BLOOMINGTON. Ill. - Farm suppliers have jumped into the agriculture lending business in a big way, giving rural community banks a run for their money on their own turf.
"There's more and more supplier programs out there," said Mike O'Brien, director of FS Credit Corp., the financing subsidiary of Growmark, a regional farm supply and grain marketing cooperative operating in Illinois, Iowa, and Wisconsin.
"The farm supply industry has gone to the point where if you don't offer a financing package along with your products, then you're kind of out of the market."
FS Credit Corp. is one of many nonbank competitors that agriculture bankers face.
These finance companies offer credit lines to pay for the farm products their companies sell, which in Growmark's case includes fertilizer, feed, seed, and petroleum fuels. A main attraction to the customer is the convenience of a one-stop shop for the product and financing.
Growmark, which nearly abolished its finance company a few years back, has stepped up lending in recent years after retooling its program as a sales enhancement tool.
From a portfolio low of $9 million during the agriculture crisis of the 1980s, FS Credit last year lent $56 million, and Mr. O'Brien expects lending this year to peak at about $60 million.
FS Credit reported record earnings of $500,000 before taxes for fiscal 1994, Mr. O'Brien said. Earnings have been between $250,000 and $500,000 since 1989, he said.
Nonetheless, he said, "Profitability is not our primary objective. We get challenged that if we make too much money we should have had lower interest rates.
FS Credit will expand next month into Ontario, Canada, where Growmark recently acquired the assets of another cooperative.
Its farm customers are members of 80 U.S. farm supply and grain marketing cooperatives that in turn are members of Growmark.
Funding comes from CoBank, a Farm Credit System entity based in Denver that lends money to cooperatives.
The relationship between FS Credit and banks is both competitive and cooperative, said Mr. O'Brien.
In some cases, FS Credit has participated with banks on loans.
However, Mr. O'Brien said, "It wouldn't be truthful to paint a picture that it's all rosy. There are some areas where the community banks see us as a threat.
"It really depends on what the mission or scope of the commercial bank is," he added.
Banker Bill Blickhan, assistant vice president, agricultural services, at $670 million-asset First State Bank of Monticello, Ill., said FS Credit is "out marketing their services and out being competitive."
Still, Mr. Blickhan downplays FS Credit as a rival. "They're another player - rather than a threat - in the agriculture financing arena that didn't used to be there."
In one case, a farmer got better terms from his local bank after considering FS's Agri-Finance program, Mr. O'Brien said. "The patron was happy, we got the sale, so everybody went home happy," he said.
Bankers' complaints about such nonbank lenders include lack of bank-like regulations, as well as rate competition, particularly if the company can use profits it earns on its products to subsidize lower interest rates.
"That may be true with some supplier financing programs," Mr. O'Brien said. "But as far as FS Credit is concerned, we do not benefit from any product margin."
George Wells, FS Credit's marketing manager, added, "We know that we have to solely rely on our own underwriting criteria and our own disciplines to maintain a viable portfolio."
Steve Moehring, assistant vice president at $74 million-asset Havana National Bank in Illinois, said that Mason County Service Co., in Easton, Ill. - a Growmark member - has increased rate competition for some farm loans.
"I don't feel that we have lost any business, but they have been very competitive," he said.
Mr. O'Brien said the local cooperatives have rate flexibility. But "Because ... we're not a full-line lender, we've got to set rates where the banks or traditional lenders are or just a smidgen below."
Still, Randy Wilson, Agri-Finance manager for Mason County Service, said he has a good working relationship with the seven banks in his area.
Mr. Moehring agreed. "We talk to them all the time because a lot of farmers use their crop inputs," he said. "We want the farmers to be able to get the lowest price."
Five FS Credit lenders make the ultimate lending decisions and establish most terms and conditions. They have some contact with borrowers, but most direct relations are through the local cooperatives.
Most of the loans that FS Credit finances are short-term operating loans to finance products Growmark sells, said Mr. O'Brien, 45, a Growmark employee since 1975 and head of FS Credit since 1988.
The finance company's main disadvantage in competing with banks is its limited financing capacity, said Mr. O'Brien. But a big advantage is that FS Credit can be more flexible in establishing repayment dates, he said.
And while bankers don't foresee FS Credit and its breed usurping the traditional farm lender, the agriculture business is going through enough flux to make anything possible.
"They are a competitor," said Leon Hinton, vice president of $500 million-asset Bank Illinois, Champaign. "But ... they've not been overwhelmingly effective, which could change."
