In the emotionally charged era of the economic downturn, interesting exchanges occur between lender and borrower.
At a recent agricultural bankers’ conference, one lender asked, “What do you say to a farmer that tells you, ‘It’s my net worth and if I want to lose $200,000 in equity it is mine, not yours.’” Well, in some cases, producers with high net worth may feel able to take the economic hit. However, there may be more to a comment like this that necessitates further examination.
As agricultural operations become larger, it is not uncommon to see losses six and seven figures long. While one year of losses this size may not result in bankruptcy or liquidation, these types of figures do raise concern amongst reviewers and regulators responsible for the soundness of our financial institutions. Additionally, these types of losses may result in higher interest rates as well as restricted loan terms.
Historically, a borrower could seek credit at another institution. However, even alternate sources have become more restrictive as a result of the same regulatory and oversight pressure for all lending institutions.
Another aspect to consider is the role equity plays for most farm operations. Often, equity is the 401(k), or the retirement account of agriculture. In this instance, I wonder if the partners and spouse of this producer agree with his assertion regarding equity loss. Repeated losses can mount quickly if corrective strategy and actions are not engaged.
In the 1980s, income losses compounded with asset value discounts drained equity from the farm balance sheets. This resulted in rapid financial instability and specifically, more liabilities than assets.
Finally, the producer’s statement above suggests a fair amount of denial, which is a common behavior early in the economic downturn. An emotional response is sometimes used as a mechanism to gain control.
Often, this type of response stems from the fact that the producer has already lost at least some amount of control and flexibility, and may be struggling under mounting losses.
In summary, helping a producer to see his or her financial situation more clearly is part of a lender’s job, which requires good information and patience. Otherwise, it may be too late. Recreational farming is a leisure pursuit. Farmers that want a sustainable, successful operation and legacy must farm for profit.
P.S. Note that the aforementioned $200,000 may be losses on the Schedule F. Often, an accrual adjusted income statement and earned net worth statement will show the losses amount to much more.