First Dakota National Bank in Yankton, S.D., is teaming up with Cargill Inc. to offer farm loans with a built-in hedge against swings in commodity prices.
After two and a half years of wrangling with the Office of the Comptroller of the Currency, the $526 million-asset bank got permission last month to launch its "Extra Cents" program with Cargill Risk Management, a unit of the Minneapolis agribusiness company.
The program ensures that loans made to farmers are repaid, even if the market price for the borrower's crops falls. The hedge brings no extra cost for the borrower, and because it reduces the loan's risk, First Dakota can charge a lower rate, said Denny Everson, its president of agribusiness.
Because the hedge is built into the loan, farmers do not need to negotiate a hedge contract themselves, Mr. Everson said. "We take the hedge position on their behalf."
He would not detail First Dakota's arrangement with Cargill, except to say the contract is confidential.
First Dakota is Cargill Risk Management's first bank partner, but Jeff Seeley, a vice president at the Cargill unit, said he is trying to sell the program to other farm banks. Cargill is taking on the market risk for First Dakota but does not interfere with the relationship with the borrower or take on any credit risk, he said.
"You can think of my group as a price insurance company," Mr. Seeley said.
John M. Blanchfield, the director of the American Bankers Association's Center for Agricultural and Rural Banking, said the program is an easy way for farmers to reduce an ever-present risk. Bankers have asked farmers to use hedges for years, but fewer than a third use the commodities markets to manage their price risks.
"Farmers cannot afford to be speculators, but they cannot afford to not hedge," he said.
Under the program, the farmer chooses a price level above the break-even point of production costs. When the loan matures, if the commodity's price is lower than the level the farmer chooses, First Dakota forgives part of the loan, and Cargill reimburses the bank that amount. If the commodity's price is higher, the borrower pays back more than the original principal, and the bank passes the excess proceeds on to Cargill.
"Pick a price, and if it goes up, you pay a little more, and if it goes down, you pay a little less," Mr. Everson said.
The program protects both First Dakota and its borrowers he said; the bank benefits because the entire loan gets repaid, whether the money comes from the farmer or from Cargill.
Interest in the program - from both banks and borrowers - will probably rise when markets are more volatile, Mr. Everson said.
