Choosing the Right Agricultural Lender: Key Qualities to Consider

One of the most important teammates you’ll have in your farming or ranching operation is your bank, but what makes a good agriculture bank and lender?

Building and maintaining a strong relationship with your banker is critical in the ag industry, and there are specific characteristics you should look for in an ag lender. We know that this topic is especially important in today’s economy as we face quickly shifting markets and global events‡.

What to look for in a lender

Lenders have significant influence on the eventual financial outcomes for you and your family. And, their interactions with your farm can have long term effects – both good and bad. Since your lender and bank can have such a profound impact on your financial life, it’s wise to take a step back and simply research what makes a good agriculture bank and lender.

I am very appreciative of a few quotes that have framed much of my core lending philosophy. One of which is from the famed and revered Dr. David Kohl‡, a professor and ag lending expert. Dr. Kohl has often encouraged ag lenders to be “conservative in the good times, courageous in the tough times and consistent above all.” I couldn’t agree more.

Conservative in the good times

You may think it doesn’t matter what bank you work with when times are good, but as an adage states, “The worst loans are made in the best times.”

When times are great, it’s easy to believe they will roll on forever – a term some refer to as the “recency bias.” This is often when leverage is piled onto the balance sheet and payment obligations are taken to an unreasonable level. What makes a good agriculture bank is an institution that will keep you “rowing close to shore,” even when others might be straying far from it.

In the last great boom in production agriculture, the wise decision was to reduce leverage and pile up working capital in preparation for the next period of leaner times. A good banker encourages this kind of thinking – even if it results in lower loan totals for the lending institution.

Courageous in the tough times

The span of time from 2016 to 2020 was not easy for those of us working in the agriculture industry. While it is true that banks have undoubtedly had to make some adjustments during that period, many remained steadfast in support of their customer base. The last thing any producer wants is for their bank to pull back during the most challenging times. So, how can you help your bank be courageous in tough times?

It is critical that borrowers proactively address any issues the bank expresses concern about. Also, be quick to make sure that you are doing everything you can to make the bank confident in the security of their loans with you. This kind of working relationship – marked by strong communication and mutual respect – will result in both parties finding favorable outcomes.

Consistent above all

Many items on your worry list are simply outside of your control – timing, rainfall amounts, market price direction, weed resistance, death loss in your cattle operation, etc. Agriculture is inherently an inconsistent business. Therefore, it is prudent to remove uncertainty as much as possible in other facets of your operation.

A hallmark of what makes a good agriculture bank is consistency. In an up-and-down business like agriculture, it’s easy for cash flow performance and collateral values to move around significantly. Thus, when you consider your lender, it’s appropriate to ask how they handle the cyclicality of the industry, and why they feel they have strong staying power in the industry.

What makes a good agriculture bank? Conservatism. Courage. Consistency. These items are sure signs of being a great ag bank. As you consider the choice of who you will work with, I encourage and challenge you to find a lender who exhibits all three.

Interested in learning more about how to connect with UMB’s Agribusiness team? See what we mean when we say, we’re an ag bank for all seasons.