Farmers Face Challenges with Lenders

October 26, 2012 09:37 PM
Farmers Face Challenges with Lenders

Farmers face plenty of credit, tight standards and increased need for communication

Lenders are just as crucial to a farmer’s success as cooperative weather, agronomic know-how and savvy marketing. But it’s still important that farmers—not their bankers—ultimately make the operation’s business calls. Les Anderson learned that the hard way. In 1986, the Minnesota producer had the oppor-tunity to buy farmland for just $800 per acre. Even with a significant down payment in hand, his lender said no.

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"Lenders were taking huge write-downs on land and were scared to make farmland loans," says Anderson, who grows corn and soybeans. "He encouraged me to expand my hog operation instead of land."

Despite the fact that farm credit was tight in the 1980s, Anderson believes that if he had gone with his gut instinct and found a lender who would work with him to buy the land, it would have been a smart move. The experience taught him several lessons. First, he’s the one who has to make expansion decisions. Second, there is more than one lender out there. Eventually, Anderson found a great lender who he’s been with ever since. Third, while credit is plentiful today and everyone wants a piece of agriculture, once farm prices crash again, creditors might again flee the industry.

In light of the drought, you need to be up front with your banker and share how you plan to get through the next few months. Furthermore, you need to give your lender advance warning on what your credit needs might be. Doing so creates far more options than approaching your banker late in the game, whether you’re looking for farm inputs to book for 2013 ISSUESor the next load of feed. For as many as 20% of producers, the reality of 2012 hasn’t yet sunk in, but it needs to and soon, lenders say.

One of the benefits of providing lenders cash flow, balance sheet and liquidity information before the fact is that if a great land or machinery deal comes your way, your banker has the information he or she needs to make a rapid-fire decision and get you the money to close the deal.

Relationship rewards. For Ethan, S.D., producer Shannon Klumb, having a close relationship with his banker paid dividends this year. "I consider our banker to be a partner—on our board of advisers just like our nutritionist," he says.

After suffering a total loss of their corn crop, Klumb; his father, Larry; and brother Ben had to borrow additional funds to keep their livestock operation afloat.

"The least we’ve paid for corn is $7.10 per bushel," says Klumb, who’s had to purchase 200,000 bu. of corn so far. "At the moment, we’re showing a $20 to $30 head loss on hogs.

"The cattle side should be great, however. If you have a diverse farm operation like we do, you can offset," Klumb adds.

To manage this year smartly with a higher level of borrowed funds, the Klumbs worked out a deal with their banker to convert as much operating debt as possible to term debt. This keeps them from maxing out their operating line in case interest rates go up and gives them the most flexibility moving forward.

For now, the Federal Reserve Board says interest rates will remain low until 2015 or the economy rebounds. Once they start creeping up, though, it will happen fast, lenders say.

To maintain a close relationship, the Klumbs provide their lender with detailed balance sheets on a regular basis. "We don’t want any surprises," Klumb says. "I particularly like his
willingness to adjust to changing times. He rolls with us during the high times as well as the lows."

It’s that willingness to be a team player that prompted Randy Oleson to follow his banker of 29 years when he took a job at a new financial institution. "The reason that I’ve stayed with him is that he puts his customers first," says the Newcastle, Wyo., rancher. "He’s the type of lender who, when interest rates drop, calls to tell you."

Oleson’s close relationship with his lender has paid off as well. "With the drought, I’ve had to buy twice my normal amount of hay, at more than twice last year’s price per ton. The people I bought the hay from wanted all of the money up front. With no yearling or calf sales this early in the year, I didn’t have the money. If I didn’t have a good relationship with a lender, I wouldn’t have been able to do it," he says.

In particular, Oleson values the fact that his current lender understands and values agriculture. He has dealt with lenders in the past who have not, which never turned out good.

This year more than ever, producers need to communicate fully with their lenders because they might have out-of-the ordinary needs. Even crop farmers—for whom crop insurance indemnity checks combined with high commodity prices could mean record farm income—might need  short-term loans for buying inputs before their insurance checks come (see the sidebar on page 24).

Net farm income is forecast to be up 3.7% from 2011 to $122.2 billion and net cash income up 3.4% to $139.3 billion. These income forecasts, if realized, represent all-time records in all three measures of farm income.

"Without crop insurance, farm income would be far lower this year," says Joe Glauber, USDA chief economist. In total, 80% of producers are insured this year, compared to just 25% in the last major drought year, 1988.

Not all producers will share equally in the bounty. Livestock producers will need to buy far more feed than normal, and at record prices. The 20% of crop farmers who do not have crop insurance are in the same financial boat as livestock producers.

Ready to extend credit. Are lenders on board to work with the dynamics of production agriculture?

"I believe we’ll be able to respond to our customers’ credit needs," says Keith Geis, president of Platte Valley Bank in Wheatland, Wyo., which serves western Nebraska and Wyoming. "It’s been an outstanding crop year for western Nebraska" following a series of strong years, he says.  Livestock producers, too, are coming off several profitable years.

Most producer customers went into this year with healthy working capital and equity, Geis adds, which makes it easier for his bank to extend credit.

If next year brings widespread drought, it could force bankers to change lending practices, particularly for livestock producers.

Approach lenders early. "Bankers understand that agriculture is a business of cycles," says John Blanchfield, senior vice president of the American Bankers Association. "The earlier producers have conversations with their lenders this year, the more [banking] options they have, such as  renegotiating loans," he says.

What producers absolutely do not want to have happen, Blanchfield says, is for a loan to become nonperforming and have it referred to the collection division of the bank. At that point, producer options are slashed, he states.

Minnesota’s Anderson, who sits on a bank board, has learned one important fact: "I didn’t realize how much regulators run the banks." That’s why credit has become tighter in recent years in some cases, even though banks have plenty of money to lend, he says.

"It used to be that bankers would loan you money based on your character. No more," he says. They need hard numbers—balance sheets, cash flows, working capital position and debt-toasset

That said, banks would in fact like to be making more farm loans. Banks have a high percentage of loanable funds sitting idle, due partly to strict lending standards but also to the fact that agriculture has been so profitable that loan demand is reduced.

"It’s not that credit is really any tighter, it’s just that you have to go through more hoops," says Julie Wuthrich, vice president of Citizens Bank in Amherst, Wis.

One example, she says, is that the bank now requires farmers to ensure there are no  environmental problems on land being purchased with a loan.

Even if the Dodd-Frank Act is not
making farm credit tighter—a debatable point—it will make it more expensive. "It is causing us more heartburn and more of a regulatory burden, and will increase the cost of credit because it drives up bank costs," says Kim Greenland, market president of Great Western Bank in Mount Ayr, Iowa.

"We’ve had to increase staff," he says. The number of bank disclosures required is huge. Overall, "we are doing more analysis of loans," Greenland says. "We shocktest them for increases in interest rates and commodity prices."

Crop Insurance Claims Test System

Once you finalize the paperwork for your crop insurance claim, it should take about 30 days to get your check. The key word is should.

"Given the number of claims that will occur this year, we will test the system in ways it has not been tested, however," says Keith Coble, ag economist at Mississippi State University and crop insurance expert. "Companies can process claims much more quickly than in the past, but
we have not had such widespread losses in years."

If your payment is delayed through no fault of your own, the insurance company has to pay you interest beginning on the 61st day after your claim has been finalized—a strong incentive to make good on claims, and quick.

Given the expected record number of claims this year, however, when can you expect to receive your money? One insurance company says the timing on payments will vary by region and whether it’s awash in claims. Another insurance company official says there could be a five-month
window for payments, October 2012 through February 2013, depending in large part on when claims are filed, finalized and turned in.

That sounds worse than it actually is. Harvest is likely to take five months to complete in some places. That alone will go a long way toward ensuring producers receive their indemnity checks in a timely manner, says Kevin Johnson, sales manager of Farmers Mutual Hail Insurance Company of
Iowa. "No company can be staffed for a year like this, however," he adds.

Producers who have revenue coverage—particularly livestock producers who have to buy feed they normally grow—have some options, depending on the type of policy. For example, they can file claims by production unit as they harvest—unless their entire farm is tallied as one unit.

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