Banks reliant on agriculture must begin to diversify, a leading agricultural economist warns.
"Changes are under way that are not going to allow you to do business the way you've always done business," said Mark Drabenstott, an economist at the Federal Reserve Bank of Kansas City. "Consolidation and weak prices mean fewer farms and fewer deals."
Mr. Drabenstott, director of the Kansas City Fed's new Center for the Study of Rural Development, said continued low crop prices will spur even more consolidation among the nation's farms.
That means rural bankers must consider ways to shift the focus of their local economies toward industries such as tourism, services, and manufacturing, he said last week at the Independent Community Bankers of America convention.
Though some banks and communities will clearly benefit from being near new, larger farms, others "are going to be left on the outside looking in," he said.
Mr. Drabenstott used hog farms as an example. Since 1990, the number of hog farms in the United States has declined by about 50%. And with hog prices at or near their lowest levels in decades, Mr. Drabenstott predicted that fewer than 40 farms-concentrated in just a few states-would soon dominate hog production.
There are now about 114,000 hog farms, according to the Department of Agriculture.
Some banks are already recognizing the need to find new customers.
Kenneth M. Walsh is president of $40 million-asset Ruby Valley National Bank in Twin Bridges, Mont., an area that has emerged as a fly fishing destination.
The bank has found new customers in tour operators and fishing rod makers, Mr. Walsh said.
"It's made quite a bit of difference for us," he said, estimating that recreation accounts for 20% of the bank's business.
But a Colorado banker told Mr. Drabenstott that tourism is no panacea.
Les Mergelman, president and chief executive officer at Olathe State Bank, said he is "scared to death" of declines in the ski industry and of environmental groups that fight tourism-related development.
"It's the agricultural economy that's always pulled our rear out of the fire," Mr. Mergelman said.
But Mr. Drabenstott said farm banks must prepare for changes.
"The future of farming lies in crops that are valued as products, not as commodities," he said. For example, soybeans may someday be used in drugs that fight prostate or breast cancer.
For bankers, that means persuading farm customers to grow such specialized crops and even to team up with neighboring farmers to meet drug or chemical factories' demands.
"What I see are islands of specialized production," Mr. Drabenstott said. "What you have to ask is, 'How do we make sure we are part of the action?'"
