Embracing differences in ag clients helps bankers deliver customized service

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Total U.S. farm debt is on track to rise to $427 billion this year, up from an inflation-adjusted $317 billion a decade earlier and approaching levels seen in the 1980s farm crisis, according to the U.S. Department of Agriculture. Wisconsin's ag bankers need to both manage the bank's exposure to risk and help their ag clients through this down cycle. "We want to prepare the farmer to survive the downturns and prosper in up cycles," said Paul Curran, vice president of commercial/ag lending at Ergo Bank, Fox Lake and a member of the 2019-2020 WBA Agricultural Bankers Section Board. Part of that balancing act is finding the sweet spot between efficiency and customized service. 

"Efficiency within the bank depends on some amount of common practice and process," said Dr. Kevin Bernhardt, professor of agribusiness at UW-Platteville and farm management specialist for the Center for Dairy Profitability at UW Extension. "Treating every customer differently could result in a loss of efficiency for the bank." However, tailored service is the primary way ag lenders can differentiate themselves from the competition and provide their clients with the best possible advice. One solution is for ag bankers to specialize in working with particular business models, such as commodified vs. diversified farms. 

These specializations are fluid but important for ag bankers to identify for each client, as they impact the types of financial products the client will need, the areas of greatest challenge, and the level of risk exposure for the bank. "Smaller operations might have smaller credit needs but require you to be a counselor first and banker second," explained Jeff Gruetzmacher, senior vice president at Royal Bank, Elroy and Chair of the 2019-2020 WBA Agricultural Bankers Section Board. "Larger operations might need more of a banker first, but require you to be part of their 'team' along with other professionals. You just don't know, so you have to tailor everything to their personality, business acumen, and background." 

Size Isn't Everything

In the media, ag operations are most often classified by size (i.e. the "family farm" or the "factory farm"). However, most experienced ag lenders know that size isn't everything, and often it's not the most important thing. A better strategy is to focus on business management issues and the business model of the operation. "In serving any farm, it's important to understand the owners' goals and vision for the farm," said Amber Keller, senior vice president, director of ag banking at Town Bank, Hartland and a member of the 2019-2020 WBA Agricultural Bankers Section Board. "There is not a one-size-fits-all approach." Some owners/managers may pursue maximum production output and aggressive growth while others choose to optimize resources and remain a similar size for a longer period of time, and some others choose to farm as a lifestyle or part-time business while maintaining off-farm employment for the majority of their careers.

An ag operation's business model is often—but not always—related to its size. "Small farms tend to be more diversified compared to large farms," said Bernhardt. "That's a different management challenge compared to a large farm that's probably a commodity farm with just one major commodity." Diversification (such as organic and/or pasture-raised products, agri-tourism, etc.) can be very advantageous for smaller operations, but it means the management challenge is likely more focused on brand marketing and servicing end-use customers and less on cost-containment and commodity marketing, as it would be with a commodity operation. 

However, size is still an important factor for bankers to consider as they customize their approach, as it impacts both the type and scale of risk. "A mistake with a larger farm with a larger loan has a greater impact than on a small farm with a smaller loan," said Bernhardt. "Staying small and commodity-only could spell an erosion of profitability that the farmer can't do much about." It also impacts how the operation should be managed from a human resources and business perspective. "Small typically means sole-proprietor, where the farm manager has to be the jack-of-all-trades," said Keller. "In a larger operation, where you have multiple people involved, a lot of the time you see specialization of those management roles." Bankers should be prepared to assist their clients with that transition from barn to office as the enterprise grows.  

Common Ground

No matter what type of ag operation a banker specializes in, there are commonalities nearly all of them share. "Farming is farming, and the language is mostly the same," said Curran. For example, most operations are family-owned. "There are more similarities than there are differences," said Gruetzmacher. "It's very rare, in the Midwest especially, to do business with a farming or ag operation that isn't family-based. Even for the large ones, it's just more family members involved or more family capital."

In addition, all operations are impacted by factors outside the owner/operator's control, Gruetzmacher explained. "Everyone is affected by prices," he said. "They all have the same opportunities and have the same ability to let those opportunities walk past them. It happens all the time." Other uncontrollable factors include the weather and politics (such as the current trade disputes). 

Ag bankers should also identify the key risk areas of for each of their clients, which tend to fall into four categories, regardless of size or complexity. "Learn as quickly as you can by spending time at the farm and sifting through their financial records to determine what their critical control points are, regardless of the size or type of farm," Bernhardt advised. "In other words, what are the things that are really going to hurt that farm if they go wrong?" Typically, those critical control points are in one of four areas: marketing, production efficiency, labor efficiency, or cost of production.

Finally, all banker-ag client relationships will benefit from a consultative approach. "It's such a relationship-based situation," said Gruetzmacher. "It's not always all about the loan or the banking services. It all starts with understanding who they are as people and their history." Ag bankers can set themselves apart by helping their clients with the more technical aspects of their balance sheet and cash flow, for example, or by providing projections showing the pricing impact of different crops. "Go through projections every year and help them learn how the farm will perform with current prices," Curran advised. "Don't just give them a loan. Give them advice."

"Agricultural lending is both an art and a science," said Keller. "Demonstrating both competence and care goes a long way in developing rapport, trust, and a long-term relationship with our farm clients." Demonstrating that competence and care is a differentiator, especially during difficult times, Keller explained. "Doing it every day is great practice for when they become critical during difficult economic times," she said. "Practice makes perfect."

Tips and Tools
Advice from the three experts interviewed for this article: 

Kevin Bernhardt: "Thoroughly completed documentation is a good way to start out on a good footing. The banker has to be able to defend every number on the balance sheet."

Paul Curran: "Farming is a business, and farmers are businessmen and businesswomen. You will have customers managing multi-million dollar operations, so treating the farmer as anything less than a business owner is a mistake." 

Jeff Gruetzmacher: "Always be a learner. No matter how long you've been in the industry, you always need to learn and keep up with your customers and be open-minded. Things change fast, so you have to be adaptable. You can't be viewed as the third wheel."

Amber Keller: "Be patient, be willing to learn, and be willing to think through alternatives in any given situation. That will serve you well now and in the future."