By Carrie Clark CarlsenIt’s the third week of January, a chilly time on the Great Plains at the western edge of Kansas. In the town of Elkhart, farmers and ranchers are gathering for Heartland Tri-State Bank’s annual Farmer Focus Day—a free opportunity for agricultural producers to build their farm business IQ. The event is seeing its biggest turnout ever, with the bank inviting middle and high school students to join their parents for lunch and a talk by atmospheric scientist David Snodgrass, who assesses and forecasts weather risks for the ag industry.
“While we have a keynote speaker, we also bring in a commodities outlook guy, an update on crop insurance, some artificial intelligence, and someone from a machinery equipment dealer in New York,” explains Shan Hanes, the bank’s president and CEO.
“We’ve had an expert panel on everything you wanted to ask your banker but couldn’t,” he adds with a chuckle. “We had bankers up here on stage and it was free rein—attack your banker!”
Events like Farmer Focus Day are just one way that America’s ag bankers are tackling a perennial farm challenge: improving ag producers’ business acumen, especially in an era of disruption. “Changes in agriculture are going to accelerate over the next 10 years,” says David Kohl, an emeritus ag economist at Virginia Tech—especially in areas like technology, bioengineering and big data. Agribusinesses are increasing in complexity, and operations are growing in size at a time when many farms are transitioning to the next generation.
“We are transitioning from the baby boom generation to Generation X, millennials, pick your generation, and as that changes, technology is changing, the cost of farming is changing, farm sizes are getting bigger—and you can’t farm the way you used to farm,” adds Tony Hotchkiss, EVP for ag banking at Regions Bank. Farmers have done a lot to upgrade the tech they use—but many are still running the farm the way they used to.
“I often hear ‘we’ve never done it that way’ or ‘I’ve never had to do it that way,’” Hotchkiss explains, speaking at the recent American Bankers Association Agricultural Bankers Conference. “It’s very important that as bankers we take ownership of this issue and make sure we are introducing concepts and topics, and helping producers understand the new complexity of farming.”
In navigating these sweeping changes, Kohl emphasizes that farm business IQ is the common denominator for producer success. And that’s an opportunity for ag bankers to team up with customers as their trusted advisers—delivering candid conversations, constructive coaching and community-building events. After all, when ag borrowers develop their business IQ, it pays off for the lender as well.
It all starts with dialogue. Scott Hauseman, a senior ag lender at Fulton Bank in Pennsylvania encourages his team to consider expectations with their producers; ask about accruals; talk about sales, credit quality and exposure; and do stress testing with lots of of what-if questions: “If we go to covenants at this level, what’s that feel like? Are you comfortable?”
“You need to be able to talk to your borrower about cost of production, where maybe in past eras we didn’t really care—because in our part of the world we had lots of equity and usually cash flow drove decisioning,” he adds. “That’s a big change because of things we’re seeing and the times we are in.”
Meanwhile, Hotchkiss instructs his lenders to challenge their customers’ thinking, have them look at their margins, study statistics based on acreage and calculate the cost of production. If a producer prefers the “dirt side” of farming, his lender should be asking what he’s doing to make sure that the business side is managed properly.
Hard conversations are where things begin, but producers need to move beyond questions and start finding their own answers. Hauseman emphasizes the importance of sharing data—and analytical tools to employ it—with farm customers. His personal philosophy is that if he’s making credit decisions on customer financials, he should be willing to give them the spread that he made that decision on.
Shan Hanes agrees. “The bank felt that the number-one thing that ag producers were missing was knowing their breakeven costs, he said.” Fifteen years ago, Hanes’ bank developed a breakeven analysis spreadsheet for customers to use. “The reason I think that’s important is as events happen … people can make adjustments to that spreadsheet.”
At the beginning of the year, Hanes also has his ag customers write down their projected cash flows, including living expenses, and set objectives for the year. He asks them what they expect the market high and low to be. “It forces them to engage in the marketing process,” he says.
Hauseman uses coaching models with his loan officers, which he hopes they will use with customers. He asks his lenders: “Do you have the right financial statements that are even testable? Or accrual statements?”
“I’ve seen that this coaching model goes over very well,” Hauseman continues. “I’ve seen some really good discussions with customers because lenders have been taught some skill and capability levels that they wouldn’t have had without that model in place.”
Hotchkiss encourages his ag lenders at Regions Bank to use this coaching approach to prove their value as a partner who can do more than lend money. He tells lenders: “Share data with your producers, and show them, ‘Based on what was reported, here’s what your peers are doing and here’s where you are.’”
Additionally, Regions Bank is employing technology to deliver coaching on succession planning, land trusts, diversification and many other topics. Younger row-crop farmers prefer high-tech interfaces, Hotchkiss says. “We are generating more interest with webcasts and podcasts, where we send them links. They’re watching these little 10-15 minute snippets on very specific topics while they are in their combines.”
Events like Farmer Focus Day build on the tough conversations and one-on-one coaching to provide a fun yet educational group dynamic. Another example Hanes uses: the “marketing game.” Over the course of several weeks, six to eight novice and experienced farmers are intermingled at tables for role-playing and problem solving. Each group is assigned an actual farm operation case study involving a commodity, specific market conditions, financing options and other variables.
In each weekly meeting, new variables are presented, such as developments in world trade, price fluctuations and/or unplanned expenses. During the simulation, Hanes says young and old engage with his lenders and with each other—rooting for and learning from each other, working together to come up with a viable plan for a profitable farm operation.
Hanes was surprised by a corollary outcome—one that has nothing to do with business IQ, but one that lays the groundwork for producer success. “We have seen those older farmers who were looking for their next tenant sit at a table and build a relationship,” he reflects. “They made a friendship, they stayed connected to each other and we were able to provide an environment where they could transition from one generation to the next.”
Building farm business IQ—it brings bankers and farmers closer together.