Ag credit counselor, mediator say new lending rules hit hard
WATERTOWN, S.D. — Farmers and ranchers in the region are feeling tougher times, and many will wind up in financial mediation, some professionals say.
Jon Timothy "J.T." Korkow, of Northwest Financial Consulting of Volberg, Mont., is one of few freelance ag credit advocates in the region.
Korkow met with a reporter at a Watertown, S.D., restaurant after he'd gone through a consultation and mediation between a client and lender. The couple eventually sold cattle with the goal of keeping their farmland.
Korkow says some farmers who suffered low crop prices two years ago bought high-priced cattle to add value. They suffered a double whammy when cattle prices turned volatile and a triple whammy when the drought hit, and banking regulations are too stringent for the times.
"Out of the five-state area, eastern South Dakota seems to be the hardest hit with the recent economic downturn," Korkow says.
Korkow, 56, has clients in Montana, North Dakota, South Dakota, Minnesota and Wyoming. He's worked with more than 40 bankruptcies over the past 15 years. He charges a $500 retainer fee and then charges rate by the one-tenth of an hour — less than half of what lawyers charge, he says.
Right now he has 18 farm clients in the five-state area, with about a third in bankruptcy.
One of his jobs is opening the eyes of clients about what bank standards mean. Liquidity standards are 1.5 to 1, meaning "you have 150 percent of your current cash assets available (crop production or calf crop) to pay your current liabilities, the liabilities due within the next 30 days," he says.
Bank regulations tightened after the banking crisis in 2008 and 2009, with the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010, but Korkow believes that's only part of the story.
"I'm seeing an unwillingness of all of the banks to work through these credits within their own structure," Korkow says. "The banks are well-secured but they don't want to continue with these (farmers and ranchers) even when they've made adjustments in their cash flow."
Inside and out
Korkow knows ag lending inside and out. He grew up at Iroquois, S.D. As a high school student, he spent parts of summers with the custom-combining wheat harvest crew. He went to junior college in Oklahoma, where he met his ex-wife. In 1981, the couple moved back to Iroquois to lease his aunt and uncle's 800-acre diversified farm. In 1986, Korkow sold out the farm in the face of low grain prices and double-digit interest. (He got a surprise $225 check from the Farm Aid relief organization, which started in 1985.)
He went back to school in part with money from the payment-in-kind certificates from the government as it flushed Farmer-Owned Reserve grain out of on-farm storage. He completed an animal science degree from Panhandle State University at Goodwell, Okla. In 1988 took a job with the Farmers Home Administration (now the Farm Service Agency) and eventually became a county supervisor at Shelby, Mont.
In 2001, he left the FmHA to start his own consulting company. He did "safety and soundness" audits for a bank system at Bigfork, Mont. In 2004, he was hired as branch bank manager at Broadus, Mont.
In December 2009 Korkow took a job as a field representative for Rep. Dennis "Denny" Rehberg, R-Mont. Rehberg lost a U.S. Senate election bid in 2012, so Korkow went into cattle and commercial trucking. In 2016, Korkow saw a need and restarted the ag credit consulting business.
"There's a lot more zeroes behind the numbers now," Korkow says, reflecting on what's changed. Technology management is huge.
Korkow perceives that a new generation in input sales professionals — equipment, parts sales, fertilizer sales, insurance, and banking — have less consideration than they used to for customers trying to make a living on the land. Some even seem to "gouge their ag customers any way, any time they can," he says.
At the same time, today's lenders generally are more solvent than they were in the 1980s.
"They have a lot of cash because the cost of funds has been nil," he says. "They pay depositors ¾ of a percent (interest), and charge 6 to 7 percent on ag credit. Ridiculous," he says.
Bankers "will not commit to any longer term than five years on a full real estate secured loan, with the mindset the loan can either be re-written at a new interest rate, or the customer can be 'let go.'"
State rules differ
Korkow says mediation differs from state to state. In Montana, certified mediation service is inactive today, Korkow says.
Minnesota's Mandatory Farmer-Lender Mediation means that during a 90-day period, creditors in mediation may or may not collect on a debt. No creditor can start a proceeding to collect debt of $15,000 or more against a property unless the offer of mediation is extended, and if the farmer chooses, completed.
North Dakota has a voluntary program. Agriculture Commissioner Doug Goehring says his department's voluntary mediation program is seeing double or triple the traffic from 2016. Goehring says things are bound to come to a head by the fall.
South Dakota requires parties go through a financial mediation program before a lender can start foreclosure action on $50,000 or more. The financial mediation program is run the South Dakota Department of Agriculture.
Ron Frauenshuh, Jr. of Watertown, S.D., has been a contract ag mediator for the state of South Dakota for the past three years. A graduate of Concordia College in Moorhead, Minn., Frauenshuh has been an attorney in Minnesota and South Dakota and made much of his career in Milbank, S.D., where he also has been active in debate and baseball coaching.
Typically, Frauenshuh's service handles eight to 10 mediations during the busy season from February to September. Last year, they did up to 15 and this year, they're up to more than 30, and perhaps will hit 40.
Frauenshuh makes a point to say he takes no sides in the talks. Most times a compromise means short-term debt for equipment or operating and converts into longer-term mortgage debt. Quite often, troubled loans involved too much machinery, he says. The important thing is a "non-adversarial setting for parties to work through their disputes," he says.