Choices and Options Down on the Farm: As Interest Rates Move Up and Commodity Prices Stay Low, Bankers' Use of the Secondary Market Is Evolving to Focus on Fixed-Rate Products

By Nixon, Brian | ABA Banking Journal, November-December 2017 | Go to article overview

Choices and Options Down on the Farm: As Interest Rates Move Up and Commodity Prices Stay Low, Bankers' Use of the Secondary Market Is Evolving to Focus on Fixed-Rate Products


Nixon, Brian, ABA Banking Journal


With interest rates expected to continue their way up--and with an overhanging risk of volatility--Northwest Financial Corporation President and CEO Jeff Plagge knew his agricultural customers would be looking for solutions.

"We really started looking at these interest rate cycles and saying, 'Shame on us if we don't have a good solution to recommend to our farmers who really need or want a fixed-rate funding mechanism,'" he says.

Like many ag banks around the nation, Northwest Financial's two banks--$1.5 billion Northwest Bank of Spencer and $240 million First National Bank of Creston, serving customers in Iowa and Nebraska--have seen ag customers experiencing some stresses on their cash flow as a result of low commodity prices. Providing an option to structure longer-term credit at fixed rates can help put producers in a better position to weather these challenging conditions in the ag economy, Plagge decided.

To meet these anticipated needs, Sharon Hotz--an ag and commercial lender based in Northwest Bank's Fort Dodge, Iowa, office--found an option in Farmer Mac's fixed-rate solutions. "What we've done here is create a centralized process to provide our ag bankers the resources available and to understand the Farmer Mac products," she says. "We work directly with Farmer Mac at the centralized desk for on boarding the information and underwriting the credit application."

"If we're going to restructure something in order to give them liquidity and working capital, this is an opportunity to give them a structure that really guarantees their interest rate for a long time," says Plagge, who served as ABA's chairman in 2013-14. "It allows them at least that option. We can sleep at night knowing that we gave them several options to consider."

The evolution of the secondary market

Curt Covington has seen both sides of what Farmer Mac can do for ag lenders and their producer clients as an ag banker, including a stint at Bank of the West, and more recently as Farmer Mac's SVP for agricultural finance. "During the 'golden age of agriculture' a few years back, banks needed us to help them keep up with the demands of their borrowers," he says. "Now banks are coming to us to help them mitigate some of their credit risk."

Working capital is the first defense against commodity price volatility. "However, you're starting to see working capital dwindle," he notes. "That's a looming problem, particularly for midwestern farmers, as we move into harvesting the 2017 crop and the 2018 loan renewal season." Excessive leverage is an additional concern, Covington adds--"and I am concerned about rising interest rates and the impact on the leverage on the balance sheet and ability to repay the debt."

Ed Coates, SVP and agricultural banking manager at NBT Bank, based in Norwich, N.Y., said his institution a quarter-century ago became one of the first banks to use Farmer Mac, particularly Farmer Mac II, which purchases the guaranteed portion of Farm Service Agency-guaranteed loans. "When it was initially started, we used the program from the standpoint of selling loans on the secondary market and then providing additional funding for the bank to re-loan funds back out," explains Coates, who recently became chairman of ABA's Agricultural and Rural Bankers Committee. …

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