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Small Banks Know How Farmers Are Doing

Farmers are asking for smaller loans.

When I was a teenager, I took a Red Cross Senior Lifesaving class one summer. We were taught not to swim toward an active drowning person from the front. As soon as the drowning victim saw you, he or she could claw over you in a panic and pull you both under. You were supposed to surface dive under the victim and approach from the back. (These days, you’re taught to take along a buoy or towel, extend it to the victim, and not get too close.)

I’m lucky never to have had that skill tested.

But in the 1980s, as a newspaper ag reporter in Nebraska, I saw too many lenders and farmer borrowers drown together financially. Well-meaning bankers rolled over operating loans, refinancing old debt with new until neither the bank nor all of its borrowers survived. More commonly, borrowers sold off land or quit farming to pay debts or banks and Farm Credit System lenders foreclosed and sold off the assets, dragging land prices down as well.

I’m old enough to remember all of this vividly. That may be one reason why the editors here at Successful Farming magazine at times drag me out of retirement to cover ag finance. Another is that I still enjoy interviewing economists and bankers. (I’m proud to say, too, that my son-in-law is a banker in the not-very-rural economy of Chicago.)

In spite of my searing education in agricultural lending principles 30 years ago, I’m inclined to believe the many economists and analysts who say the 1980s won’t be repeated in the new century’s teens. Lenders no longer finance land purchases with the meager down payments seen in the inflationary ’70s. And both banks and farmers shared in real, not speculative, gains just three or four years ago.

Still, debt is like deep water: Never underestimate its potential to float you or pull you under.

Small town banks are a strong and important source of credit in rural America. That’s especially true in the western Corn Belt, Great Plains, and Rocky Mountain states. That’s where you find most of the banks that make the American Bankers Association’s annual list of the top 100 banks by farm loan concentration. These are modest institutions that make nearly all of their loans to farmers and ranchers in places where big banks may just cherry-pick a few borrowers.

Here are trends gleaned from bankers who are on the ground in farm country:

First, it’s possible the worst is behind us.

John Schmid, president of Grant County State Bank in Carson, North Dakota, works with conservative, diversified farmers and ranchers southwest of Bismarck. But he has an interest in another bank farther east where high corn prices drew young people back to farming earlier in this decade.

“It got pretty lean pretty quick. I think some of them went back to their old jobs,” he says.

That’s nothing Schmid welcomes. Most of his Carson area borrowers are no younger than their mid-30s, and he worries about a lack of new blood in farming. Yet, it’s also a reality that the newest entrants to farming often are the least able to withstand a downturn in prices.

Second, farmers themselves are more cautious about debt, not just their lenders who depend on renting out money for a living.

A survey of bankers cited in a midsummer report by the Omaha branch of the Federal Reserve Bank of Kansas City may support this. In “Farm Lending Steady, but Risks Remain,” economists Nathan Kauffman and Matt Clark found that loan volume ticked upward in the second quarter of this year but during the entire first half of 2017 it was down 7% from the first half of last year.

That could be due to a “prolonged renewal season,” they said. “Amid a recent decline in working capital and a slight increase in risk associated with agricultural lending, some bankers and borrowers have taken more time to reaffirm financials, expenditures, and loan terms from one year to the next.”

That’s true, no doubt. But conservative farm borrowers are part of that, too.

At the Campbell County State Bank in Herreid, South Dakota, executive vice president Earl Melhaff was surprised at his borrowers’ penny pinching this year. They were asking for smaller operating loans than a year or two back, he says, spending less on machinery and fertilizer. “It’s amazing where they’re at,” he says in our story on the health of farm banks.

Third, the value of high-quality corn ground is being proven. Some of the farms served by our sample of country bank lenders don’t have the best land. As a native Nebraskan, I’m familiar with the hilly ground near Ashton State Bank. It’s tougher to make that cash flow under current prices.

Fourth, any optimism about farm lending and borrowing rebounding a lot could be misplaced. When I asked Blake Howsden of Nebraska State Bank if we’re in a new normal, he corrected me. “It’s not the new normal. It’s normal normal,” he said. The supercycle high prices of 2012 are unusual. The current tight farming margins are not, he believes.

Fifth, point one could be dead wrong. The worst may not be fading away. Maybe it’s still to come, if other trends observed by the Kansas City Fed continue: rising interest rates, stretched out loan terms and rising delinquency rates. They could be leading indicators. The truth is, no one knows what the weather and commodities markets will bring to farmers and their lenders.

How should we deal with that timeless uncertainty? Here are a few modest suggestions:

  • Diversify your credit sources if you can. Bankers dislike competition from the Farm Credit System, which they view as unfair subsidized competition because of implied government support for bonds sold by the system. I think farmers need both the support of local banks that understand them as well as that outside capital that Farm Credit brings in. Don’t abandon that local bank that stayed with you, but keep open other options for credit.
  • Follow your bank and farm credit lender financial trends. In this issue, we show you how to follow your bank’s financial status with public records that are online. It’s definitely a project for slow evenings in the winter, but in a few rare cases, you might be glad you did. Most of the time, this will just be an interesting glimpse into the red tape your banker has to put up with.
  • Don’t be tempted by too much refinancing or extended terms. About a year ago, Gary Schnitkey at the University of Illinois, one of the nation’s leading agricultural economists, published a column on http://farmdocdaily.illinois.edu/ called “The Danger of Refinancing.”

“Many farms have depleted working capital in the past several years,” Schnitkey wrote. “Now operating loan balances may exist that cannot be paid down with this year’s cash returns from farming operations. Some farms may consider restructuring all or a portion of their operating balances as longer termed notes. Refinancing may provide needed operating capital, but it also is a warning sign. If cash shortfalls continue and operating note balances build again, refinancing may lead to deeper problems in the future.”

I urge you to read it, especially if you are older and still have enough assets or marketable skills that would enable you to retire comfortably. If that’s the case, you may find when you jump into this new pool, that the water temperature is just fine.

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