Farmers are no strangers to cycles—production and prices of everything you produce swing from too much to too little and back, almost yearly. With more than 70 banks failed since the banking "crisis” hit, you now may be feeling the rush of the banking pendulum swinging.
Traditionally viewed as a rather stodgy, stable business, bankers now have a reputation as rather more daring and flashy. "That's less true in rural America and of farm lenders, but even they had loosened the rules based on the string of good profits agriculture has seen,” says Michael Swanson, Wells Fargo's ag economist. "Now the pendulum is swinging back toward the more conservative historical environment of 10 or 15 years ago.”
Unfortunately, the pendulum always swings too far, Swanson notes. "Attitudes went from wildly optimistic, ‘everything will take care of itself,' to pessimistic, ‘nothing is going to work.'”
A more conservative approach is not necessarily a bad thing, notes John Ryan, president and CEO of Rabo AgriFinance. "Creditors had gotten overly generous in general lending. Qualifications were spelled out in the past, but in good times, it is easy to steer away from them. Now, banks will be sticking more closely with individual loan requirements.”
In addition, it is more difficult for banks to access capital now, and they are passing on slightly higher costs to customers, Ryan points out. "So what has changed for borrowers? They are seeing higher spreads. In some cases, lenders have lowered limits on operating credit. Some borrowers have to supply more collateral.”
It's more important than ever to develop a relationship with your banker, Ryan says. "Share your vision for the future—what are you going to be doing that raises confidence that you are not just a good producer but that shows how you will thrive in your industry.”
Provide quality financial information; make sure it is current. "Take the guesswork out of how you are doing,” Ryan urges.
"Make sure your communication is ongoing, whether times are good or not so good,” he adds. "Bankers don't like surprises.”
Longer term, agriculture's optimistic story is a true story, Swanson says. "The demand is there—we need more food, more fiber and more fuel than ever. However, we have to keep an eye on the competition—there is always someone with a labor or environmental competitive edge. We can't close our eyes to cost structure.