With the downturn in the farm economy headed into its second year, community bank boardrooms are turning into classrooms as bankers try to help farmers weather the storm.
Many bankers are hosting seminars on forward-pricing techniques and crop insurance policies, to teach farmers to be better business managers.
"We're trying to do everything we can to help our customers," says Terry J. Jorde, chief executive officer of Country Bank U.S.A. in Cando, N.D.
With weak export demands from Asia holding commodity prices low and U.S. government aid to farmers set to run out by 2003, farmers are under increasing pressure to improve their management skills.
Many farmers find it difficult to generate enough income to support their families and pay off their loans in the current environment.
Producers can guarantee some income by forward pricing their crops or by buying insurance policies that protect against natural disasters and low prices.
"Everybody should look at hedging," says Stephen R. Koontz, assistant professor at Colorado State University. "It's empowering because it gives you control over something you had no control over before."
Yet many farmers who have normally sold their commodities at harvest or slaughter at the market price find that new risk management techniques can be intimidating. Still, bankers agree that farmers' survival may depend on whether they learn to hedge their business risk well.
"If the producer isn't doing that within three to five years, he won't be here," says Dale Schnee, president of First National Bank of Otis, Colo.
Bankers who want to help improve their farmers' risk management skills should start by getting familiar with the products themselves.
"You need to know how this works first," Mr. Koontz told a group of bankers at a risk-management seminar held this spring in Colorado Springs, Colo. "You can do a lot to spread your risk by learning the basics."
Local cooperative extensions, a part of the land-grant university system, often have educators on staff who can teach farmers and bankers how to hedge against low prices by using futures and options contracts.
Those contracts, which trade on national exchanges such as the Chicago Board of Trade, allow farmers to lock in prices for their commodities months before they sell them.
Extension service personnel have been teaching risk management classes at Citizens State Bank of Loyal, Wis., which lends almost exclusively to dairy producers.
Dairy farmers, who recently lost federal government price supports, are learning to hedge their price risk for the first time. To help producers along, the U.S. Department of Agriculture is sponsoring an educational pilot program where the government foots the bill for 80% of dairy farmers' futures and options contracts.
Citizens, which is in a county where the forward-pricing pilot program is offered, encouraged its borrowers to sign up and then hosted classes taught by extension personnel to explain how it works.
"I would like the bigger producers to take a look at forward pricing," says Gary Weirach, president of the $68 million-asset bank. "With an 80% guarantee, it's hard to go wrong."
Banks can also ask brokers who sell futures and options contracts to teach farmers how to hedge.
First National of Otis invites local brokers to give classes at the bank each winter - the season when most farmers do their business planning. The bank asks husbands and wives to attend the classes together so both understand how forward pricing works. Then one spouse - often the wife - carries out the risk management plan.
Other bankers, however, prefer that their farm borrowers do some group learning before they start forward pricing their crops on their own. At First National Bank in While Sulphur Springs, Mont., 10 customers who raise cattle have formed an investment club so they can hedge their price risk together.
The club is setting up a forward-pricing plan and intends to buy and sell futures and options contracts as a group. The ranchers will use a computer terminal in First National's lobby to keep track of their contracts and local cash prices, says Michael E. Grove, president of the $35 million-asset bank.
While some farmers want to control their own forward-pricing plans, other prefer to hire a commodity marketing firm to hedge their risk for them. Representatives from those firms, such as RWA Financial Services in Austin, Tex., frequently speak to banks' borrowers about the companies' services. RWA, for example, forward prices crops on the farmers' behalf for a fee.
Other farmers forward price their grain at the local elevator by agreeing on a price before planting. Some livestock producers make similar arrangements with area meat packing plants.
Security Bank in Idalou, Idaho, helped a group of cotton growers team up, pool their cotton, and forward price it with the Plains Cotton Coop Association.
"If there's a good opportunity out there, we tell our customers about it," says Mike Maudlin, president of Security Bank.
Forward pricing contracts are not the solution for all farmers, however. With commodity prices projected to be low throughout the end of 1999, most contracts for sale this spring did not allow farmers to lock in prices that exceed the expected market prices in fall and winter.
Farmers should also avoid forward pricing if their area is subject to natural disasters because the contracts assume that farmers will have a commodity to sell, bankers advise.
In North Dakota, for example, farmers do not forward price their wheat crop because in recent years, wheat has been destroyed by either disease or bad weather. Instead, North Dakotans take out crop insurance policies that pay out if wheat is lost.
Country Bank USA in Cando, N.D., requires borrowers to take out a crop insurance policy before the bank will make a loan. To make sure farmers understand how the policies work, the bank hosts seminars that explain the policies and any recent changes.
The crop insurance seminars Country Bank held this spring were especially popular because a new policy - one that protects against both low prices and natural disasters - is available in the state for the first time this year.
"It's one of the best tools for our producers right now," says Ms. Jorde of Country Bank.
Still, experts warn that while forward pricing and insurance policies can be helpful, the risk management tools have some pitfalls as well.
First, many are expensive. Mr. Koontz of Colorado State University suggests that banks set up marketing lines of credit for their farmer borrowers that are separate from an operating line of credit.
Other problems may surface if a farmer gets cold feet and strays from the plan. Farmers who buy futures contracts should be prepared to pay margin calls should prices begin to fluctuate dramatically. Selling a futures contract when a margin call seems high can be a costly mistake down the road because the price protection is removed.
Finally, a risk management plan cannot solve major operational problems on the farm, Mr. Koontz warns.
"Marketing provides a revenue enhancement. That's it," he says. "It's not going to save them if they're losing money right now."