With federal farm price guarantees being phased out, farmers are encouraging banks to make it easier for them to use risk management techniques to better ride out price fluctuations.
That means either extending lines of credit specifically for hedging or allowing farmers to use part of their regular loans for the practice.
"Without the farm program, the ups and downs that are going to occur in the market mean farmers are going to have to hedge a lot more than they did in the past," said Alex Palmer, a farmer who grows corn, cotton, rice, and soybeans near Marianna, Ark. "There's going to be a big need for lenders to loan you the money for hedges."
Hedging, which is often achieved through the purchase of futures contracts or options, works much like an insurance policy, allowing a farmer to buy protection against possible fluctuations in market price. For example, if the farmer worries that he won't get $6 a bushel for his beans, he can buy a put option that could help him turn a profit - or avoid a loss.
Although no studies are available, there's plenty of anecdotal evidence that banks are increasingly turning to risk management techniques in the wake of Congress' move last year to repeal price guarantees on a host of crops - including cotton, corn, rice and wheat.
And many farmers are calling on bankers to help them learn to manage risk.
"I think it would be better if bankers assisted farmers in getting good advice," said Freddie Norman of Hurley & Associates, an agricultural marketing firm in Marianna, Ark. "The farmer is less likely to speculate if he knows the banker is looking over his shoulder."
Besides, "the better job a farmer does of" managing risk, "the better loan a banker has," he said.
Under the government's farm price support program, farmers had to plant specific crops. If the market price fell below a certain level, eligible farmers would receive a payment or loan.
However, the new federal farm policy, effective from 1996 to 2002, repeals price supports and lets farmers plant any crop. Farmers who signed up for the federal program last year are guaranteed a certain amount of cash based on previous planting history, according to a spokesman for the Department of Agriculture.
Some rural bankers are trying to do their part by offering farmers risk management seminars, clubs, and educational material in addition to financing.
"I think we can play a role in helping customers manage that risk," said Jerold Harris, president of the $4 billion-asset Farm Credit Bank in Wichita, Kan.
First National Bank of Manning, Iowa, sponsors a club in which farmers can meet regularly to discuss and learn about the commodity markets.
"They're going to have to do that to survive," said Howard C. Roe, senior vice president at $45 million-asset First National.
Still, some banks feel that hedging has its speculative side, and they won't participate in anything that even has the appearance of that kind of risk. Hedging can get risky if a farmer doesn't use projections of what his crop yield might be and instead tries to make money on crops he doesn't expect to harvest.
Mr. Palmer, the Arkansas farmer, said he doesn't expect local banks to offer him loans, especially if he intends to use them to hedge the price of his crops.
"Your local banks don't deal with risky accounts," he said.
However, Gregory J. Luehmann said his farm customers typically take money for hedging out of their crop loans.
"Anymore, it's just a regular expense," said Mr. Luehmann, executive vice president of First Security State Bank, Charleston, Mo. "I think a lot of banks are getting more familiar with it. They're seeing the importance of hedging and marketing services."
But Mr. Luehmann said First Security, which does 50% of its lending to agriculture, is only comfortable if a farmer is making what he calls a true hedge. He'll make the loan "as long as they don't get out there and start speculating," he said.
By speculating, Mr. Luehmann said, he means a farmer's gambling on what he doesn't have, for example, if the farmer has only 600 acres to plant but hedges as if he has 1,000.
But he said First Security's role is to help the farmer succeed.
"I think it helps my farmers overall," he said. "The way we look at it, anything good for the farmer is good for the bank."