It has been four decades since the last full blown farm crisis in the 1980s. The combination of interest rate increases, high debt levels, price collapses due to global markets, and inflation brought a major depression to the farm and rural sector in the 1980s.

In recent banking and lending seminars, I have been asking attendees to stand up if they were making farm loans in the 1980s. Usually, between three and five people in an audience of 50 to 150 participants will rise. Within five years, this institutional memory will most likely be out the door enjoying retirement.

Given this perspective, what financial risks exist in today's agriculture industry? Let's examine a few of the risks that can deteriorate the individual and overall portfolio financials.

Fraudulent activities and actions

Fraudulent activities are alive and well in today's fast paced world. The term ghost collateral describes when the collateral on the balance sheet, such as crop and livestock inventory, do not reconcile when inspections are made. Another example of fraudulent activity are monies that are committed to loans and bank deposits suddenly lacking a paper trail.

Credit card debt may suddenly appear without the knowledge of the spouse or partner with the lender awkwardly delivering the news. The account manager or the chief financial officer (CFO) may sell inventory, collect receivables, and deposit the monies into a special account for their benefit. These are just a few of the activities that are becoming more prevalent, particularly for larger businesses in growth mode.

Expect lenders and oversight institutions to conduct more inspections and require documentation in reconciling and balancing accounts.

Third-party counterparty risk

As the agriculture industry consolidates, many businesses are linked on the price and input side to other businesses. A recent example are the losses in the hog industry that have resulted in some producers with no markets.

Whether it is grain, milk, poultry, beef, or other commodities, this has historically happened across the board in agriculture. Third-party counterparty risk will continue to become a much larger risk to the individual producer, agribusiness, and lender. Due diligence must be conducted concerning the overall risk.

In one case years ago, an agribusiness filed bankruptcy that led to an $80 million loss to the lender but also influenced another $40 million of the loan portfolio that represented a number of other producers.

Concentration can be dangerous, particularly in a world of extreme volatility created by geopolitics, weather, and military actions that can influence the economic fate of big companies that are connected to smaller entities.

Stay tuned for the next article where we will discuss more risks to today’s agriculture industry.

The opinions of David Kohl are not necessarily those of cornsoybeandigest.com or Farm Progress.