Navigating Through the Troughs

Banker, customer communication a key element to success

For the past few years, farm and other ag enterprises have been dealt a tough hand. As the ag sector works through the worst part of the super-cycle, the relationship between ag bankers and their customers becomes critically important; it can even be a lifeline for some. There are several actions ag bankers can encourage their clients to consider using, and several ways the bank can have a direct impact, as well. Above all, the key to survival and a return to profitability is consistent, open communication between ag bankers and their customers. 

The Farmer's Toolbox

There are many strategies bankers can offer their clients as options to help with cash flow during tough times. According to Steve Apodaca, senior vice president of the American Bankers Association's Center for Agricultural and Rural Banking, many farmers can take self-help action by reviewing their marketing plan for commodities, considering hedging, looking for expenses to cut, and/or cycling in more profitable crops. "Be careful of lender liability, however," Apodaca cautioned. "Bankers shouldn't instruct their customers to do something, but instead make suggestions that will help with profitability." 

Michael Irgang, executive vice president at Global Risk Management Corporation, advises having a well-thought-out, disciplined, strategic approach to marketing commodities that utilizes the applicable tools – exchange-traded futures and options, for example, to protect against downward movement in grains. "The use of futures and options when used in a disciplined risk management program can significantly reduce a lot of the risk that the farmer would otherwise have to a collapse in grain prices," he pointed out. Commodity prices are often very volatile and unfavorable shifts in grain prices can significantly impact a farmer's cash flow.  "As business partners to the farmers, bankers can suggest that farmers create and follow a risk management program to protect their cash flow against adverse changes in grain prices," Irgang said. "This is a win-win for both the farmer and the banker."

Ag bankers can both help their customers and position themselves as experts by becoming a source of education about these varied strategies. In addition to industry best practices, bankers should also encourage their customers to be open about financial obstacles. "Communication is the biggest thing," said Mike Brueggen, loan officer at the Bank of Cashton and 2016-2017 WBA Agricultural Banking Committee Chair. "To avoid pitfalls have an open line of communication and have a plan in place. We've been through these tight times before, so it's a matter of planning for it." Open communication gives the bank more options to assist in certain situations, such as a farmer needing to switch from cash to charging for accounts payable. "One of the best things a farmer can do is see their banker early and disclose everything they're going through financially to see what the banker can do to help them out," said Apodaca. Brueggen recommends the same strategy: "With my farmers, I always say 'let's talk about it now, not when you're in a bind.'" 

The Banker's Options

While it's essential that farmers communicate with their ag bankers, it's just as important for the bankers to communicate with their clients, particularly when it comes to understanding their financial situation during tough years. "As part of their portfolio review process, the banker should be going out and visiting their customers and asking for financial information," Apodaca advised. "Call up the customer, visit the farm or ranch and sit down with their financials and go over everything that's going on. After reviewing the complete financial picture the banker can offer solutions, and then ask the farmer to put down a financial plan for the next year, on paper." 

Because most Wisconsin banks have the financial capacity and risk-bearing ability to work with borrowers during stressful times, ag bankers have several options available to them to help provide relief for their stressed customers. To do so, Apodaca says banks will need to "intensify loan servicing efforts as borrowers begin encountering increased stress." One common tool is to increase or open lines of credit, according to Brueggen. "As a last case we'll do interest-only loans for a period until prices resume or they get back on their feet," he added. "Those types of restructuring definitely take some planning and meeting time with the customer." Under certain conditions, the bank can offer additional aid through the Farm Service Agency. "If there have been two or three years of negative cash flow and a collateral deficiency, combined with expectations of future positive cash flow, the banker can try to get a guarantee from FSA, or a combination package of some kind," said Apodaca.

It's also important for ag bankers to lend their financial expertise to their customer's situation, particularly when it comes to bringing objectivity to their plan for marketing. "The banker has to partner with the farmer to determine what makes the most sense for them and provide a degree of objectivity," said Irgang, emphasizing that bankers can bring objectivity to conversations about managing commodity risk and ease their customers' fears of "missing out on the high." That partnership requires a thorough understanding of the customer's specific needs and business risks. "There isn't a one-size fits all risk management strategy for every agri-business," Irgang cautioned. "You have to understand your clients and have the discussions with them of what marketing program makes the most sense for them." As part of that planning process, bankers may also offer assistance with financial modeling as a tool for their customers. "We're able to offer some stress testing of their operation, whether it's dairy or crops," Brueggen explained. "We can help them find their break-even and identify the prices they need to hit in order to make ends meet." 

Ultimately, whatever ag bankers can do to help their customers improve will also benefit their institution. "What's good for the farmer is good for the bank," Irgang said. "Ag lenders can improve the credit quality of their loan portfolio by setting standards for marketing grains." Banks may even offer better pricing to customers who have a risk management plan in place. 

Need a refresher on some of the strategies mentioned in this article? 
A true sign of an exceptional agricultural banker and bank is their ability to work with customers through the cycle, in good times and bad. The 2017 Ag Problem Loans Workshop is designed to prepare agricultural bankers for the challenging conversations and servicing options that might be necessary during the tough times. Topics covered during the workshop will include action plan development, lender liability, protective and emergency advances, guarantee protection, servicing actions, and more! Join your fellow aggies on February 23 in Wisconsin Dells by registering at www.wisbank.com/events/ag-problem-loans-workshop.


WBA Ag Conference: April 5
Don't miss seeing each of the experts featured in this article at the Agricultural Bankers Conference in Wisconsin Dells! Read more about the conference on page 21 of this issue, or visit www.wisbank.com/agbankers


By, Amber Seitz