A competitive field

Northwestern Financial Review, May 15-May 31, 2003 by Hilgert, Jackie

Mired by climate extremes and years of low commodity prices, producers can be sure of only one thing - credit will be the only input that costs less in 2003

While last year's drought has western farmers and their lenders waiting on disaster relief checks, lenders in other parts of the Midwest have other concerns. Iowans are scratching their heads at the skyrocketing cost of farmland and nearly all bankers across the Midwest are in awe - no, shock - by how aggressively the Farm Credit System has come in pursuit of their best customers. With all the unknowns and negatives that are endemic to agriculture, the fact that there is cheap money, and plenty of it, is a huge positive for producers.

Ag lenders, on the other hand, are facing fierce competition for business. In 2002, Farm Credit System lending grew by 12.5 percent while commercial bank lending grew by 2.3 percent. "I never want to downplay the fact that the banking industry holds 39.4 percent of the ag credit market," said John Blanchfield, director of the Center of Agricultural and Rural Banking for the American Bankers Association, "but Farm Credit continues to make gains on commercial banks in the marketplace and by the end of 2002 they held 30.3 percent of the ag market." The last time Farm Credit lending grew by double-digits was 1981.

FCS long-term real estate loan volume also went up in 2002 - by 13 percent - while its short- and intermediate-term loan volume rose 9 percent.

So what's a banker to do when the Farm Credit guy shows up at his best customer's door with a bushel basket full of cheap money? Remind the farmer that your counsel is worth a lot, said Dennis Hackett, president of rural banking at the $6 billion First Midwest Bank, Morris, Ill. "The strength of your relationship," added Hackett, "is your best way to compete with Farm Credit."

During the past six years, Hackett has watched Farm Credit lenders pursue the most successful farmers in his market, which covers most of northern Illinois' corn and soybean producers. "What has disappointed us is seeing Farm Credit move away from operating lines of credit," he said. "Operating lines take more time, more effort and more personnel."

Marty Tollefson, vice president of $73 million American Bank & Trust-Wisconsin, Fennimore, also advised pushing service to compete with a Government Sponsored Enterprise. "We hold our own against Farm Credit," Tollefson said. "The majority of farmers realize there's more to a lending relationship than just price."

But Tollefson's bank also shaves its margins pretty close to the bone to stay competitive - not a solution every banker finds attractive.

O. Jay Tomson, chairman of the $750 million First Citizens National Bank in Mason City, Iowa, said he loses money on ag loans. "We have lenders who spend a lot of time helping farmers prepare their necessary financials and all this prep time takes them away from productive lending," Tomson said. "When the farmer gripes that my rates are one-and-a-half points above prime, I tell them if they'd go out and hire a CPA, I could do better."

But ag lending makes up less than 25 percent of Tomson's loan portfolio. Bankers embedded in the ag industry need to exploit Farm Credit's weaknesses which, as Blanchfield points out, do exist.

"For those who qualify," Blanchfield said, "Farm Credit offers a good deal. But, for those who don't have spotless credit, or need to borrow a large amount of credit, FCS punishes that borrower." Every time FCS aggressively pursues the very good deals with cheap money, he said, someone on the other end is forced to pay more and farmers who don't get the best deals from FCS continue to be highly bankable customers. "These guys never forget who helped them when they needed help" said Blanchfield, referring to young, beginning and small farmers (YBS), the market FCS is mandated to serve but basically ignores.

"I don't see them trying to handle young farmers," Hackett said. "We're handling the young farmers."

Last November, the Farm Credit Administration board heard recommendations on how to improve its YBS lending. Joe Kennedy, president and CEO of the $28 million First National Bank, Frankfort, Kan., testifying at that hearing, linked Farm Credit's poor performance lending to YBS farmers to the organization's predatory pricing practices - "cherry picking" banks' top customers. "The FCA doesn't regulate against predatory pricing," Kennedy stated. "If FCA did regulate to constrain predatory pricing, then FCS would be forced to focus more efforts on serving YBS farmers."

USDA economists report the FCS loan portfolio is heavily concentrated among larger, wealthier farm borrowers. Another concern for bankers is a likely review of the Farm Credit Administration's "lending objective" regulation; FCS is expected to ask the FCA board to water down lending restrictions after FCA holds its public hearing on rule making, scheduled for July. Ag lending watchdog Bert Ely said FCA's advance notice of proposed rule making ought to alarm bankers.