When Russell Williams started his grain farm in 1980, he got financing from the same small bank his parents had relied upon when they first tilled the earth 40 years earlier.
But three years ago, when it came time to expand, Mr. Williams took his cue from the name of his hometown in Illinois, New Leaf. He turned to a newfangled nonbank, Ag Services of America, an agriculture supply company that offers real estate and equipment financing.
"Things are going the direction I want them to go," he says of his financing.
Across the country, agricultural lending is going in the wrong direction for banks, especially for the community institutions that have long dominated the business.
After eight consecutive years of growth in market share, banks are suddenly losing ground to innovative finance units like Ag Services and a resurgent Farm Credit System. Increasingly, these players are beating banks cold on rate, convenience or both.
"We're being bombarded from all sides by competition," said James E. Peck, vice president and director of agricultural services for 132-year-old Paris (Mo.) National Bank.
According to the Department of Agriculture, banks held 39.4% of total farm debt last year, down from 39.8%. While small, it was the first dip since the 1980s-and observers expect the slide to accelerate. The Department of Agriculture figures the share will drop a full point this year.
Making matters worse, the overall market is growing at a snail's pace. Total agriculture debt expanded only 9.3%, to $150.8 billion, in the five years ended in 1995, according to government figures.
"It's a borrower's market and will be for some time," said Mark Drabenstott, vice president and economist for the Federal Reserve Bank of Kansas City. "You hear any number of cases of borrowers being lured away by others for a quarter of a point or an eighth of a point difference."
The government-sponsored Farm Credit System, a longtime rival for ag loans, is clearly turning up the heat.
From 1994 to 1996 the system widened its market share to 25.6% from 24.4%, according to government data. In 1997, the network of Farm Credit banks are expected to control 26.3% of the market.
"The Farm Credit System is always out there waiting to pounce on customers," said Howard C. Roe, vice president of the $42.5 million-asset First National Bank of Manning, Iowa. "If they decide they want someone, they just drop their rates and take them over."
Farm Credit System was created after the Depression by the federal government to guarantee access to credit for small farms, and it's resurgence in recent years has rankled commercial banks. They maintain that the system has an unfair advantage from its government sponsorship.
The 231 Farm Credit banks can make any kind of farm-related credit to their "members"-farmers and cooperatives that buy a token amount of stock in the institution. But they get most of their funding from the capital markets, where investors welcome the government's support. Thus, the system can make loans at rates cheaper than banks.'
The system's growth marks a sharp turnaround from the 1988-1993 period, when it couldn't put together two years of sustained market-share expansion.
The system seems to finally have overcome the credit and image problems brought on by the farm crisis of the 1980s, Farm Credit officials and competitors said. The network has turned itself around through consolidation, streamlined lending practices, and shrewder marketing.
In the past "a great deal of attention and focus was on working with stress in our portfolio," said Jerold Harris, president of the $3.8 billion-asset Farm Credit Bank in Wichita, Kan. "Marketing for new loans was a thing of the past, but now we're focussing on that."
Farm Credit is by no means the only player flexing its muscle. Over the past few years, a host of captive finance subsidiaries of agriculture vendors have sprouted up, touting one-stop shopping for farmers.
None of them lend with the vigor of gigantic John Deere Credit, West Des Moines, a subsidiary of farm equipment manufacturer Deere & Co.
Last year the unit boosted its ag retail note portfolio 5%, to $3.6 billion-an amount equal to about 5% of all outstanding ag debt in 1996, according to government estimates. Meanwhile, its farm equipment leasing volume grew 152% to $174 million.
In much the same way car makers now offer financing for buyers, financing available through the "input" companies-whether they make seed, fertilizer, or weed killer-is now commonplace.
Most of these companies had retreated from financing during the crisis of 1980s, when thousands of debt-laden family farms filed for bankruptcy. Now, the companies are returning in droves. Such loans cut directly into the most common bank farm loan: the operating loan.
"If you're a dealer that offers a complete package that includes financing, you can differentiate yourself from the dealer down the street," said Mike O'Brien, director of FS Credit Corp., a financing arm of the giant Midwest farm marketing and supply cooperative Growmark. "It's definitely a marketing tool or a sales enhancing tool."
Industrywide growth by these finance companies is difficult to track, because the government lumps their performance in a category called "individuals and other." But observers and anecdotal evidence suggest that finance companies were the driving force in that category's market-share growth to 23.1% in 1996 from 20.2% in 1990.
The category is expected to control 23.5% of the debt market by the end of this year, according to federal statistics.
"There's a number of customers interested primarily in quick, convenient, cost-effective plan to obtain production loans," said Michael D. Boehlje, and ag economist at Purdue University. "They may be the prime focal point of the captive finance companies."
PHI Financial is a prime example of a captive company on the move. Owned by a big seed supplier in Des Moines, it plans to generate some $110 million in deferred payment credits this year in a 35-state market area.
Meanwhile, the finance unit of Ag Services of America has made steady gains since opening with its parent company in 1985.
The Cedar Falls, Iowa, company now has about 1,000 customers in 24 states, and $130 million outstanding.
"The agricultural credit market is huge," said Neil Stadlman, vice president of credit administration, "and there's still potential out there."