Banks Teaching Farmers the Value of Risk Management

By Lutton, Laura Pavlenko | American Banker, June 8, 1999 | Go to article overview

Banks Teaching Farmers the Value of Risk Management


Lutton, Laura Pavlenko, American Banker


With the downturn in the farm economy headed into its second year, community bank boardrooms are turning into classrooms as bankers try to help farmers weather the storm.

Many bankers are hosting seminars on forward-pricing techniques and crop insurance policies, to teach farmers to be better business managers.

"We're trying to do everything we can to help our customers," says Terry J. Jorde, chief executive officer of Country Bank U.S.A. in Cando, N.D.

With weak export demands from Asia holding commodity prices low and U.S. government aid to farmers set to run out by 2003, farmers are under increasing pressure to improve their management skills.

Many farmers find it difficult to generate enough income to support their families and pay off their loans in the current environment.

Producers can guarantee some income by forward pricing their crops or by buying insurance policies that protect against natural disasters and low prices.

"Everybody should look at hedging," says Stephen R. Koontz, assistant professor at Colorado State University. "It's empowering because it gives you control over something you had no control over before."

Yet many farmers who have normally sold their commodities at harvest or slaughter at the market price find that new risk management techniques can be intimidating. Still, bankers agree that farmers' survival may depend on whether they learn to hedge their business risk well.

"If the producer isn't doing that within three to five years, he won't be here," says Dale Schnee, president of First National Bank of Otis, Colo.

Bankers who want to help improve their farmers' risk management skills should start by getting familiar with the products themselves.

"You need to know how this works first," Mr. Koontz told a group of bankers at a risk-management seminar held this spring in Colorado Springs, Colo. "You can do a lot to spread your risk by learning the basics."

Local cooperative extensions, a part of the land-grant university system, often have educators on staff who can teach farmers and bankers how to hedge against low prices by using futures and options contracts.

Those contracts, which trade on national exchanges such as the Chicago Board of Trade, allow farmers to lock in prices for their commodities months before they sell them.

Extension service personnel have been teaching risk management classes at Citizens State Bank of Loyal, Wis., which lends almost exclusively to dairy producers.

Dairy farmers, who recently lost federal government price supports, are learning to hedge their price risk for the first time. To help producers along, the U.S. Department of Agriculture is sponsoring an educational pilot program where the government foots the bill for 80% of dairy farmers' futures and options contracts.

Citizens, which is in a county where the forward-pricing pilot program is offered, encouraged its borrowers to sign up and then hosted classes taught by extension personnel to explain how it works.

"I would like the bigger producers to take a look at forward pricing," says Gary Weirach, president of the $68 million-asset bank. "With an 80% guarantee, it's hard to go wrong."

Banks can also ask brokers who sell futures and options contracts to teach farmers how to hedge.

First National of Otis invites local brokers to give classes at the bank each winter - the season when most farmers do their business planning. The bank asks husbands and wives to attend the classes together so both understand how forward pricing works. Then one spouse - often the wife - carries out the risk management plan.

Other bankers, however, prefer that their farm borrowers do some group learning before they start forward pricing their crops on their own. …

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