Agriculture is an industry with unique banking needs due to cash flow seasonality and marketplace cyclicality. Farm operators within this industry own and manage crop and/or livestock. Despite operational differences, they share a similar relationship with their bankers.
- A crop operator is responsible for the planting, fertilization, and harvesting of the crops as well as transport to the proper production elevators for sale at harvest.
- A livestock operator is responsible for providing care and nurture of healthy, hearty livestock for food processing or consumption. He or she often specializes in one type of animal in this field, carefully breeding the livestock to produce the best quality offspring each season.
- Bankers are the mediators for investors and those who wish to sell their investments. When bankers accept deposits from a customer, they reinvest the amount in higher yield debt and equity instruments. They investigate the credit risk of customers applying for a loan. Bankers are responsible for establishing solid customer relationships, the planning and delivery of sales strategies or products, and monitoring their progress.
These simplified definitions of farm operators and bankers make them sound very distinct and unrelated. However, this can’t be further from the truth. These two parties co-exist as business partners when it comes to operating and financing agriculture. Bankers and farm operators need to work together and rely on each other to attain mutual success. This means maintaining a good relationship during good times and an even stronger one during rough times.
Let The Good Times Roll
It’s easy being a banker or an operator during the good times. To put this into a fairytale-like context, everyone gets along as loans are easier to obtain and to repay. There may appear to be less, or more lenient rules and possibly not as much collateral is required. Farm operators do not need permission for every financial decision they make and bankers do not have any problem approving loans. In addition, farm operators do not typically seek out their banker during good times as they do not need as much financial advice. Sometimes the good times in agriculture can result in unwise spending decisions that may seem like a great idea at first - whether it is making large capital improvements, buying that new vehicle, or building a lake cabin, but may not be a good decision for the future. When operators get used to spending without thoughtful consideration, these spending habits can have repercussions when times worsen.
Agriculture is cyclical in nature with good times and bad times. The cycles in the agriculture industry are largely predictable, occurring nearly every decade with the exception of an atypical period of good years that ended with a 2012 record year for yields and prices. Looking back, that was a year that did not do us any favors. Those good years led to an increase in the prices of machinery, crop inputs, and land values/rents. In fact, we are still trying to recover from some of the cost increases from the good years all while dealing with depressed market prices.
During times of stress, including trade wars or other influencers in the agriculture markets, the sale and movement of any given commodity can be uncertain. Farm operators have tough decisions to make. For example, when a commodity that was projected to be profitable becomes essentially unmarketable, farmers are faced with decisions of whether to store the crop and sell everything else, or sell immediately at a very low price. Another example is the decision to apply fall or spring fertilizer based on uncertain input costs. For some of these decisions, operators tend to rely on advice from their crop consultant, agronomist, elevator manager, or seed/chemical/fertilizer salesperson.
But should farm operators keep in touch with their banker during these not-so-great times as well? Yes.
Staying Close All the Time
For many of the reasons and concerns referenced above, farm operators and bankers should remain close during both the good and the bad times.
During the good times, their relationship should grow stronger with conversations about management of the operation, purchases that are necessary, or even how well crop marketing is working. The banker is interested in learning more about the operation to be an advisor and sounding board. Keeping a close relationship during the upside of the agriculture cycle is key for when times turn as the banker has a solid understanding of the operator’s farming philosophy.
During bad times, the conversations become more difficult, but if the relationship has been developed and strengthened during the good times, then both parties understand that it’s just part of how business has to be conducted.
For instance, bankers may need to ask for additional financial information, increase interest rates, request more collateral, obtain guaranties, shorten maturity dates, or do other things to make the credit a more sound investment for the bank and its shareholders. A strong banker-farm operator relationship means having someone to talk to or get advice on making a purchase or fixing an interest rate. These conversations turn the relationship into a partnership.
A close relationship with the banker is important for the operator because they may never know who they can actually trust. When times are bad, they can rely on their banker to be consistent and honest with them as more requirements are placed upon them. If other bankers are making attempts to take them away from their current bank, they can never be sure if they are hearing the truth or if it is just a sales pitch.
Competition for bank clients is fierce and has gone well beyond the brick and mortar of local banks. Insurance companies, crop input suppliers, machinery manufacturers, and others have joined the banking industry and have products available to finance farm operations using non-standard terms and conditions. It can almost seem like a banker is not needed. Solid relationships highlight the financial expertise, problem solving, and trust that can make bankers a valued resource and trusted advisor.
The key to mutual success for bankers and farm operators is to build strong relationships, no matter the up or down cycle, and to work together as business partners looking out for the good of one another.