As the family farm grows up, the heartland's agricultural banks could be squeezed out.
Farm consolidation has increased the size of the typical expansion loan sought by farmers, straining the lending limits of the banks that have financed U.S. agriculture for generations.
And the trend toward bigness is shaking up core operating assumptions for many midwestern farm banks, which have built their profits on local relationships rather than huge balance sheets.
Still, a growing number of farm lenders say they aren't seeking help from the traditional upstream, city-bred correspondent banks - most of which aren't equipped to take on specialized farm credits.
Instead, they say, the way to cope is to forge new types of participation relationships with other community banks.
"The local independent banks would like to keep a banking relationship" with farm customers, said Gary Sipiorski, vice president and agricultural loan officer at Citizens State Bank of Loyal, Wis., whose bank is participating in farm loans with other community banks. "We feel independent banks need to work together."
Farms have been increasing in size since the Depression. Only recently, however, have lenders seen farm financing needs start to outstrip their individual resources.
According to the Department of Agriculture, the nation had 5.9 million farms, averaging 195 acres, in 1945. A 1987 census of agriculture showed 2.1 million farms, with an average of 462 acres. And the consolidation has continued.
"The consolidations we're seeing in agriculture are resulting in bigger loan requests from farmers," said Bruce Jones, an associate professor of agricultural economics at the University of Wisconsin, Madison.
Advances in machinery, fertilizer, and plant breeding have resulted in increased productivity and efficiency at farms, according to the Agriculture Department. But each step forward in technology has encouraged the trend toward consolidation.
In the Midwest, ag lenders bumping up against their loan limits have few options. Local economies in the heartland haven't diversified as much as those in other regions and, as a result, it can be hard to find other business borrowers to replace lost farm customers.
But the expansion trend isn't squeezing out small farm banks that can adjust. Many say they are turning to other banks as a buffer, and to maintain existing customer relationships.
"We're going to see more of them continue to do that if they want to continue to be involved in agricultural lending," Mr. Jones said.
The trend toward large-scale farms has also played a role in the blossoming of bankers' banks throughout the Midwest.
In Illinois, a largely agricultural state, there are almost 400 independent banks, the vast majority of which have less than $200 million of assets. Even for the larger of these banks, anything more than a $1.5 million loan would push up against most limits on loans to one borrower.
John D. Schneider Jr., president of Independent Bankers Bank of Illinois, has seen a significant increase in the last year in agricultural participation requests from community banks.
The growing size of farm loans is "not a huge problem in Illinois," he said. "But I expect the trend to continue. More ag banks are feeling the need to participate out more of their credits."
In addition, participations have become easier to do, said Bruce Sherrick, a professor at the University of Illinois' Center for Farm and Rural Business Finance. However, Mr. Sherrick said he is unsure whether participations have increased directly as a result of farm consolidation.
In Wisconsin, expansion and modernization in the dairy industry exemplifies the types of changes taking place.
Mr. Sipiorski's bank has taken a leading role in coordinating dairy farm loan participations.
About a year and a half ago, the $50 million-asset Citizens began looking at ways to help other small rural banks evaluate and participate in bigger farm loans.
Citizens expects to coordinate at least $3 million in loan participations within the next year with about 10 banks, Mr. Sipiorski said. While the project is still in formation, the idea is that Citizens would act as both consultant and matchmaker, tying its expertise in dairy to the combined resources of several community banks that, together, can make the larger expansion loans increasingly in demand in Wisconsin's dairy industry.
"We've had a number of calls from banks around the state that don't have a handle on being able to analyze dairy operations," he said. "Our real expertise is in the dairy end of it."
A typical expansion might be a producer of 50 to 100 cows who wants to grow to 150 to 250 cows, with an average loan of about $450,000, he said.
In North Dakota, Wes Well's $23 million- asset First National Bank, Milnor, N.D., also has sold loan participations to bank-affiliated agricultural credit companies when credits exceeded lending limits or when the bank wanted to spread risk from a high concentration of cattle-related credits.
Mr. Well said he has noticed the trend in the last couple of years and expects it to increase.
"Whereas a regional banking institution has the avenues to accommodate large credits, a lot of times we're going to have to develop those from the ground up," said Mr. Well, vice president.
