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PCBB Banc Investment Daily March 24, 2017
Banc Investment Daily
March 24, 2017

Digging Into Ag Lending

When you dig into the fields of the agriculture industry, a whole lot of information can be found. For instance, did you know that farming began in 10,000 BC, figs were one of the first cultivated fruit crops, bananas are the #1 fruit crop in the world and 4th largest behind wheat, rice and corn. Also of note, the US government defines a farm as any establishment that produces and sells (or would have produced or sold) $1,000 or more of agricultural products during the year. Finally, for every $1 spent on food, farmers take home 12 cents for the raw product.
Certainly, the agricultural lending business is not a niche suited to every bank. But for those banks that choose to cultivate this market, well, the rewards can be abundant.
Whether a community bank is based in traditional heartland of the Midwest, the citrus-growing Southeast, the cattle ranch areas of the mountain regions, or among the commodity crops of central California, agricultural lending can offer substantive growth to those who focus on this market. Of course you must carefully manage risk, reach out to federal resources, offer other ag-related banking products and specialized support, but it can all work quite well for those who make a go of it.
Recently, the topic of agriculture lending has taken some hits. Bankers have been caught between the demands of the Dodd-Frank regulation and risk-monitoring specific to agricultural, along with customers seeing plummeting farm income in some regions, increasing farmland prices and dipping commodity prices. In fact, overall farm income dropped 38% between 2014 and 2015, according to the Department of Agriculture. However, for many community banks, this portfolio is still strong.
Indeed, community banks are responsible for about 75% of all the country's agricultural loans, according to a 2016 report by the Dallas Fed. Approximately 1,500 US banks are defined as agricultural banks by a Fed whitepaper entitled, "Successfully Managing Agricultural Credit Risk Regardless of Agricultural Market Conditions".
Of course, the risks in agricultural lending have arguably increased since the Fed initially issued supervisory guidance on expectations for managing this credit risk in October 2011. But, as is typically the case in the financial industry, with risk comes reward. Many community banks find their relationships with the ag community as highly rewarding.
For some banks, courting farm communities can deepen opportunity with small businesses and commercial lending.
Banks can build close bonds with farmers by even selling crop insurance or other related products, as well as originating loans. In addition, by reaching out to the emerging Millennial, the next generation of farmers and ranchers could give community banks an expanded opportunity in the future as well. This younger group has a strong appetite for online banking and bill payment, as well as mobile banking and remote deposit capture services.
Tapping into the tailored needs of the agriculture industry can give community banks a way to support local businesses and increase revenue. To do so, it is important to pay careful attention to commodity fluctuations, the level of federal support, the development of the industry, technology and a host of other factors. All play an important role for banks interested in exploring the best way to enter this sector of lending.