Editor’s note: This is the third in a three-part series on the current state of the farming industry and ag banking. Previously, we covered current trends in the industry and commodity prices in 2022.
As they near the end of 2021, many community ag bankers say their farm clients are feeling optimistic. Commodity prices — from corn to dairy — look favorable. Low interest rates are driving the price of farmland in some areas, but expansion is an obstacle in others. Some of the sunnier projections for the coming year are partially offset by higher costs for feed, fertilizer and fuel.
Some banks reported a decline in ag loan volume over the past eight to 10 months. Limits on growth and farm consolidation are two other issues affecting farmers. Weather remains, of course, the factor that tempers even the sunniest outlook.
We asked six Midwestern ag bankers from across the region to reflect on the past year, and share their insights into what the next year might look like for them and their ag customers. Here’s what they said:
What are you hearing from farmers about the call to adapt their practices in response to climate change?
Ed Sullivan, CEO, State Bank of Bussey, Iowa: “We’re going to see quite a bit of this really come together in the next three to four years. I think a lot of exciting things [will happen] for people who’ve got pasture, timber; but it’s all about changing your ways of farming to be much more eco-friendly. And if you can verify that and do all that, that’s where you’re going to get the carbon credits.”
Dave Coggins, executive vice president-chief banking officer, Investors Community Bank, Manitowoc, Wis.: “It’s expected that there will come a time in the next decade or two that the carbon footprint and carbon neutralization expectation from dairy processors will be real. In the dairy space, renewable natural gas production through anaerobic digesters has become a viable option with significant economic value being derived from the credits. We’ve been getting up to speed on this phenomenon through industry contacts who are also helping our farm customers navigate this new opportunity.”
Jacob Jenniges, branch president, Integrity Bank Plus, Walnut Grove, Minn.: “I can honestly say that I have not had a single conversation with a producer regarding climate change or carbon credits. Because of that I have not done much research on carbon sequestration or carbon credits. The Independent Community Bankers of Minnesota is planning to focus on environmental issues, including carbon credits, at its annual Ag Conference [Oct. 28-29].”
Joseph Carlson, president and CEO, Community State Bank, Royal Center, Ind.: “Farmers and ranchers understand sustainability and stewardship better than, or equal to, any corporate strategy that is available for review. My customers know that stewardship of resources has always been necessary to maintain a profitable operation. The change to reduced fertilizer and chemical rates was underway before climate change came to the forefront. The climate change discussion in my market normally revolves around downward solar flux and the impact of reduced sunlight for crop production. Our focus on climate change information sharing and gathering has remained at the bank and board management level. The bank is gathering information from numerous banking-related articles and organizations about the impact climate change will have on credit analysis at the bank regulator and legislative levels. My customer base has had very limited exposure to carbon sequestration but are very engaged in discussions regarding cover crop usage, having already implemented reduced tillage practices and reduced nitrogen usage.”
Powell Becker, branch president, Stockman Bank, Stanford, Mont.: “From a climate change standpoint, we feel like our farmers or ranchers have always been the greatest stewards of the land, that the land only gives back what it can, and so you have to take care of it in order to reasonably expect it to treat you right as well.”
Scott Zimbelman, vice chair, Homestead Bank, Cozad, Neb.: “Certainly more organic crops [are] being grown every year. Not sure if this is driven by environmental concerns or profitability. We are not currently discussing operational changes relating to climate change with our borrowers.”
What other challenges do you or your producers face?
Sullivan: “I would say the biggest challenges banks face is the disadvantage that we’re at because we pay income tax where the Farm Credit System and credit unions do not pay income taxes. That makes it a huge disadvantage for banks. That’s putting the squeeze on the smaller institutions, because if you’re multiple billions I think you can spread your costs out and be a little bit more competitive.”
Coggins: “The dairy industry is continuing to face the need for farms to grow to stay viable. With the limits on growth being imposed by dairy processors, it’s forcing some operations to look at consolidation. And consolidation requires more capital, which stretches some of the credit metrics we underwrite to as well as being able to increase our lending limits prudently. We also continue to face serious competition from Farm Credit.”
Jenniges: “Rate pressure from point-of-sale financing, along with the FCS is heating up as ag credits improve. As a community bank we anticipate that our work helping our producers through the past five years along with our activity with the PPP loan program will be enough to overcome any potential rate difference. We are also seeing a trend toward producers working together with neighbors to offset M&E [machinery and equipment] expense. This has been a successful business model, especially for the younger producers who do not have any other family members to offer help.
“Finally, over the past five years we saw some high depreciation on equipment. That combined with low net incomes created the need for producers to update their equipment. Now that producers are profitable we are seeing that happening. The problem is the lack of equipment inventory. The pandemic slowed down production of new equipment, which has created a shortage of options and has increased the value of used equipment. Farm M&E is definitely a sellers’ market right now. This will not stop producers from attempting to offset their potential 2021 income tax burden by purchasing overpriced equipment.”
Carlson: “Farm consolidation is a major concern for small, wanting-to-remain-independent community banks as legal lending limits are forcing banks to find willing and knowledgeable agriculturally-based banks for participations. To remain viable, we must remain a reliable provider of credit to our customer base. As the Farm Credit system and credit unions continue to operate with different funding sources and taxation status, the burden to remain competitive is continuing to increase. Removing independent community banks as a source of capital will limit the growth, expansion and survivability of our local communities. Local ag banks know where they are, who they serve and support their communities.”
Becker: “The largest thing for us around here is real estate values. Obviously there’s been a major shift in where folks want to live, as a result of the last couple of years. Blame it on the pandemic. Blame it on the administration. However you want to take it.
“But at the same time, we have a lot of demand for our real estate out here, whether it’s bare ag land or land in small rural towns. It’s difficult for our existing producers to expand their operations because the amount of money coming in here and buying up all our property is significant. And it makes it very difficult to compete when you’re trying to pay for it through agriculture production. It just doesn’t work given where our prices are in relation to where land prices are. It’s very difficult for any of our producers to really have an opportunity to expand at this point. So that’s a large challenge for us. Dealing with renting property from out of state or folks who don’t live here — absentee ownership — that’s always difficult as well.”
Zimbelman: “Farm consolidation is a challenge. That leads to increased competition for the producers who are left. It is definitely a beneficial market to the producer with relation to funding an operation. Rates are favorable and competition helps ensure most producers have access to low-cost funding. A lot of liquidity in the financial market also lends to favorable borrowing terms for most producers.”