INDIANOLA, Iowa (DTN) -- Iowa farmer Chris Barron was in high school in the mid-1980s when he watched his parents scramble to find a new lender. "They thought we had a solid foundation of credit with a lender who understood agriculture, but they got the rug pulled out from under them," he said. In today's highly volatile markets, part of Barron's risk management strategy is to have a banker "on the bench" in case he needs him.

"I don't want to be searching for a lender under pressure," added Barron, a Rowley, Iowa, corn/soybean producer and independent business consultant. "If your bank gets bought out, or things occur beyond your control -- if the dynamics of your lender change -- you need a back-up plan," Barron noted. "And finding a banker that suits your needs takes due diligence."

Moe Russell, a farm financial consultant in Panora, Iowa, concurred: "I think the biggest problem for farmers and ranchers in the years ahead is finding a lender who is knowledgeable in production agriculture and has adequate resources to meet the high capital requirements of agricultural producers. The cost of production for corn and soybeans has doubled in just the past four years."

Bumping up against his local bank's credit limit spurred cattle feeder and row-crop producer Russ Keast to find a new lender. During 2008's financial panic, some lenders severed their loan participation with community banks when New York financial markets froze. Producers like Keast were part of the fallout.

"My lender didn't force me to leave, but in 2008, I went from being one of the biggest and best customers of my local bank with two over-line loans to a potential 'risky' customer with no over-lines and a red flag to my bank's regulators -- and I hadn't changed my business one bit," the Henderson, Iowa, producer said. (An over-line is a loan amount in excess of a financial institution's legal lending limit to any one borrower in which the bank enlists the services of another lender to participate in the loan.)

Whether you need a new bank immediately or not, Russell recommends you start the search for a back-up lender now when most balance sheets look relatively healthy. You never know when you'll need to switch.

"When I was in farm lending, I had a customer in Wyoming who was paying a commitment fee of $20,000 per year for a $5 million line of credit he never used," Russell said. "When I asked him why he was spending that kind of money for something he didn't use, he answered, 'Because if you tick me off, I know I can have you paid off by 5 o'clock this afternoon.'"

It takes time to find a new lender. "I spend about three to five days per year discussing my financials with other lenders," said Barron. "They understand if something changes in my operation and I make a change, they'll be the first in line and we'll already have a relationship. I also ask them what in my financials do they see to improve so that I'm a more attractive customer. I get good feedback," Barron explained. "In the meantime, I'm satisfied with my current lender and they know my loyalty is there, unless something changes."

Here's what experienced producers look for in a lender:

1. They've got to be big enough.

"We went from a small bank, to a mid-size bank and now we have a large bank that can offer an operating credit line up to $50 million -- which is way more than our operation needs, but I vowed never to have an over-line loan again," said Keast. "In the cattle feeding business, you burn up capital. One average pen of cattle can cost a quarter of a million dollars. If you have dozens of pens, you need a lot of capital."

2. They understand production agriculture.

"I want a lender who will add something to my management team," explained pork producer Dana Sleezer of Aurelia, Iowa. He hasn't switched from his hometown bank but he knows it's important to keep his options open and see what other lenders are out there.

"I want someone who understands the hog industry," Sleezer added. "I don't want to have to explain to my lender what our numbers mean and why. That's not adding to my management team."

Keast chose First National Bank of Omaha because of its experience and reputation in the cattle business. "Going with the bigger bank, we had to change our accounting reporting to a more sophisticated model. We hired a CPA part time. Now, we provide a 60-page monthly report; we watch our working capital like a hawk. And it has made me a better manager."

3. Their lending standards and expectations fit your operation.

Some lender expectations may be unrealistic for your operation. "One customer was surprised when his lender wanted him to zero out his account at the end of the year before renewing his operating loan," Russell reported. "Obviously, you need to do what's best for the market and not sell just to satisfy unique terms a lender may have," advised Russell.

4. They understand and respect hedge positions.

In a survey at last year's DTN-Progressive Farmer Ag Summit, only 45% of the 250 grain producers surveyed said that their lenders provided all the money they needed for hedging accounts. "You want a creative, aggressive -- but not too aggressive -- lender who understands a marketing plan and the need to hang on to true hedges," explained Barron. "As margins tighten in the next few years, it will be another test for farmer/lender relationships."

"When the markets go against your futures positions after, say, three limit-up days and everyone is nervous because your financial exposure is stretched, you want a lender who will stay with you, because as soon as you take your position off too early (locking in your futures losses), the market will change, and you'll lose both in the futures and the cash market," said Keast.

5. They can be flexible.

"I had a previous lender who would only lend a set amount based on the number of acres I farmed and would not help finance side enterprises, such as equipment sales which are an important part of our business," explained Keast. "If you have multiple side businesses, you want a lender who will be flexible."

"The complaint I hear about agricultural lending is that loan decisions in some of the larger institutions are not made by the credit officer but by a central committee that may not understand agriculture. That may be OK if you have a standard loan, but if a farmer is a round peg trying to fit into a square hole, it's hard to get adequate funding. Find out how flexible the lender can be with you," advised Russell.

How lenders handled pork and dairy loans when their industries collapsed may be a good indicator of how they will handle relationships when tighter margins eventually hit crop producers.

"Study the history of the bank," Russell said. "Production agriculture is cyclical. How have they worked with customers in the past, especially those under financial stress? It's important to ask those questions now. You want to be prepared for what's coming ahead."

Elizabeth Williams can be reached at elizabeth.williams@telventdtn.com

(MZT/BS/AG)

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