The blueberry crop grown in California this year is expected to exceed 30 million pounds, enough to make the state the No. 5 producer in the country. Not bad, considering that 15 years ago the only blueberries to be found in the Golden State were in grocery stores.

Why California has had such a blueberry boom is seeded in the expansion efforts of grape, nut, citrus and other niche farmers looking to add a second or third crop to their operations. Behind this drive to diversify are the state's agricultural banks, which have grown increasingly wary of farmers who focus on a single commodity (or put all their eggs in one basket, so to speak).

"One thing we look for in a business, and what we get most concerned about, is concentration of crops and concentration of buyers for that crop," says Curt Covington, a Fresno-based senior vice president and agricultural risk manager for the $61 billion-asset Bank of the West in San Francisco. Many of the crops grown in California aren't insurable, says Covington. So if weather destroys a crop or prices collapse, a famer's entire income is at risk, he says, "and the money we lend is all at risk."

This diversification trend—for which California serves as the "bellwether," according to Covington—is gaining traction in other areas of the country too. Generally the farmers are looking to hedge against the volatility of commodities markets or to move away from crops with fading prospects.

Many tobacco farmers in the Mid-Atlantic states, for instance, have added new crops with the help of co-op extension education often sponsored by ag banks. Using $9.4 billion in federal grant payouts they've been receiving following the end of government price support programs in 2004, the tobacco farmers also have been able to expand into areas as varied as producing biofuels or goat meat for ethnic food markets, says Gene Copenhaver, vice president and regional ag credit supervisor for the $1.1 billion-asset First Bank and Trust Co., a top ag lender in Lebanon, Va.

Once farmers diversify, banks often require them to adopt new accounting methods too.

The cash-based accounting used by 90 percent of all U.S. farmers is proving unsuitable for large farms with a blend of different harvests and livestock, according to John Blanchfield, an executive with the American Bankers Association's Center for Agricultural and Rural Banking.

Farmers accustomed to simple, daily balancing of income and expenses don't get insight into long-term performance issues. They also can't construct the three- to four-year capital plan that's needed to finance a multimillion-dollar operation.

First Bank, Bank of the West and other ag lenders now have farmers adopt corporate accrual accounting methods to include year-to-year analysis of expenses and projectable revenue—which these banks need to rate the risk in their own portfolios.

"It's not uncommon for our bank to make that a condition of borrowing," says Bank of the West's Covington. "We want a higher quality, more reliable and consistently prepared set of financials."

The banks' need for better records comes partly from their own compliance edicts, but they also recognize that they need to help farmers getting into new, unfamiliar operations.

"Initially you can spread the risk" of growing new crops or expanding livestock across years of investments, says Robert Craven, extension economist and director for the Center for Farm Business Analysis at the University of Minnesota. "But you increase the overall total risk in the short-term because you're doing something you haven't done before."

As the farmers adjust, banks become more like business advisers than mere lenders, Craven says. "I think the biggest challenge for banks is getting producers to think like managers."

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