Banker Roundtable: A Linked Economy

By Brian Nixon

As low commodity and livestock prices have cooled off the agricultural economy in many parts of rural America, there’s a natural ripple effect up and down the supply chain. Feed and fertilizer suppliers, equipment dealers, Main Street retailers and other businesses will feel the impact of reduced demand as producers reduce their spending.

Such is the case in Indiana, says the chairman of ABA’s Agricultural and Rural Bankers Committee, Joe Kessie, SVP at Warsaw-based Lake City Bank, which has $4 billion in assets. While used equipment dealers are doing okay, new equipment sales are slumping.

In the Northeast, the situation is similar, says Ed Coates, SVP at Norwich, N.Y.-based NBT Bank, which has just slightly less than $9 billion in assets. One positive factor in his region, however, is that machinery dealers benefit from a more diverse market. “While a large percentage of their sales would be to farmers, a large percentage is also to construction and recreational type, suburban type of homeowners as well,” says Coates, the vice chairman of the ABA committee. “So there might be a little more diversity for equipment dealers.”

Beyond equipment, other suppliers such as feed, fertilizer and similar agri-businesses are seeing their receivables increase. “There’s some concern there,” Coates adds.

“We kind of see the same thing with the lower commodity prices,” says Heather Malcolm, VP at the $135 million Bank of the Rockies, based in Livingston, Mont. “I financed one feed store and the thing that worries me there is they’ve told me that their customers are taking longer to pay. And you can see it in even our little town of Livingston. We have 7,000 people and the Main Street stores are not being supported by the ag industry as much because there isn’t as much money to go spend.”

Malcolm also says producers are making do with what they have. “People are repairing their balers and their equipment instead of going and buying new.”

In California, “water is really the key, and it’s not so much mother nature, it’s the regulations,” says Ken Ramos, president of Wells Fargo’s central California region. “And the ag economy in California is really subject to the haves and the have-nots. Those farmers that have water, they’re actually doing very well. They have their almonds. They have their pistachios. They have their grapes. A lot of the permanent plantings.”

Areas lacking access to water, such as the western portion of California’s Central Valley, are seeing a slowing economy says Ramos. “There’s all these small little country towns—they’re drying up just because the little mom-and-pop hardware store can’t stay in business anymore and the little grocery store can’t stay in business anymore.”

Environmental and economic factors are also driving certain sectors of California’s diverse agricultural production, such as dairy, into other regions of the nation (see sidebar). Similar factors are also at play in the Northeast, says Coates.

“One of the things probably most similar in California and New York state is just the general regulations that are in place,” he says. “That pushes up the cost of business. Some of the environmental regulations, [such as] road travel regulations, are burdensome to a lot of farmers. I don’t think that’s going to change anytime soon in the Northeast, and it will continue to drive up the cost of operation.”

That doesn’t mean there aren’t opportunities for astute ag lenders. For example, Bank of the Rockies has a history dating back to 1883, plus a reputation for being willing to work with new producers. Case in point: Malcolm—after some research on her part—helped put together a guaranteed loan for a sheep dairy to support specialized cheese production. The operation is the second sheep dairy in Montana.

Indeed, instances like that inspire ag bankers. “That’s really the one thing I want to point out to all my staff,” says Kessie. “We’ve got to remember there are still farmers that are doing all right now, so don’t get caught up in that one problem you’re working on. There are still good operations out there.”

“By and large, we’ve been fortunate,” says Kessie. “We did have those really good years, so we do have some good balance sheets left in a lot of operations. We’ve got a lot of customers I’d gladly help expand during this time because they don’t have much money borrowed—if any—right now. Not that they’re making a lot of money right now, but it’s just kind of like ‘The Three Little Pigs.’ They put it away when the times were good—they just didn’t blow it on houses of sticks.”

The Last of the 
Pre-Crisis De Novos

Lone Star State Bank had an auspicious start when it opened its doors in Lubbock, Texas, in December 2007.

As President Kirk Thomas says, the date was “just about the time things got interesting,” coinciding as it did with the official beginning of the Great Recession. Despite the timing, the bank has grown steadily thanks to a loyal customer base and a laser-like focus on business lending, specifically agriculture and energy.

“We’re probably one of the last new banks to be chartered,” says Thomas. “We are purely a lending bank. We take deposits and we make loans, and we don’t do anything else.” Roughly 40 percent of the bank’s loan portfolio is in agriculture and another 15 to 20 percent is in energy. “Of the ag piece, half of it is going to be row crop and half of it is going to be livestock,” says Thomas. “Livestock to us is 100 percent beef cattle. We have a little bit of cow-calf stuff but most of it’s going to be stocker operators and feedlots. There have been a lot of challenges in beef cattle.”

The other piece—row crop production—mostly is in cotton. The grain that is grown in West Texas is largely due to changes in the ag economy of California’s Central Valley. “We do have a growing dairy industry in West Texas,” shaped by environmental factors and the highest and best use of land in California.

“So, a lot of [California] dairymen have sold out, cashed out and moved to a more environmentally friendly place. We’ve got a nice dairy industry that gives us an outlet to grow something besides cotton.”

Thomas describes Lone Star Bank’s clients as “friends, neighbors and customers—we know every one of them, and the fact that they trusted their capital livelihoods to us is something that I will never take for granted.” Those ag producer customers are also loyal. “I think something all my ag banker friends will share is the best customers of the banks tend to be ag customers,” he adds. “They don’t beat you up over price—I mean, some of them will—but as a group, they’re your most loyal customers. That’s always been gratifying to us, that we’ve got grateful customers who are with us through thick and thin.”