By Alan Rosendahl
What could possibly be scarier than being a farmer who stakes his yearly income on getting the divine cooperation of Mother Nature? Being the banker who makes the loan to the farmer every year to take that risk.
In a year when both the Mississippi and Missouri rivers have left their banks and Iowans are sandbagging levees while the Southern Plains bake in drought, it’s not hard to understand the risks associated with farming.
Recognizing the inherent and yearly risk in agriculture and the need for the country to have a stable food supply, years ago Congress assembled a set of policies known as “farm safety net programs” to ensure that farmers weren’t knocked out of business because of bad weather or wild market fluctuations. The most important of those policies—and the one that serves agriculture the best—is crop insurance.
As a banker and a farmer, I can tell you first-hand that federal crop insurance is the only thing that makes it possible for us to loan money to small farmers here in Iowa. Banks, like other businesses, need to turn a profit to stay in business. But loaning money to small and beginning farmers can be very risky, because they often have less net worth, and tighter cash flows. Coupled with the fact that small banks are inherently risk-averse, particularly after the banking implosion of 2008, and you see the dilemma.
But federal crop insurance bridges the risk problem because the policy itself serves as the collateral that the farmer needs to secure the loan, lowering or eliminating the risk to the bank altogether and ensuring the loan is made. Crop insurance establishes the floor for the farmer under which he can fall no further, ensuring that although he is small, he will be here to farm yet another year, and perhaps, pass the family farm on to his or her children.
During my long career in the banking business, I have noticed that the most profitable and successful farmers carry the most crop insurance. Why is this? Because successful farmers must be good businessmen, and good businessmen manage their risks. And it’s precisely their ability to manage risks and ensure continuity of production that explains the abundance and affordability of the American food supply. Food is plentiful here in the U.S. because our system is working.
But it doesn’t stop there. A side benefit of crop insurance is that is also serves as a much needed capital lifeline for small towns and rural America. This happens because crop insurance policies establish a cash flow from the farmer to the bank, in what will be the first of many times those dollars change hands.
So how does this happen? The bank takes the money it brings in from farmers and invests it in the local community or makes the funds available as loans to others seeking growth or investment capital. In fact, I’d argue that these dollars turn over multiple times and have major rippling effects benefitting the vast majority of the residents of small towns throughout the Hawkeye state.
The beauty of crop insurance from the taxpayer’s point of view is that it is a public-private partnership where the public helps fund a portion of the premiums yet the bulk of the risk, and the costs associated with that risk, is shouldered by the private sector, not taxpayers.
Unfortunately, farm safety net programs, like other parts of the federal budget, are on the chopping block. That’s why it’s critical that Iowa’s congressional delegation ensures that agriculture is not forced to shoulder a disproportionate part of the burden. Despite its success, crop insurance has already sustained over $12 billion in cuts over the last three years. Any more cuts to the crop insurance delivery infrastructure could undermine the viability of the program, and its benefits to Iowa and all of rural America.
Thankfully, because of federal crop insurance, it’s not scary for banks to make loans to farmers. There are no federal policies that can eliminate all risks to farmers or anyone else. But there are policies, like federal crop insurance, that make risk manageable. And the fact that banks aren’t forced, year in and year out, to take a leap of faith when they make the loan to the small or large farmer is one of those little known facts that makes America’s agricultural abundance the talk of the world.
Alan Rosendahl is a Senior Vice President at Iowa State Bank and a farmer who resides in Kesley, Iowa.
This op-ed appeared in the Cedar Rapids Gazette on July 13, 2011.