Corn+Soybean Digest

When Good Loans Go BAD

Tough times may make your banker ask more questions When banker Dale Pohlmann's clients come in this winter to talk about their farm loans, he'll have the same country-boy smile and handshake waiting for them. As president of Ravenna Bank, Ravenna, NE, the odds are good he'll also have a few more questions than usual.

As agriculture's three-year run of low prices continues, with no practical end in sight, more and more farm loans are moving from rock-solid to risky.

"It would have been an unimaginable catastrophe without government farm payments," says John Blanchfield, director of the American Bankers Association's Center for Agricultural and Rural Banking.

But there are telling signs that low prices are taking their toll, according to Blanchfield.

"In the last year and a half, loan extensions and renewals have ticked up," he says. "We've seen a minor increase in delinquencies, but no increase in charge-offs by banks. As the farm situation weakens, banks are looking for more guaranteed loans through USDA's Farm Service Agency (FSA). In 1999, FSA doubled its annual output of loans to $1.75 billion of ag loans annually."

So a signature and a smile may not be enough to get some farms financed for another year. That can be tough to swallow. When you've been on top, it's hard to admit that your balance sheet doesn't contain the bragging rights it used to.

"You have to get rid of the pride factor," says Pohlmann. "The borrower needs to realize that his banker wants him to stay in business and prosper. We don't want to lose people from the rural community."

It may be a cliche, but communication is what will keep you on good terms with your banker, according to Pohlmann.

"We really don't ask for much more paperwork when farmers get in financial trouble. Our customers are already used to giving us an annual balance sheet and cash flow projections," he says. "Communication, however, is so important.

"Ninety-eight percent of farmers are good producers," Pohlmann says. "Something less than that are good business managers. You need to prove to your banker that you understand your operation from a business standpoint.

"A banker wants to see your plan to get through this depressed price period," he says. "Something has to change. And we need to be convinced that you've thought it out and have it written down."

Pohlmann stresses that low prices haven't created a 1980s scenario. But he and other bankers will be asking farmers to take some actions they may not be happy about.

"In some cases we'll use a grower's collateral and switch part of the debt to term," he says. "In others, we might suggest they sell off assets and downsize to the point they can cash flow. That might mean getting some work custom done, sharing work with a neighbor or working part-time off the farm."

Put yourself on the other side of the desk before you get too frustrated. "It's a partnership," Pohlmann says. "You and your banker have to have trust in each other. If you don't, you've got trouble."

To find a Midsouth production season as hot and as dry as 2000, you've got to look back 20 years.

In 1980, conditions were just as miserable, and the scorching temperatures and prolonged drought depressed yields, even by the standards of that time. The state-average soybean yield in Arkansas in 1980 was 18 bu/acre, Mississippi managed 14, and Tennessee's yield was in the 12-13 bu range.

As the combines started cutting in late summer, it was pretty clear that the 2000 state averages were going to be lower than in recent seasons. Even irrigated yields were down.

A couple of things, though, will probably keep statewide yields from hitting 1980 lows.

First, more acreage is irrigated. About half of the 3.5-million-acre crop in Arkansas is now watered, compared to 25% in the early '80s. Irrigation also is more widespread now in Louisiana, Mississippi and the Missouri Bootheel. And with new scheduling techniques, growers are doing a better job of irrigating their fields.

Second, a large part of the crop is now planted in April and even March with Maturity Group IV varieties. While it doesn't drought-proof a crop, the approach gives soybeans a chance to make and fill pods before dry weather typically develops in August. This year, of course, that dry pattern came a month early.

In 2000, half of Mississippi's crop was in Group IVs, mostly planted in April and May. Some dryland fields planted with IVs in the first half of April were yielding 35-45 bu/acre, despite almost a total lack of rainfall after early July.

Part of the crop won't be harvested because there isn't enough seed in the fields to justify combining at $5 a bushel. Lanny Ashlock, Arkansas soybean specialist, estimated in late August that perhaps 10% of the state's dryland crop wouldn't be combined. That works out to 175,000 acres.

"We're not sure how many acres won't be harvested in Mississippi," says Alan Blaine, Mississippi soybean specialist. "But I figure some will be combined that shouldn't be."

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