Community Bank Ag Lending in Uncertain Times for Farmers

Community bankers have a long history of helping America’s farmers in good times and bad. These days, there is plenty of both.

Many farmers are facing stiff headwinds that include volatile commodity prices and effects from extreme weather, tariffs and rising costs on everything from equipment to fertilizer. On the other side of the spectrum, beef producers are riding record high prices.

Navigating such highs and lows is par for the course for both farmers and community bank lenders. 

“We’re business as usual here at our bank,” says Cayle Paulson, Harvey branch president at $415 million-asset Dakota Heritage Bank in Hunter, North Dakota. The community bank serves both crop producers and ranchers in North Dakota and Minnesota.

The “usual” means providing customers with operating lines of credit, debt restructuring, in-depth cash flow analysis and guidance on short- and long-term planning. 

“What’s important to our farmers is a very deep relationship and understanding of the economic, financial and succession planning needs of that farm,” Paulson says. “We’re a partner that helps them through challenges that they might not see on the surface.” 

Communication with farm customers is always critical, and especially so in the current environment, adds Greg Brooks, senior vice president and Henrietta branch president at $1.2 billion‑asset Legend Bank in Bowie, Texas. During periods in which there are volatile swings in commodity futures, Legend’s lenders might be talking with borrowers as often as three times per week. Their goal is to better understand current needs and any shifts in strategy. 

“In conjunction with those conversations,” Brooks says, “we’re looking at financials, and we’re paying attention to both positives and potential negatives in a client’s financial situation to see how they can best capitalize on being as profitable as they can.”

Diversification strategies are key

One of the keys to surviving and thriving in the challenging ag industry is diversification.

“Producers are very good at seeing the risk and then pivoting to what is most profitable,” says Brooks. 

If grain prices look like they might be lower for the next 12 to 24 months, a producer might want to pivot to livestock production. So, how do you make the farm more productive in that area? Such a shift might mean making investments in fencing to be able to graze more acres for cattle. 

“Farmers are looking for those little nuances where they can pick up additional value,” says Brooks.

Lenders play an important role in those strategic moves. 

“A good lender needs to be able to have that ongoing conversation about what challenges are coming up, and how things can change in their particular operation to take advantage of market conditions,” says Brooks. 

The conversations that community bankers are having with their ag customers are very analytical, with elaborate spreadsheets where inputs can be adjusted for things such as feed costs or a quarter-point change in interest rates. 

Lenders are laser focused on where a producer is financially, what resources they have available and how those resources can be shifted to maximize earnings.

“We’re paying attention to both positives and potential negatives in a client’s financial situation to see how they can best capitalize on being as profitable as they can.”

—Greg Brooks, Legend Bank

Providing guidance and financing solutions

In a market where farm credit shows signs of deteriorating, a common saying is that it’s wise to be conservative in good times, courageous in bad times and consistent always. That is advice that Dakota Heritage Bank takes to heart in its approach to ag lending. 

While the community bank is consistent in working with customers, it also takes a conservative approach to lending. In the current market, its lenders are cautious in financing cattle operation expansion, because it’s difficult to properly collateralize a cattle operation based on what could be peak market pricing. 

“It’s almost like an oil boom with cattle,” Paulson says. “When it [corrects], it could be ugly if we’re not conservative in these good times.” Now is an ideal time to work with cattle ranchers to reduce debt to better position a ranch for if the market turns, he adds.

Community banks are working with the standard toolkit they have in terms of loans and lines of credit, as well as programs available through the USDA and Farm Service Agency (FSA) to assist borrowers. 

Banks also come up with creative solutions when needed. For example, during the government shutdown last fall, Community State Bank in Union Grove, Wisconsin, implemented its own commodity loan for customers who usually rely on Commodity Credit Corporation loans from local FSA offices that were unavailable during the shutdown.

“We are always there for our customers to offer guidance,” says Brian Lois, assistant vice president and agriculture relationship manager at $617 million-asset Community State Bank.

 In terms of current financing needs, Lois agrees that lending is somewhat business as usual, with a focus on loan renewals. Many of its customers experienced above-average crops this past growing season, which has helped with tighter margins. 

“I’m sure that as the winter renewal season approaches, we will be offering guidance to our customers where we can,” he adds.

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