This spring the Ag Press has been filled with breathless articles about the future direction of commodity prices. “Wheat Hits 14-Year High!” and “How High Can Corn Prices Go?” are two of our favorites. The sad fact is that a war in Europe has historically led to record prices for U.S. commodities (see 1914 and 1939). The deeper Vladimir Putin’s tanks roll into Ukraine, the higher the markets for U.S. commodities will go.
While the situation in Europe is heartbreaking to witness, world events in the spring of 2022 have, at the same time, presented American farmers and ranchers with potentially historic selling opportunities. As uncertain as the situation is in Ukraine, it is equally uncertain where prices will peak.
As a banker, you hope that your customers seize these opportunities and maximize their incomes by selling their commodities at the peak of the market instead of at the bottom. But, during great moments of opportunity for farmers and ranchers, there can be great peril for bankers.
Any good ag banker develops a special relationship with his or her customers. They keep in regular contact with their customers, they visit them frequently on their farms and ranches, small and large achievements are celebrated, and tragedies are mourned together. This special relationship is what makes ag banking a unique form of banking. When asked about it, many ag bankers have a hard time explaining the relationship other than to note that it is different than, say, financing a convenience store down by the interstate. All of that is the positive side of the work.
On the negative side, ag banking can be a highly paternalistic type of credit management, with the banker fretting over the decision-making of each customer. Part of it is that farmers and ranchers are the most optimistic people on earth and some bankers feel they have to help keep their customers tethered to this planet. But this type of paternalism can get some unwary bankers into trouble, especially when there is a budding price bonanza.
The very same optimism that farmers and ranchers have when it comes to producing a crop or livestock works against them when prices go up rapidly like they are doing now. If soybeans are at $14 a bushel on Wednesday, then surely they will be $15 by Friday, and so on.
As a member of the producer’s support team (and often the supplier of much of the operating capital for the business), bankers can find themselves in a potentially dangerous position when asked by their customers what should be done about pricing and selling their commodity. Lawyers call this lender liability.
In ag banking, the special relationship between a banker and his or her customer can quickly become complex. In a perfect world the ag banker provides the credit and other banking services to the customer and the relationship is governed by signed loan agreements. Bankers are not supposed to participate in any way in the decision-making management of the borrower’s operation.
So what goes wrong and when? Some bankers have fallen into the trap of assuming the driver’s seat and being accused later of causing the owner harm. For instance, telling a customer to sell soybeans at $14 a bushel and then they go to $16 a few days later. Experienced ag bankers have been down this road many times. But, for a significant number of bankers, they may have never experienced anything quite like what is being experienced today with commodity prices rising faster than almost anybody has seen before.
To help ag bankers avoid some of these pitfalls, we suggest following a few rules of the road (we are sure there are more rules, but these are the most important to observe. Prudent ag bankers will want to discuss additional lender liability issues with their bank or outside counsel):
Bankers should never act like they are in the driver’s seat. In fact they shouldn’t even be in the back seat. They shouldn’t be in the decision-making vehicle at all.
Bankers have the right to collect their loans as agreed. If a customer does not want to sell their commodities in order to pay their obligation when it is due, then it is reasonable for the banker to ask how and when the loan will be repaid.
If there was a marketing plan for the sale of the commodity that was developed as part of the credit application then it is reasonable to return to that agreement and to point out to the customer that the customer themselves developed the plan and that it is advisable to stick with the plan. By the way, remind them that repayment is due. (See above.)
The bottom line is this: While you hope your customer is successful, it is his or her decision how to price and when to sell their commodity. Your responsibility is to collect the loan as agreed and in a timely manner. If your customer blows their marketing opportunity, but successfully repays the loan, no harm and no foul.
Your customer has the right to make bad decisions. As a banker, you may evaluate future credit based on how your customer performs, but you cannot intervene as an owner/operator to “save” any situation.
If your customer blows their historic marketing opportunity, and does not successfully repay the debt as agreed, then you and your customer will have to explore alternative repayment plans, additional collateral, or liquidation of another asset in order to repay the loan. But, try to not make your customer feel like a loser while working things out. All relationships have rocky moments; the great ones survive and grow stronger.
EDITOR’S NOTE: John Blanchfield and Heather Malcolm are not providing legal advice. They are sharing what they have learned from their years as bankers working with farmers and ranchers. They do suggest that now would be an excellent time to ask bank counsel to provide all lenders with a review seminar on lender liability.
Heather Malcolm is vice president of agricultural lending at Bank of the Rockies in Livingston, Mont. She was the 2020 chair of the American Bankers Association’s Agricultural and Rural Bankers Committee. She can be reached at [email protected]
John Blanchfield owns Agricultural Banking Advisory Services, an independent consultancy that works for banks that lend money to farmers and ranchers. He can be reached at [email protected]