Ag banker notes income, attrition as issues for industry

Northwestern Financial Review, Apr 1, 2001 by Bengtson, Tom

[interview: Ray Thull]

Tell us about your ag customers. How would you describe the agricultural environment right now?

Our agricultural customers are definitely dependent upon government program payments to survive. As we look at the tax returns of our customers, we see that generally a fourth to a third of their income is some form of government payment.

You'd lose a lot of those farmers if it weren't for the government payments?

That's very true. A study of farmers found the average farmer in southwest Minnesota in 1999 actually lost money without government program payments. In southeast Minnesota, the farmers showed a small profit before the program payments. So the payments are a very integral part of the farm economy.

You have worked with farmers for a long time. Are farmers becoming more sophisticated as business people?

Definitely. They are so much more sophisticated when it comes to the input for agriculture, the fertilizer and the chemicals that are used that they have increased their yields dramatically.

Congress will be considering a new farm bill. Are there some things that you believe should be considered in that bill?

That's a difficult question to answer. One time in a meeting with former U.S. Senator Rod Grams, he said: 'If there was an easy solution, we would have done that years ago.' It seems like no matter what program is put in, it is beneficial for some and harmful for others. Some sort of safety net has to be developed; I am not certain what that is. Perhaps more importantly, we need to look at a strategic grain reserve. It seems like most over-production is considered surplus and, therefore, it doesn't have much value. The truth is our surpluses really have not grown that much in the last few years; a serious weather problem could reduce those carry-over bushels.

As you think about the average age of farmers, and the number of people entering farming, what do you consider to be the long-term outlook for farming?

I'm optimistic that we are going to continue to have agriculture. The part that I do not like to see is that many of our young people - the children of our middle-age farmers - are not going to be staying in agriculture. They are going off to get an education and they are not coming back because the income you generate from farming is so low. When you look at a farmer, the amount of investment and what he does in relation to his income, it's not very surprising people are not going into farming. A farmer probably gets paid a decent return on his investment or he gets paid for his labor. He does not get both.

Are farms getting so big that a traditional community bank can't meet all their credit needs?

That certainly could be coming. Some of the farmers we have out here are beginning to have fair-size operations; they are the ones who are financially set and do not have to borrow. However, they may still need to borrow money to make large purchases of land. In our immediate area in the last six months there's probably been six or eight farms sold in the area of $1,900 to $2,100 per acre. As we see this land being sold, in most cases the owner was not farming the land but the tenant who was operating that land is just going to lose out. You are right, if this continues, we'll have problems. And I don't see anything to change the direction we're headed. It doesn't appear to me that the young people are going to stay out here and farm. I can think of six families out here, and it doesn't look like any of the kids are going to farm.

What does that mean for a bank like yours?

Well, there's always going to be loans to be made out here. They are not all going to get that large that quickly.

If you could run a time machine and be a banker today or 20 years ago, which would you choose?

Being a banker today is very interesting. Being a banker 20 years ago was much easier. In the days before deregulation we basically couldn't pay over 4 percent, couldn't charge over 8 percent. You had a rather built in fixed spread. In today's world, that is considerably different. However, our agricultural customers are very knowledgeable. In fact, they have to be because they work on such tight margins. They can't afford to make mistakes. In the old days they would say that lots of hard work would overcome poor management. That really isn't true anymore.

Ray Thull is president and vice chairman of the State Bank of Lucan, Minn., a $22 million bank founded 65 years ago in this western Minnesota community of 235.