CLAYTON, Mo. -- Problems in the way farmers are marketing their crops could cause a sharp reduction in the number of agricultural banks in next decade, according to an expert.
At best, ag banks aren't earning as much as they could because farmers are taking unaccounted-for risks on crop prices, said Randy Allen, president of RWA Financial Services, Austin, Tex.
The problem is, farmers wait to sell crops in hopes of higher prices that don't materialize, Mr. Allen said. The practice of managing the risk of fluctuations in crop prices is almost nonexistent in the underwriting of ag loans.
Farmers are "controlled by their fear in marketing," he said. If they sell, they fear the price will go up; and if they don't sell, they fear it will go down. "So, they're locked into doing nothing?'
Almost no U.S. farmers have a marketing plan, he said. Plus, bankers don't yet require such plans for loans.'
"This is the worst year of farm marketing I've seen in my life," said Mr. Allen, who led an ag banking session at the recent annual convention of the Community Bankers Association of Illinois in this St. Louis suburb.
Banker Herbert Siegert knows farm customers who didn't sell their crops when prices were good because they bet they would go even higher.
"You can call it poor management, but I think they were gambling - and they gambled wrong," said the chairman of $57 million-asset First National Bank of Pana. Then "they come back in and need more money."
First National Bank hasn't taken any losses because most of its loans were well collateralized. However, "If it becomes a habit, it's going to affect us," Mr. Siegert said.
Mr. Allen stressed that ag bankers must help educate farmers to help change the status quo, and expects them soon to require marketing plans with loan applications.
Otherwise, as farmers disappear, so will ag banks, he said. By roughly 2003, Mr. Allen predicts, two of the average five banks per county in predominantly agricultural areas of the country will vanish through consolidation or failure.
The current system is costing banks money, he said. "When you add up all the clients that are doing a horrific job of farm marketing, lt's costing the average ag bank over a million and a half dollars per commodity because of their market screw-ups," he said.
Overall, ag banks didn't lose money last year, thanks to factors including good ag prices and the success of businesses catering to the ag industry. "My point is, banks could've done so much better," Mr. Allen said.
Princeville State Bank already has started hiring experts to educate its clientele in farm marketing, but farmers are slow to change their ways, said Chuck German, a director of the $26 million-asset bank and owner of a farm implements company.
"A farm customer is a conservative customer, and he wants to see other people doing something before he does it," he said.