issues involved with agriculture fall into a few main categories: legal business structure, tax and estate planning, contractual arrangements, tort liability, and statutory
compliance, including environmental issues. It is good practice to visit an attorney prior to entering into a business transaction—preventative actions are often cheaper and less time-consuming.
At Farm Credit Services Southwest, we understand that risk is inherent in all stages of farming from beginning farmers to wellestablished farmers. And, we understand the importance of managing that risk. We welcome the opportunity to provide a risk and financial assessment, and discuss the programs we offer to help you
protect your lifelong investments. For more information, call your
local loan officer or our main number at 800.822.3276.
Page 7
Questions for your risk
management assessment:
Have I identified my risk
management tolerance?
Which risks can keep me
from attaining my goals?
Which risks am I comfortable retaining and
managing with my own
resources? Which risks
will I shift to others?
Which risks will I avoid?
When was my last insurance check-up for health,
life, property, disability,
long-term care, crop insurance?
Have I had a risk exposure assessment done by
an advisor?
Farm Credit Services Southwest is collecting
favorite family recipes from employees, members and our Ag partners to create a cookbook.
To share your favorite family recipe send it to:
Farm Credit Services Southwest
PO Box 24138, Tempe, AZ 85282
or email [email protected].
PRSRT STD
U.S. Postage
PAID
A Taste of the Southwest
Deadline: October 1, 2010
Our gift to you will be ready in December.
Check out our new website!
Secure File Transfer—a way
to send and receive sensitive
information, like financial statements, in a secure environment.
Market Information with
weekly publications on the dairy and food market, Dave Kohl’s
weekly Ag Globetrotter, and Global Insight’s economic and interest rate forecasts.
Online Banking is another tool on our website that will help you
manage your account 24 hours a day, 7 days a week. And, if you
sign up by September 1st, your name will be entered into a drawing to win an Apple i-Pad. Check out our website for details. If
you have questions or need help with the new site just give us a
call!
Coming Soon...Cash Management
by Farm Credit Services Southwest
Efficiency:
Checks written are funded from your Farm Credit loan
Remote deposit
Online Banking
Profitability:
Minimize interest expense
Minimize banking related costs
Maximize interest income
Contact your Loan Officer for more information.
Address Service Requested
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you will have access to:
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Our new website is up and running and we invite you to take a
look—www.fcssw.com. With easy navigation and new tools, you
now have valuable resources at your fingertips.
Farm Credit Services Southwest
PO Box 24138
Tempe, Arizona 85285
www.fcssw.com
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