Editor’s note: John and Heather are not providing legal advice. They are sharing what they have learned from their years as bankers working with farmers and ranchers. This spring, the ag press has been filled with breathless articles about the future direction of commodity prices.
“Wheat Hits 14-Year High” and “How High Can Corn Prices Go?” are two of our favorites. The sad fact is that a war in Europe has historically led to record prices for U.S. agricultural commodities, such as in 1914 and 1939.
While the situation in Europe is heartbreaking to witness, world events in the spring of 2022 have, at the same time, presented American farmers and ranchers with potentially historic selling opportunities. Nobody really knows how high these markets will go. Your bankers hope you seize these opportunities and maximize your income by selling commodities at the peak of the market instead of at the bottom.
As a progressive dairy farmer, you most likely have a good relationship with your ag banker. You recognize that having a strong relationship with a banker who is on your side willing to lend you money and provide you the financial services you need is critical to the overall success of your business.
Because we are in a period of rapidly rising prices, the optimism this creates can sometimes work against you. If milk is running $25 a hundredweight (cwt) right now, the thinking is that you should add more cows. If soybeans are at $14 a bushel on Wednesday, then surely they will be $15 by Friday, so wait until Friday or later to sell. Selling production in times like these can be difficult for many producers because nobody wants to “leave money on the table.” Decision-making gets harder the higher prices go.
Your banker is part of your support team and can be a great sounding board for ideas, a source of reliable information and at times someone who can help tether you to reality. However, when you contact your banker with questions about when to sell or how much to sell, they may seem hesitant to provide exactly what you are looking for: the answer. Your banker should not want to be in the driver’s seat of your operation when you are the one responsible for making management decisions. If you have a banker who wants to be the bus driver, change buses. Telling you when to sell a commodity, or how much to sell, isn’t their job and they can find themselves in legal jeopardy if they do tell you what to do. Good bankers have been trained to avoid situations like this.
During periods of rapidly rising commodity prices, the special relationship between a producer and their banker can become complex. In a perfect world, the ag banker provides the credit and other banking services to the customer, and the relationship is governed by signed loan agreements. Bankers are not supposed to participate in any way in the decision-making management of your operation.
So what goes wrong and when? Some bankers have fallen into the trap of assuming the driver’s seat and being accused later of causing the farm owner harm. For instance, having a banker tell a customer to sell soybeans at $14 a bushel, and then they go to $16 a few days later.
To help producers and bankers avoid some of these pitfalls, we suggest following a few rules of the road. (We are sure there are more rules, but these are ones we believe are the most important to observe.)
1. As a bank customer, you have the power to decide when to sell your production. If that sale does not occur in time to pay the bank’s loan when it is due, then it is reasonable for the banker to ask you how and when the loan will be repaid. While bankers do not have the right to tell you when to sell, they have every right to collect their loans as was agreed to when you borrowed the money.
2. Marketing plans are often developed as a required part of the credit application. Visit with your banker about any deviations to this plan and why the changes were made. The banker may point out that it is advisable to stick with the plan, and that the loan will need to be repaid. Without sounding like a broken record, getting repaid as agreed is your banker’s primary concern when it comes to managing their loans.
The bottom line is this: Bankers want you to be successful, but bankers don’t drive the bus. It is the producer’s responsibility to decide when and how to price and sell their production. It is the ag banker’s responsibility to collect the loan as agreed and in a timely, agreed-to manner. If you miss a great marketing opportunity but are still able to repay the loan, no harm and no foul. As a producer, you have the right to make good or bad decisions. Understand that your banker has the responsibility to evaluate future credit to you based on your performance, but it is not the banker’s responsibility to intervene to “save” you from making a bad decision.
If you don’t take advantage of the historic marketing opportunity and do not successfully repay the loan as agreed, then you and your ag banker will have to explore alternative repayment plans, additional collateral or liquidation of another asset in order to repay the loan. This can be a rough discussion, yet it is best to visit with your banker as soon as possible to find a reasonable solution. All relationships have rocky moments; the great ones survive and grow stronger.
