Then & Now – Rural Banking

Banking in an agricultural community has always been a difficult business. Bankers are essential to the financial health of agriculture. But when times go bad and bankers have to foreclose on loans, farmers are forced out of business. Bankers become the personification of evil.

That's what happened during the boom and bust cycle of the 1970s and 1980s. In 1972, the Soviet Union unexpectedly bought up one-sixth of the entire U.S wheat crop. A surplus of wheat on the market quickly became a scarcity, and the price jumped. The next year, the Soviets again made secret purchases of grain. President Gerald Ford halted further shipments of grain to the USSR, and for the next five years the government regulated agricultural exports.

Farmers saw their prices rise, so they borrowed more money, bought more land and planted "fencerow to fencerow." Prices were up, land values were up and everyone thought the situation would continue.

Banker Kelly Holthus (in the video) says that what happened next changed the business of banking. "The bankers were doing what we 'collateral lending.' If you have a piece of ground and it was worth X number of dollars, we'd loan you 60 percent and let you buy another piece of ground." The value of the loan was supported by the value of the land.

But in 1979, the Russians invaded Afghanistan. The U.S. embargoed shipments of grain to the USSR. Other countries decided they couldn't rely on U.S. suppliers. Because of that and other factors, the export market collapsed, and prices collapsed. Farm land prices declined, as well, and many farmers found themselves unable to pay off the mortgages.

"We didn't look at cash flow, then," Holthus says. "All of a sudden, when the cash flow stopped, they couldn't make their payments. Nobody could make their payments."

Now, bankers go through the year's expected expenses and income. If the farmer can reasonably expect to make enough to pay that year's loan payment, the loan is approved.

"We've had some tough years here in the last two or three years," Holthus says. "But the value of land has stayed up because most financial institutions are doing cash flow lending."