Greg Williams of Northwest Farm Credit Services tells Basin's current financial impacts from 2001

August 8, 2003

By Dan Keppen, Executive Director of KWUA


Contact the Klamath Bucket Brigade:

Greg Williams, branch manager of Northwest Farm Credit Services, provided an informative and sobering overview of the financial impacts of the 2001 Klamath water crisis to Congressman Wally Herger (R-CA) on Thursday in Tulelake.

Williams, a 30-year employee with his organization, has worked for 23 years in Klamath Falls, and was raised on a cattle ranch near Bonanza, Oregon.

Northwest Farm Credit Services serves Northern California and the four northwest states and Alaska.

According to Williams, his company has about $41 million in loans outstanding in the Klamath Basin.

Williams thanked Herger for his assistance in securing federal financial assistance in 2001.

"I can tell you that many of our customers only remain in the basin due to the federal programs that helped to mitigate losses from the water shutoff," he said

"Without that assistance many farmers would have ended up in liquidation, either voluntarily or involuntarily."

Most growers "dodged the bullet" with the 2001 financial assistance, he said. However, agribusinesses and some farmers still sustained large financial losses.

"I know, because I saw the financial records," said Williams.

Williams identifies five credit factors that lenders evaluate when making loans and the impact of a reduced deliveries of water, without adequate compensation.

Credit Factor #1: Character

Character is the individual's background, education, willingness to pay bills on time, and farming ability. Williams believes this credit factor has been significantly impacted due to added stress, inability to concentrate due to uncertainty, and increased time commitment to defend water rights. Stress manifests itself through anger, health problems and tension between neighbors.

Credit Factor #2: Capital

Capital refers to the balance sheet of the customers. The strength of the balance sheet is one of the key factors in determining how much credit a lender can extend to a borrower. According to Williams, the Klamath Basin water crisis has generally adversely impacted the financial position of the farmers of the Klamath Basin. This is due to loss on income, loss of opportunity to grow crops in 2001 (a year with high potato prices), capital expenditures for wells and other adjustments to irrigation systems, farming further from home, and cash contributions to fight the water battle.

It was not unusual to have loan requests of $50,000 - $250,000 to drill and develop a well. Some prospective drillers developed wells that were dry or had inadequate water, which drained their resources. For successful well developers, the costs increased their debt/asset ratio and depleted cash reserves. However, the new backup water supply may have given them a safety net for the future.

According to Williams, real estate values remain "shaky." Although local appraisers have not seen a decline in land values in the Klamath Basin since 2001, they are quick to point out that there is less demand for land without an alternate source of irrigation water.

They will also tell you that following the cutoff of water in 2001 the real estate market stopped in its tracks for a few months.

Should there be a total cutoff of water, the basin's irrigated land value, without wells, could drop from $1,200-2000/acre to $150-250/acre, says Williams.

"In other words, a 500-acre farm valued at $1 million could drop in value to $100,000," said Williams. "These dryland values would destroy the balance sheets of basin farmers as well as taking away their ability to generate income."

Credit Factor #3: Capacity

The third credit factor is capacity, which is the ability to generate income to pay annual operating expenses, service debt payments, and provide a reasonable level of living for the family. The water cutoff in 2001 impacted the ability to repay debts due to inability to grow a normal crop and/or increasing expenses. In addition, there were fewer part-time employment opportunities available for those who also work off their farms.

The water cutoff left irrigators in a position of not knowing when the next "surprise" cutoff or reduction in water deliveries will occur. This has impacted the capacity or repayment ability of farmers as they have taken a more conservative approach to crop rotation. Many of Williams' customers now plant fewer acres of row crops like potatoes and onions due to the risk of water curtailment. In addition, tenant farmers now prefer land with secondary water sources. This adversely impacts the landlords without an alternative source of water.

Credit Factor #4: Collateral

Collateral is the fourth credit factor and includes assets to repay and secure the loan. This may include a lien on crops, cattle, equipment, and real estate. A water shutoff would cause the value of collateral to fall to the point that customers may not be able to repay the loans from normal income or the sale of collateral. If land values drop by 80-90 percent, the owner will not be able to either sell out or generate sufficient income to repay their loans.

Credit Factor #5: Conditions

The last consideration in making a loan decision is the conditions or terms of the loan. This may include the amount, collateral needed, interest rate, length of loan, and other requirements. Williams says that Farm Credit Services has been able to continue to finance the Klamath Basin with no more attrition of its customers than normal. However, in some cases his lenders have had to beef up loan conditions.

"We are approving these loans but we are not ignoring the increased risk," said Williams. "As a cooperative, we are committed to financing the farming community. Our directors and local advisors are farmers and ranchers and they understand this risk and realize that the Klamath Basin may be the first of many communities to face extraordinary challenges."

Risk Management

Recognizing the challenges is one thing. Taking proactive measures to reduce or manage the added risk is another. Williams' company is setting aside additional reserves for losses that could be sustained if there is a total cutoff or substantial reduction in the deliveries of water. The firm also emphasizes close working relationships with its customers to ensure that added risk is recognized and appropriate steps taken to protect their own equity.

All of this takes time, effort and commitment of staff and management.

"As a lender in this environment we financially support organizations that are on the battlefront," Williams told Congressman Herger.

"We, too, get worn down, but we must remain positive to be successful. I believe we will have tough times ahead, but a viable farming community will remain in the Klamath Basin," said Williams.