I have written several articles concerning how risky a farmer’s operation is. However; they are not the only ones who should be contemplating their level of risk. If farmers begin to fail for a variety of different reasons, what will your loan portfolio look like? What percentage of your portfolio would then be considered troubled or downgraded loans? How risky is your portfolio overall?
Some portfolios have a healthy mix of “long time and low debt customers” as well as startups that are highly leveraged. Having some you don’t have to worry about mixed in with the “iffy” ones is always great, the more you don’t have to worry about the better (obvious I know). Well, what about the loan officers that took a chance on a lot of start-ups during the high times several years ago? Some loan officers were aggressive in those times and their loan portfolios could very well be more than half full of new highly leveraged farm operations. What happens if all those new highly leveraged farms fail? Even if they don’t fail, what if they all need to be “reworked” in order to cover debts and have adequate excess cash? That is going to be a lot of work for one loan officer to handle.
If your loan portfolio is one of the more risk heavy ones it doesn’t mean imminent doom for you. There is a lot you can do to curtail any hits your portfolio may take. Also, let me say I am in no way bashing those who took a chance on young, innovative, or expanding farmers. If no one ever took a chance on the young and entrepreneurial segment of farmers our future in agriculture would be very bleak.
With that said the very first thing you should do is make every effort to be proactive. Make a list of those you are more concerned with in the coming year and make it a point to call them often. Keep notes on who planted on time and how their crops are looking in the fields. Visit the farms and take a look at your collateral and keep notes on that as well. Ask questions of your farmers and write down their answers, so if a problem arises you know what questions are left to be asked. When things take a turn for the worse, farmers may begin to get nervous and withhold information in an effort to “wait on things to turn around.” Most likely they are not trying to be deceitful, they are just waiting to see how bad it will really be before they talk to you.
This is why you should always encourage your customers to be upfront with you and let them know you can’t help them if you don’t know. Encourage them to come talk to you about the little problems, and let them know this could possibly keep those little problems from becoming big problems. Let it be known you have an open door policy and you want to help them make it. You may think, I don’t want to end up spending all my times listening to these little problems all the time! Honestly, you probably will get tired of it at some point. However; when you realize some of that information helped you help a farmer or helped you manage your portfolio risk you will feel great about all that listening you did!
If a problem begins to surface go ahead and have a conversation with your customer. Ask them if they have another plan to mitigate the effects of the current problem at hand. For example: Have they got income coming from another source (maybe custom hire) that may help offset their loss of yield on a particular crop? If things are at the point they can’t be fixed, go ahead and tell them what their options are going to be. Also, you should go ahead and speak to the “powers that be” at your bank about what the problem is and what plans you can offer that customer. You could also offer to run some additional analysis for the customer to show them what “could” happen “if this or if that” to help them be more aware.
You will not be able to fix every customer’s problem, this is definite. However; if you can head off some problems and begin to work on problems ahead of time you will save some time and headaches later. If you are able to help one customer avoid a possible problem, on top of feeling great about yourself, you will have also gained a lifelong customer and solid reputation as an Ag. Banker.