In ag banking, the right relationship still matters

John Blanchfield
Heather Malcolm

“Ag banking is different.” How many times have you heard that one? Or, if you are an ag banker, how many of you have used that argument in loan committee as the discussion goes on and on about the viability of a particular credit? 

Is ag lending really different, and if so how? We recently put our heads together to come up with what we believe are the reasons why ag banking is different than other types of lending, and why it demands a different, relationship-driven approach.

First, ag banking requires a holistic approach by the lender. Successful ag bankers must have at least a working knowledge of the type of agriculture that is being financed. And while you could argue the same is required by lenders who make convenience store loans, for example, we believe that most successful ag bankers must know more about the businesses they are financing than just about any other commercial bankers. 

The proof of this is what happens when a banker, who has no agricultural experience whatsoever, gets into an ag credit — usually it is a disaster. In addition, schools for ag bankers still teach that lenders need some expertise about the particulars of agricultural enterprises. In part, tradition exists around this approach, but ag banking is also taught this way because it has been proven to work.

Second, farmers and ranchers look to their bankers to be a source of information. As a result, they look to their banks for educational forums, discussion opportunities and educational referrals to make them better business people. Go to any rural community and the most successful ag bank in that community will be known for its commitment to the financial health and wellbeing of its customers. These bankers demonstrate this commitment not only through the forums and seminars they sponsor for their customers and prospects but also the information they provide through other avenues.

Third, farm financial statements often make a trained commercial lender’s skin crawl. They are frequently developed by the customer, income is almost always reported on a cash accounting basis, and there are often no detailed schedules supporting the statements. Again, the importance of having a trained ag banker on staff comes to the foreground. 

Being able to “look through” the financials to develop the real cash flow of the business and understand if the asset values on the balance sheet are reasonable is key to successfully analyzing a farm customer’s financial strength. Farm financial statements have certainly improved over the last 20 years, but on a sophistication scale, they still register in the “needs improvement” category. 

Finally, successful ag lending continues to be a hyper-local endeavor. In the late 13th Century, the English adopted the longbow. It was a great weapon because archers could effectively rain arrows down on their enemy from a great distance. We see some ag lenders practicing “longbow” lending today. With an unlimited faith in credit scoring technology, some lenders are making farm and ranch loans over vast distances with little or no contact with the borrowers. Longbow lending may prove to be a disaster for these institutions because experience has shown that successful ag bankers know their customers like no other lenders, and you don’t gain this knowledge without borrower contact. 

Even very large banks that have been successful in ag lending understand the hyper-local nature of ag banking and have adopted community banking techniques. The challenge for the entire banking industry is delivering this model of lending in a profitable manner. Hyper-local lending models like those employed in ag banking are not the most economical type of commercial lending.

The old joke about the five Cs of credit is that all five of them are “collateral.” In ag banking, capacity, capital, conditions and collateral provide a sense of security to bankers (and ensure the loan is within policy), but character repays the loan. Ag bankers understand this and work to develop a close working relationship with their customers. Ag bankers understand the unique challenges farmers and ranchers face, and they know developing a strong relationship with their customers still matters.


John Blanchfield directed agricultural banking policy at the American Bankers Association in Washington, D.C., for 25 years. Today he owns Agricultural Banking Advisory Services, an independent consultancy. He can be reached at [email protected]

Heather Malcolm is vice president of agricultural lending at Bank of the Rockies, Livingston, Mont. She is the 2020 Chair of the American Bankers Association’s Agricultural and Rural Bankers Committee. She can be reached at [email protected].