A precipitous drop in the number of commercial banks means fewer lenders understand agriculture. And that spells trouble for farmers, according to Alan Hoskins, president and CEO of American Farm Mortgage Co.

“Banking and the decision-making associated with terms of credit now falls into the hands of fewer people that understand agriculture,” says Hoskins. “So we have people that are in charge of institutions that don't understand the cyclical nature of agriculture, and how it affects finance and loan availability.”

He says the number of commercial banks in the U.S. has dropped from 7,900 to 4,900 since 2002. This trend is expected to continue: by 2022, he predicts that just 2,000 commercial banks will remain.

That's a 38% decrease over 16 years. Most of this decline — the result of multiple mergers and acquisitions — comes from small banks with assets under $50 million.

“It seems somewhat intuitive that, at a minimum, there are going to be more questions that are going to have to be answered,” says Hoskins. “And if you have people in charge of an institution that don't understand agriculture, certainly finance and availability can fluctuate based on that.”

Hoskins sees trouble down the road.

“From a community banking standpoint, I will tell you there is major concern within our industry,” he says. “Because your customers as a whole are getting bigger and bigger and they're getting more complex. Because what is involved in operating a farm today and understanding the risk those people face, is going to be a whole lot more important.

“Agriculture knowledge is a must. This is going to be a major challenge in banking.”

He adds that the number two asset on farm balance sheets is machinery and equipment, and in some instances machinery is number one. Dealers are already seeing the effects on farmers now facing pressure from banks in the form of fewer equipment sales.

“I will tell you that the value of machinery and equipment is a huge component of equity in many cases today with farms,” says Hoskins. “I will also tell you the banking industry is not nearly as knowledgeable about equipment as they need to be.

“In the 1980s, the banking industry involved in agriculture had a pretty darn good knowledge as a whole of agriculture,” says Hoskins. “Now we're starting to see banks that have a pretty good knowledge of finances, but they don't understand agriculture at all.

“One of the things that is happening today that's positive, as I talk to producers, is they are looking today much more at their management styles and their management practices. And they're starting to really make decisions about whether it's good if they change.”

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