This time of year, I conduct many ag banking and lending schools. Agriculture is in a time of transition that will affect assets, operations and people. The ag lending industry, however, is also in a time of significant transition. Similar to agriculture, the careful management of this transition will be critical; especially, as some segments of agriculture enter turbulent economic times.
A major transition is accelerating in banking; specifically, in agricultural banking. The implementation of the Dodd-Frank Act in the U.S. along with the global requirements of Basel III changes the banking landscape substantially. However, much of this regulatory change is taking place inside the industry and is not overtly visible to producers.
From 2007 to 2013, banking institutions with under $100 million in assets saw the biggest decline in numbers. During this six-year period, over 800 banks of this size were lost as the result of regulations and increased overhead costs for compliance officers. Additionally, many smaller banks are family-owned and the next generation has little desire to continue in such an environment. With established relationships and personal knowledge of bank patrons, smaller institutions serve as a cornerstone for their surrounding rural community. Today, many smaller community banks are being merged into larger institutions that have less direct connection to the community. For example, the amount of banks with $100 million to over $1 billion in assets that make agricultural loans have increased, either slightly or modestly in number. Therefore, when choosing a bank, research the owners, the bank board, and collectively, their commitment to agriculture because some banks may chose not to continue to serve agriculture’s needs. Similar changes are also occurring in the Farm Credit System. Over one thousand Farm Credit associations existed at the time I finished graduate school at Cornell University. Today, there are approximately 75 associations because of continued consolidation.
Within five years, 95% of agricultural lenders with institutional memory of the 1980s crisis will have left the industry. This is not only a loss of valuable experience, but it also means that many producers will start working with a new lender. Often, new lenders do not have a farming background and may come to agriculture from another industry. I expect a significant increase in female lending officers as well as those less than 40 years of age. Regardless of age, gender or background, a good lender should be eager to learn and understand today’s agriculture and the power of technology. It is also important for producers to embrace this time of transition in the lending industry and seize the opportunity to educate new lenders.
An agricultural operation changes constantly, which creates a tremendous need for producers to communicate and coordinate with those that impact the operation or business. Producers need to be prepared to increase the level of financial reporting and documentation on financial statements and loan agreements. Lenders should actively strive to learn about the producers and operations they serve. In summary, both producers and lenders will need to utilize this time of transition to work side-by-side and develop methods to navigate the economic tides of challenges and opportunities.