AoR 161: The 5th "C" of Agricultural Lending, with Zach Ducheneaux

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>> Welcome to the Art of Range, a podcast focused on rangelands and the people who manage them. I'm your host, Tip Hudson, range and livestock specialist with Washington State University Extension. The goal of this podcast is education and conservation through conversation. Find us online at artofrange.com.

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Welcome back to the Art of Range. My guest today is Zach Ducheneaux. Zach is, I think, a member of the Rick Knight Radical Middle, people who have that brand of common sense that's less and less common, and people who can't really find themselves a solid membership in any of the prevailing political factions. And I would say two people whose ideological commitments tend toward whatever promotes human flourishing and maintains healthy ecosystems. He's been a rancher, the son of a rancher, the head of the Farm Service Agency, the head of the Intertribal Ag Council, and a small business entrepreneur. And we want to talk about probably all of those things. Zach, welcome to the show.

>> Tip, it's really good to be here. Thanks for the, thanks for the warm introduction.

>> Yeah, as I mentioned just before we started recording, our worlds I think have overlapped some, but our paths haven't crossed. So, here's what little I know about you. You live in South Dakota. You've been connected to ranching all of your life. You ran the FSA for a while. You ran the Intertribal Ag Council for a while, which I think supports and advocates for Native American farming. And you're giving yourself now to promoting healthier family ranch finances through something like a new business venture. And those things all commend you to me. I've only read and experienced a tiny bit of this on the ages. But I do lament the loss of land knowledge and ways of knowing that seem to be leaving the world as Native American memory and traditions fade. And I also feel that, or I suspect, that rangeland ranching is one sector, or a subculture of people, who would probably benefit the most from knowing just a little bit of that. I don't know whether we'll get to that today, but, you know, related to that, I also feel that maintaining rangeland ranching done well is crucial to maintaining large scale ecosystem processes. And one of the limiting factors to that success is finances. I mentioned a couple times recently that I recently read the book, The Worst Hard Time, about the Dust Bowl. And much of that, there's a description of how bad federal policy on farming and financing farming really drove some of this ecological disaster. This stuff's a big deal. Money divides family. Money drives stress, which causes people to treat other people and animals badly. And being modern farming and ranching operations rely on and move a lot of money. So, I don't have answers to those problems, but you come recommended by some people I trust. And I'm told that you have a few things to say about that. So, how is that for a sprawling introduction without any focus? How's the weather in Eagle Butte?

>> I think that's a really good introduction. A couple of things I just want to highlight and call out there. I'm a member of the Cheyenne River Sioux Tribe and live on the Cheyenne River Sioux Indian Reservation. And frankly we were here long before South Dakota ever became a state. And a lot of the concepts and philosophies that I approach life with have their genesis in that upbringing. While I wasn't brought up in a traditional sense, practicing the Lakota spiritual ways, my family has always kind of aligned with that sense of community, that sense of tribalism. And we're part of something bigger, and we're obliged to devote our skills, knowledges, abilities towards that bigger collective. And we've all kind of lived that public service roll out in that regard. So, really appreciate that. Hopefully the folks that recommended me to you have adhered to my guidance when you speak of me, lower expectations, so that's always easy for me to achieve.

>> Yeah, I think we'll be fine. What's your background? One, I'm curious, because I can't figure out where else to put this in the interview. Ducheneaux sounds like a French name. The Sioux name for, I mean the English word for whatever tribe is called the Sioux Indian. Sounds like a French name. Where did the French name come from?

>> Sure. So, my great great grandfather was Napoleon Ducheneaux. And he was a Frenchman, a French Canadian, who came down around the horn, if you will, and came up the river, in search of fortune and who knows what else. But one of the things that was unique about the French explorers, if you will, when they got to this part of the country, they weren't seeking dominion. They weren't seeking to conquer. They were just seeking commerce, and seeking a way of life. So, Napoleon, along with a lot of other French Canadian fur trappers, entrepreneurs in that day and age were actually adopted and married into my particular band of the Lakota, which is the Atozicho [phonetic]. And that's where the French name comes from. On my mother's side, Russo is the prominent French name. So, you'll see that roughly from the southern part of the Great Plains up the Missouri River, all the way over into the far reaches of Montana, where my good friend, Ross Racine, has French ancestry, and he's on the Blackfeet Reservation.

>> Yeah, Napoleon Ducheneaux is quite a name.

>> Yes, it is. And it sounds like he was quite a colorful fellow.

>> Yeah. So, what was your background to getting into advocating for agriculture from a couple of different angles?

>> Yeah, so I was a child of the farm financial crisis, which is probably the most important thing to know about me as you contemplate my work history.

>> Trajectory, yeah.

>> Career such as it is. And what I plan to do in the future. But part of that upper neat was growing up on a cow, calf, and Quarter Horse operation, on the western bank of what used to be the Missouri River. And my formative years really happened in a time of scarcity in my family. We didn't know it because my parents were fantastic stoics, but we didn't have a hell of a lot. We were poor and we didn't know it. And the realizations that I have come to later in life looking back on that, I get it. I start to understand why, start to understand the pressures that were on my parents as they were trying to raise seven kids through the heart of that farm financial crisis of the 80s when we had a culmination of events that were aligned with an era of what I think is really poor federal policy, and one that was inclined to pull the rug out from producers in economic or financial distress that got behind on federal debt as opposed to offering them a helping hand and extending terms and helping preserve their ability to produce. So, we lost a quarter million farms in that era, just good fortune, and, again, that sense of community contributed to our operation, staying in our control, into my generation and the next and now my grandson is being raised out here on the ranch. But the way that that really resonates is during that time of the 80s when mom and dad were trying to feed seven of us, the Production Credit Association decided fairly arbitrarily that they weren't going to lend in Indian country any longer. They have never been held to account for that, but that's water under the bridge that I can't recapture. By virtue of that, dad's operating capital was cut off. And in the course of this, dad was one of those prototypical producers, you know, called the local FSA office and said, if you don't help me feed these damn cows, I'm going to drop them off, because they're not starving to death on my place. But he also had kids he was trying to feed, so dad, one spring day, this is the way my memory puts it together, I look out the door, and he's over by the old dilapidated building that we call the garage, doesn't even have electricity in it at this point in time, and he's walking alongside and he's picking up a tire and he's looking and he's picking up a tire and he's looking. So, he, I go over there and I help. And I say, how about this one, how about this one? Well, the clarity of adulthood helps me realize that we were looking for the best worst tire on the place, because the ones on the pick up were all worse than those. We didn't have the money to just go buy a tire. I think about the bounty that we have on our place now where if I need a new DeWalt wrench, I'd just go buy one. I don't have to think about that. We've been able to weather that and develop some capacity. But what he was doing on one of those trips to town in that pick up was going to engage in a conversation, had in hand with the local grocery store operator, Mr. Butler. He ran Butler's Jack & Jill in Eagle Butte, South Dakota. And if his family is listening, we still owe you a debt of gratitude, because when dad went up there and talked to Mr. Butler, he said, I've got a family to feed. I need to feed them. I will pay you. I don't know how or when, but I give you my word. And that grocery store operator decided to, owner, decided to carry dad and our family for well over a year in time.

>> Wow.

>> And in 1986 dollars, that bill was damn near five figures. So, he carried him for a significant amount of time. And why that's important and why that ties back to that sense of community that we started this conversation with, that doesn't exist in today's rural America, and it's a significant shortcoming. Now in that same city, Eagle Butte, we don't have the children of Butler still owning Butler's Jack & Jill. We've got the Dollar General store. And Lord knows how many people Mr. Butler did this for. But I guarantee you if I go up there to the Dollar General manager and say, look, I don't know when I'm going to be able to pay you, I don't know how I'm going to be able to pay you, but I know that I will. Even if they want to, they're not going to have the autonomy and agency to extend me credit in that store. That sense of community has been severed by all of this consolidation, by the exodus from rural America that has caused good people like Mr. Butler to have to be the last generation to run that store. That's what we're trying to overcome. That's the, that's the result of the systems that we're operating in, because I truly believe that every system is perfectly designed to create the outcomes it creates. And if we're going to change those outcomes, we've got to take apart the machine and change the system. So, that's why finance is going to be important to me from here on out, and what I devote most of my professional capacity to, while working to be a grandpa, since my grandson is here on the range.

>> Yeah. Yeah, that story sounds like it could have come straight out of a Wendell Berry novel, describing how this social fragmentation and atomization of culture has not been good for people who live on the land.

>> Absolutely. I'm not familiar with Wendell Berry, but it's something that is rewritten over and over. And just this weekend, this past weekend, Fourth of July, I got to see the opposite of that through some of the work that I had a chance to be a part of at the Farm Service Agency. I got to visit the new ranch of a young family that was able to get financed through the FSA. And with the help of a guaranteed lender that was willing to work with the producer. And three little girls living in the most idyllic colonial house you can imagine in South Dakota, 600 acres of land surrounding them, where they can actually grow up out there on the farm, on the ranch, with their parents. And it was, that's the vision that we are trying to promote with [inaudible] and the work that we're doing. The vision that we were trying to promote at the Farm Service Agency as we started to take a different approach to the mission of the FSA and the farm loan programs there.

>> Yeah, I want to pause you there. One of my objectives with the podcast, which is mostly listened to by ranchers, and what I call natural resource professionals, is to help them understand each other's worlds. And because my background is a little bit of both, this feels like it's important. But my knowledge of the history of the FSA is pretty small. So, I'm wondering if you could just quickly give a brief history of how the FSA came about, and that might be tied to a thumbnail sketch of the history of farm lending. Then I think that would lead us into what you're doing right now.

>> Super. Yeah, and there are definitely people that are more expert in this that may stand in and correct or course correct on this as they listen. But the short version is the situations that you described at the beginning of this also helped create the need for a farm service agency. In the 30s, one of the challenges that was faced by producers was commercial lending wasn't adequately serving farming and ranching communities. Because of that, the predecessor agency to the Farm Service Agency was created, along with the farm credit system of lending, which was then the Production Credit Association and the Federal Land Bank. Along with a host of other agencies and departments that were designed to maintain rural America and help rural America flourish. So, born out of that lack of service by the commercial lending industry were these two federal supported entities. You move forward in time, and we had an evolution that culminated with a portfolio of around 250,000 producers in the Farmer's Home Administration direct lending portfolio in the 70s. And through the farm financial crisis of the 80s, we lost a lot of that. And then the mission of the agency was reimagined. And it was kind of put in the space of the lender of last resort. And where this really grinds my gears a little bit is when you hear people talk about federal lending, it's often in the context of the federal government shouldn't be picking winners and losers. Therefore, we shouldn't be out there lending. And I fundamentally disagree. Because in a borrowing and lending paradigm, if the federal government is saying, hey, Joe rancher, instead of getting the money directly from us, we believe that you should go over here and get the money from this commercial bank, and pay them 4% more for the same money, and we'll guarantee that transaction. We have certainly picked a winner and a loser in that scenario. And the loser is the producer. And you think about what that 4% that they have to pay for that capital does in the form of extracting from their operation, extracting from their livelihood, extracting from their soil resource. We've lost opportunity there because of that choice. So, FSA had been put into this position of being a lender of last resort. While we were there, we got a chance to take a look at the performance of the portfolio, given that. And that's where some of the ideas and philosophies that we're adopting going forward with Fifth C in our other work really started to germinate and take hold. So, I think that leads us into the question that you were contemplating about what next.

>> Yeah, and forgive me if I missed it somewhere there, I want to ask another dumb question. I just, am I hearing correctly that commercial lending, meaning local banks, weren't willing to serve farmers and ranchers because they were too high of a risk, or because they would only offer interest rates that farmers didn't feel like were reasonable? Or both?

>> I think there's a blend of both. I don't have the benefit of experience during the 1930s, but I've got a lot of experience through the 80s and 90s as a former distressed borrower myself. And there are times in my life where I was paying 9, 9 1/2, 10% interest on money that I was using that belonged to someone else, which is fine. But the challenge that producers are faced with is they don't get to really have a say in how long they keep the money and use it.

>> Yeah.

>> And what we're trying to do with Fifth C is create a reality where that producer has that money, has the opportunity to use it longer, knowing full well they're going to pay a cost for the money of that money. We'll talk more about conventional loan structure a little later. But, you know, I want to talk a little bit about some of the revelations that we came to analyzing FSA's loan portfolio, as we contemplated this new way of doing business. And you've probably heard, if you've talked to any number of producers, that the farm loans at the Farm Service Agency take too long. They don't move with the speed of commerce. And we heard that loud and clear and tried to do some work to improve on that. Part of that was an analysis of 100,000 operating loans on our portfolio. And that means [inaudible] cattle machinery, equipment, seed, feed, fertilizer, fuel, things that get used up can break down, can die. Everything but real estate effectively. And in that analysis of those 100,000 loans, 85% of the time, things went exactly as planned, and the producers were able to pay that money back, no problem, no questions asked. Fifteen percent of the time, there was some type of default. What we did with that information was take the 85%, find some key characteristics that they had in common, and developed a fast track loan approval system that shortened up that conversation between our staff and those producers by hours if not days in that actual file. But where my mind went coming out of the farm financial crisis and understanding that the federal government could have done things differently than, and kept producers on the farm, was what about that 15%, because that seems like a pretty high number for default. So, we dug in on that 15%, and we found that despite the fact that 15% of the time there was some default, the loan servicing tools that are available to the Farm Service Agency, which are deferral, reamortization, restructuring, refinancing, all lend to the long term success of these producers so well that they can help producers work that out. The loan loss on that same portfolio of 100,000 producers was less than 1% by loan volume. So, where that took me was thinking about, man, if we've got the tools to help people when things go bad in that 15% of the time to prevent loan loss in 99% of the cases, what if we offered those tools at the front end of this relationship? What if we offered an extended amortization? What if we offered a deferral of principal payment so that a producer can start their relationship with the lender as a depositor instead of simply staying a perpetual borrower? Help them amass some working capital. Help them think about paying themselves a wage. Help them maybe retain some to have health insurance purchased on the place from production income so they don't have to have the 38 hour a week job to have that vest from an employer. What if we look at using this as an opportunity? And I want to rewind just a little bit and point out that the 100,000 loans that we analyzed are people who by and large were subject to the lender of last resort mantra. So, their balance sheet, their economic situation would not have qualified them for financing at a commercial bank, even with a 90% guarantee. And despite that particular set of economic circumstances, less than 1% of the time did the federal government have a loss. So, it's key to point that out, because there's this notion in agriculture that ag finance is risky. Well, the way we do it, it certainly is. But agriculture production isn't risky. And we can derisk that further if we are able to align the terms of finance with what the producers actually need.

>> Yeah, that feels like it begins to get at some of the big picture questions, like why can't people make a profitable living growing food?

>> Yeah.

>> In a world with a lot of people that all have to eat, and have income to spend.

>> Yeah. So, there's some macroeconomics to talk about there too. Because I'm going around the country saying ag is actually very profitable. And I want folks to understand why. Today, there is around 560 billion dollars, give or take, in farm debt. That number continues to increase as the industry grows in size.

>> That's the United States or world debt?

>> That's the United States.

>> Yeah.

>> But the production income created from that 560 billion dollars of debt in the last three years averaged over 500 billion dollars. By any standard, that's pretty profitable use of debt.

>> Right.

>> But the challenge that our producers have is so much of that production income cycles right out of their operation before they ever get to make a plan with it, because that's part of a short term finance vision that's driven by lender liquidity and lender profitability, not necessarily the long term benefit and value to the producer of that production income staying in their control, staying in their local economy.

>> Yeah, you've, I think, been trying to ask the question, what if we, having seen this stuff from every angle, from being a borrower, from being a lender, so to speak, you know, administrating lending organization, you've been trying to answer the question, what if we stepped back and asked the, you know, the sort of a priori question of what would, what should rural finance look like? If we wanted to build it in a way that supported this long term stewardship and financial resilience, and I would add social resilience, because there's an awful lot of social strife that's downstream from farm budgets. How have you begun to answer that question?

>> It's a really good question. And to me, that's the key to all of this. How do we demonstrate that a different model can work? The challenge as I see it is from the producer perspective, we all know we are in a capital intensive business. It takes a lot of money to make money. And we all come to the table knowing full well we're going to have to pay someone else for the use of their money. That's interest. That's return on investment. We're going to have to make sure that we maintain the ability to pay them back in full if they need it or want it back in full. And we have to accept the fact that if we don't do those first two things, they're going to take some of our stuff to recover their value. We all get that going into it. But the terms within that can be structured to better benefit a producer. And that's what we're trying to do with Fifth C as we go into this into the future. We want to paint this as an investment opportunity, not a borrowing and lending to someone that's up against it. And I use an example of a producer in South Dakota, Montana. These are both cow guys, cow calf operators, and they each had about $300,000 in total debt that they needed from the world. They were using someone else's money. The fellow in South Dakota had $160,000 of term debt, all due and payable over the next two years. So, that's $80,000 a year, plus the interest. It cost that producer about $100,000 to get their calf crop to market. So, against that calf crop, they now have the 80,000 and the 100,000. So, they're paying $180,000 already for access to 300,000. Because of the poor structure of that debt, it was probably a five year loan to start with. In the previous year, they didn't have enough money to cover all of the $100,000 in operating, or all of the $80,000 in term debt. So, the bank rolled that over onto the operating note for the year, the current year, and then they had to borrow additional operating just to get that calf crop to market, because the term debt was piled on there. So, all told, that producer had the $80,000 term debt payment with interest, $100,000 annual operating note with interest, and another $40,000 additional operating note, which was actually carryover debt from a previous year. Altogether, that's about $220,000 of just principal repayment that the producer had to come up with from the same operation. So, what we're proposing to do is paint that as an investment opportunity. Because when you divide 220,000 into 300,000, you get over a 50% return, pretty damn close to a 75% return. Because, again, the producer only needed $300,000 to operate. So, if we think about this from the perspective of an investor, an institutional investor who is managing the endowment for a philanthropy, or for a land grant university that's working within this footprint, or in a pension fund manager who's looking to get a 6 to 8% return on their pension in the long run, then we say, this producer over here just used $300,000 to make $220,000. What if we give them a better deal? What if we invest for the long term 300,000 here and take say a 10% return on our investment every year? Now that producer's cash flow burden to pay for the cost of capital goes from $220,000 to $30,000 next year. Think about the opportunity that that producer will be able to take advantage of with an entire year's worth of working capital at their fingertips, instead of having to come in and settle up and then wait for a bank loan officer or a bank loan committee or a federal employee to reapprove their annual operating note. We're on the Art of Range podcast. There's a growing movement in soil health and regenerative ag, and the ability to use innovative grazing techniques. This producer can start to think about self financing some of those instead of waiting to get in the queue for the diminishing conservation programs that we're seeing today. They can start to take advantage of the fact that we've got record cattle prices and say I'm going to keep every heifer calf I've got because I want to be part of this. We have created opportunity, just by changing some words and numbers on a piece of paper and sharing the profitability across the whole capital value chain.

>> And why haven't we made the switch yet?

>> Well, so I think there are a lot of issues to overcome.

>> Yeah.

>> First, you know, we have to, we have to understand the tensions that are on the conventional lender. A conventional lender is, in some respects, a victim to the system as well, because the current capital structures haven't allowed for rural Americans to deposit meaningful long term amounts in their rural bank. And a lender struggles to go longer on their loans than the deposits that they have access to. If you'll pull up the website of any lender, they might have a three, maybe have a five year CD that they offer. They are bound to that, and they have to make sure that they get that money back in the bank when that CD comes due, in case that person wants their money out.

>> Yeah.

>> So, there's a tension there. But another of the realities, Tip, is that lenders profit from risk. And they profit from their ability to describe something as risky, despite all of the indicators that it's not. I've got a whole producer that I've worked with my entire professional career, since the 90s, he's now in his 80s, he has been borrowing at the same bank, I would wager, for five decades or more. And that in and of itself speaks to how low risk this borrower is. He's always been as good as his word, or this bank wouldn't have hung with him that long.

>> Right.

>> But the reality is when the bank puts the numbers on the balance sheet for him, they devalue his cows, they devalue his land, and put it at a salvage rate that's frankly misstated, which changes his balance sheet ratios, which puts him into a higher risk category, despite the fact that they've been working with him for 50 damn years.

>> Wow.

>> But because they do that, they can charge more for the use of their money, and not be called to account over it. They could even then go out and solicit a 90 or 95% guarantee from the federal government at that increased interest rate. And that is the type of thing that really, you know, we've got to build a system that's better than that and help folks understand that the terms that you offer to a producer can either exacerbate the real risk in ag production, which is weather related disasters, market volatility, health, health maladies in their family, you know, those things are real tangible risks. And if you structure finance too short, you make any one of them a cataclysmic event that jeopardizes the entire operation. It's no wonder the average age of our producer in this country is 58 years old and climbing. And we've got a disinterested next generation. And producers who are forced to make the decision when they decide that they want to exit agriculture, which of my assets am I going to liquidate to supplement my retirement?

>> Yeah.

>> Those are three existential crises that we've got to deal with. And we should get to it rather than later. And I think the system that we're talking about with Fifth C can certainly be a viable alternative if we start to think more about the deployment of capital as a perennial seed instead of an annual crop. And there's a lot of power in that metaphor there, because currently what we do in capital, generally speaking, is we deploy the capital. It goes out there into the soil, if you will. We harvest every last thing we can out of that, leaving just a residue. And the only way anything can grow out there again is with another deployment of capital. Whereas if you go out there with a diverse vegetative mix, and we graze through that or harvest sustainably, it can grow again the next year. But we don't treat capital like a perennial. And we wonder why we don't get perennial results with it. That's a fundamental change that we need to make.

>> Say that again.

>> We do not treat capital like a perennial seed. We treat it like an annual crop. And until we change that, we're not going to get any different results.

>> Yeah. You talked about what sounds like both barriers to exiting the industry, as well as barriers to entry into the industry. And I sense that there is a renewed interest on the people in general of getting into food production. I suspect there's probably a number of reasons for that. I think that one of them is that in a world with artificial intelligence, artificial food, artificial money, artificial relationships between people and people, and people and land, people are hungry for it and gravitating toward I guess what I call a real wealth and real satisfying work and real relationships with the land where we produce real goods and services that have value in a real economy. And we probably need a new, you're describing a new way of trying to get at that so that people who aren't fifth generation ranchers or farmers might have a chance of getting into it.

>> Yeah, absolutely. And I think, to me, what that all harkens to is that sense of community, that inclination in humans to feed and care for the broader community. And that's what all much our producers really at the end of the day are out there doing, and what are aspiring or hoping to be first generation producers, want to do. They aren't getting in it because they think that this is a good venture capital exercise. They see someone that needs food or clothing, and they want to be the provider. And they think that they've got an idea that can help provide that. And we need to help them unleash that desire to innovate and unleash their sense of community so that they can become part of this system that up until the last, well, so far, has done a decent job of providing safe and affordable food to people. There's a lot of innovation that we can see if we deploy the capital right to continue to do that and do it even better.

>> Yeah. Speaking of capital, you've mentioned several times Fifth C. Is this a business that you started? And, of course, I sort of feel like this is a quiz where I should know the answer. Fifth C obviously begs the question of what are the other four? And I don't know if community, capital, yeah, what is Fifth C? And what are the other four? And then I want you to get back to your other example.

>> Well, that lets me know that the name is doing what it's supposed to, because that's a question that we want to talk about.

>> I've been baited.

>> In the deployment of credit, in borrowing and lending, you will hear different iterations. One is the four Cs of credit. I've heard of another one lately, the five Cs of credit. But what I've had beat over my head was the four Cs of credit. And that's capacity, capital, collateral, and character. And the name Fifth C came out of frustration over the lack of character to mean a damn thing. And started to analyze why doesn't character matter to these lenders? The idyllic family farm who bought their first place that I referred to earlier, they had a lender that had that fifth C. They had a technical assistance provider that had that fifth C. And that fifth C, in this case, is courage. The producer brings courage to the table every day. We need lenders, we need investors, we need folks that are financing agriculture to bring some measure of courage on their own to the transaction. So, the producer isn't the only one doing it. So, Fifth C is courage. Stands for courage. And what we're going to do is have the courage to try to innovate in this space and bridge that gap between an institutional investor that thinks an 80% return on their money forever is a pretty damn good deal. And that producer who can go out there and do production agriculture and provide a 10% return forever, if they've got the money to use. That's what Fifth C is. So, we're that entity that's in the middle of that, looking to build out.

>> Yeah, that's interesting. At one time, the ability to discern character was the mark of a smart lender. Like that was the thing that they were paid to do was to determine whether or not somebody was likely to pay back. And, yeah, I think you're right. It's almost like that has been completely cut out of the equation nearly at every level of lending.

>> Yeah, that ties directly back to where we started this conversation, with two men of character coming to an agreement that allowed one of those men to keep the family ranch together. My dad and Mr. Butler saw something in each other. And they knew that they could count on each other. And they were able to exercise that to the benefit of future generations.

>> Yeah, and the lender was taking on real risk, at least on one side of the ledger, meaning that he was likely not free to assume that that money might not come back. Like there was, that was significant skin in the game, which speaks to his confidence in the character of the borrower.

>> Yep, exactly.

>> What was your other example?

>> So, the fifth C is courage. And knowing full well that I'm stepping into a place that I don't believe anybody has ever been before. And if there's anybody out here already doing this, let me know. It will save me a lot of damn work. And I know the ranch I'm going to go buy. So, if you're listening and you've already got it solved, let me know. But absent that, I figured I had better be putting my money where my mouth is. So, when I got out of federal service here on January 17th, I had already taken my federal retirement money, such as it was, and put it in cash. But I took it out of there, paid the tax and withdrawal penalty, and I've invested $30,000 in a young lady that's operating with my family here on the ranch. She had been an FSA youth loan participant. Bullet even the great structuring of the FSA youth loans has its shortcoming. We'll do a seven year loan there. I think hers was probably around 4 or 5%. But it's only $5,000. And that doesn't help you finance to a scale where you can absorb any loss. She had three or four cows. One of those cows comes up dry, you're in duress. Two of those cows comes up dry, you're out of business. You have that FSA youth loan, she successfully paid it back, but at the end, she really didn't have a chance to build a herd of cows. So, I visited with her, and I said, how about this? You buy a 10 head of heifer calves from us here, from my daughter and husband who are running the ranch now, and you run them here with us. And you pay fair market price. And you forward, you pay forward the operating capital to get them to their first calf. And here's a $5,000 contingency fund, because sometimes things change. So, I gave her $30,000, all told. And her obligation to me is to maintain the value of that $30,000, produce income, and pay me $3,000 next year in the Fall of '26 when her first calves get to market. So, a 10% return on my investment. And to her credit, and a statement of her character, which would not have mattered to a commercial lender, they would have never loaned her the money, a testament to her character, she said, what if I have a really good year next year, and I want to pay you back? And I said, TC, this is where this approach that I'm advancing here radically differentiates itself from what a commercial lender might do. Because a commercial lender is going to say absolutely, pay me back, because I can charge someone an application fee to get that money back out the door. I want you to pause and think. Think from a position of abundance. You have money at your disposal that you don't have an obligation against. You can certainly pay me back. Let's say it's $5,000. If you pay me back 5,000 of th 30,000 you've got in the Fall of 2026, that's going to save you exactly $500 over the next production year. Surely, you can find something to do with $5,000 that makes me my 500 and makes you some money and adds to your equity and net worth and the value of your operation. I would rather you did that. Because what I plan to do with the $3,000 I do get from you is put it out the door to one of my nephews or to my grandson and get them started in this system so that my retirement, meager such as it was, is out there compounding at 10%. Imagine if she

>> And she's in a position to grow.

>> Yeah. And imagine if instead of thinking about paying me back, which is the mantra, the mindset that we're all crammed into by the four Cs of credit, imagine if she was thinking, I'm going to start to pay into my retirement fund now, and start to pay a couple thousand dollars a year into an actual pension fund, that when she turns 45 or 50 years old, will have gotten to the mid six figures. And she convinced start to think about, I could retire, I could hand this off to my kids, because I'm comfortable. And now we've eliminated the disinterested next generation, because the kids never had to see her struggle like I did to my parents. We've taken the pressure off of her that would lead her to have to liquidate assets to supplement her retirement. And we have just created a 50 year old retiree with a 25 year old next generation on the farm, on the ranch. By changing the system, we can get at all of those things that are currently the existential crises in agriculture production.

>> It spirals up.

>> Yep.

>> How do you see that progressing? It sounded like there's, yeah, if you were, if an organization that had capital to deploy somewhere wanted to support this, is that something they could invest in, I guess with a lower case i. And what does that look like?

>> Yeah, we have put together, we and some trusted advisors here and some folks that I work with in the nonprofit sector, had put together a development plan, with an eye towards rolling this system of finance, this system of capital deployment out at scale across different production practices, across different geographies. And that development budget's around $600,000. That will get us the legal back office, the producer facing calculators and tools that they need. We're already about a quarter of a way towards the capital raised to the development budget committed. So, we're going to continue to push. If someone wanted to invest in the development of this, we've got a process developed for that. But if someone wants to actually invest in a producer, we can step in there and help them find the right producer for their investment, because we're building a catalog of producers and their capital needs. And really what that amounts to is taking producers that are already financed somewhere that may not be financed for opportunity, taking a look at their balance sheet, and taking a look at what they've been able to carve out of their production income to pay as a cost of capital from their annual cash flow, and then finding that sweet spot of what an investment would look like to them that really empowers them. Our goal, I think, would be to have producers in this system that have liquid assets, deposits, cash, retirement accounts, what have you, that equal about two years' worth of production income, so that if they have a bad year, they don't have to wait on a federal program, they don't have to wait on a Congress that couldn't even pass a farm bill, to get disaster assistance to them. They know I've got next year already planned for. I can make adjustments based on the weather, based on the market, based on production practices. I can go out there and innovate on my own terms, because the system of finance that I'm participating in is creating that type of liquidity, that type of working capital, that type of opportunity for me and my family.

>> That sounds encouraging. Yeah, thank you for what you're doing. I think I might just have a couple questions to finish us out here.

>> Sure.

>> And if it's not useful, we can punt and find a different way to conclude our conversation. But I'm curious, since you, you said you left FSA this January. At least I think it was this January 2025.

>> Yep.

>> What do you see as the future of the FSA? And what do you think about some of the current young farmer and rancher loan programs being offered through FSA?

>> I know for a fact that the folks at the farm loan programs, at FSA at all levels, are highly dedicated, highly qualified, and committed to a cause greater than themselves. That's an incontrovertible fact. I've seen it firsthand myself that young family's ranch that I had a chance to visit this past weekend is indicative of that. They are under significant pressure and tension right now, because the administration that replaced ours goes around the countryside demonizing federal employees and denigrating public service, and talks as though the private sector has all of the solutions for this. They don't. The young lady who I financed would not get the same terms or opportunity in the private sector. The young family who is living on their forever home would not have had that opportunity had it been solely left to the private sector. We need that support structure. And we need people around the countryside to go into those local offices and say, I don't care what else is going on in the world, damn it, I support you, I believe in you, because they're not getting that from their leadership right now. All versions of the federal budget are cutting FSA salary and expenses to about 80% of the normal value. And in all of my travels in the last four years, visiting FSA offices all across the country, never once did a producer come into me and say, I think we've got too damn many people in our local office, and things just happen too fast there. It's always been some other variation. And my phone number was out there in public for people to call. I fielded hundreds, if not thousands, of calls from producers, as your FSA administrator, and not one of them said, these people just seem to be sitting in this office twiddling their thumbs, why don't you get rid of some of them. I do not believe the support is there from the countryside to be cutting FSA staff. But it is certainly going to happen. The USDA is down 15,000 people from where it was come we left just a few months ago. That's out of 100,000 people, roughly. So, I am concerned for the people that are still there, and this ongoing war of attrition on them and their commitment to public service. I hope they can weather it. And I hope it doesn't undermine their commitment to community, to their local economy, to their producers.

>> Yeah, I don't have the sense anymore that people see the FSA as a lender of last resort. So, what's your sense of how the FSA is perceived out there now with other organizations that, you know, large organizations that do various kinds of ag lending?

>> When I was at Intertribal Ag Council, Secretary Vilsack was in the first iteration of his tenure as Secretary of Agriculture. And he sought to rebrand the FSA as the lender of first opportunity. Really harkening to what those terms can do to produce, for producers in their community to help them get set up. And we really tried to resist that during the last four years and push that opportunity, extend better terms to folks sooner so that he can more quickly shift out of that price taker position with respect to capital and get to be a stakeholder in a conversation about where you're going to deposit your money and stimulate that local economy that way, because that's one of the strengths and this approach that we're taking with Fifth C, to help producers keep some of that production income at their disposal. They're going to have to put it somewhere. And if they put it in a local bank, that local bank can turn it over out there in the community several different times and build that rural community from the production income that helped create the rural community out there to start with. So, I think the FSA has moved in that direction. But the challenge is farm loan program staff numbers will ebb with the current fiscal policy that the executive branch is taking. There won't be as many people there. There won't be as much time to be able to devote to these cases. So, it's a war of attrition or a starvation diet. The demand is always going to far outstrip the availability. And cutting staff isn't how you address that.

>> Well, I think that's a good place to stop. Yeah, this has been really enlightening for me as a topic that I'm not in the middle of and not intimately familiar with, so I really do thank you for being willing to talk about it, and for not just riding off into the sunset after you've had a firsthand view of what all the problems are.

>> Well, you know, tip, when I got on and looked at the episodes that you had had before this, and just to be mentioned in the same website as some of these folks is truly a privilege. I've got some good friends on there; Kate, Peter, Beck, I see a lot of game changers, system changers, taking part in the podcast. So, really glad to be, glad to be on.

>> Thank you. Thank you for listening to the Art of Range podcast. Links to websites or documents mentioned in each episode are available at artofrange.com. And be sure to subscribe to the show through Apple Podcasts, Podbean, Spotify, Stitcher, or your favorite podcasting app, so that each new episode will automatically show up in your podcast feed. Just search for Art of Range. If you are not a social media addict, don't start now. If you are, please like or otherwise follow the Art of Range on Facebook, LinkedIn, and X, formerly Twitter. We value listener feedback. If you have questions or comments for us to address in a future episode, or just want to let me know you're listening, send an e mail to show@artofrange.com. For more direct communication from me, sign up for a regular e mail from the podcast on the homepage at artofrange.com. This podcast is produced by Connors Communications in the College of Agricultural, Human, and Natural Resource Sciences at Washington State University. The project is supported by the University of Arizona, and funded by sponsors. If you are interested in being a sponsor, send an e mail to show@artofrange.com. The views, thoughts, and opinions expressed by guests of this podcast are their own and does not imply Washington State University's endorsement.

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