Most agricultural lenders agree that the agriculture industry is doing quite well, of course, with a few exceptions. Strong working capital levels, as a result of years of profitability and lush cash government payments, have reduced the need for operating monies in some cases. Land is often purchased using cash and land values continue to appreciate on the balance sheet. What are some of the risks being observed that have the potential to raise their ugly heads in the near future?

Ghost collateral?

As discussed in the last article, more lenders are discussing fraudulent activities within the business and outside that impact the financial status of the operation. “Ghost collateral” is becoming a more common risk. One lender commented that 90,000 head of cattle were listed on the balance sheet, but the inspection found only 10,000 head. The other cattle were somewhere else. Fraudulent activities in both the grain and livestock sectors have been mentioned. In the days of loan approvals based on quick credit scores with minimal information, expect to see more fraudulent activities as a few people try to take advantage of the system. This will eventually lead to more inspections and due diligence on financial statements.

Marketing and risk management plans

This past summer and fall, some lenders have indicated that the current economic environment and uncertainty has resulted in fewer producers doing marketing and risk management plans and others not executing and monitoring plans. Leaving money on the table is often seen as a sin by agriculture producers. Not having a marketing and risk management plan has been covered up in the past by government checks, but in the future this practice may be exposed.

In recent years, due diligence on government stimulus checks has found some interesting stories such as a $1.5 million lake house, $500,000 used to purchase a travel trailer, and over $1 million spent on family living expenses and youth sporting events. With strong profitability and an influx of government stimulus, the finances of these operations may be able to absorb these expenditures, but are these types of expenditures and this standard of living sustainable?

Know your financial statements

We do not know what we do not know! In some situations, monitoring financial statements for tax and operating needs only once per year is leading to some surprises. Lenders are indicating that the finances can get out of control very quickly in a negative way throughout the year. This often results not only in financial issues but is a strain on mental health as well.

Transition management is in full gear. Since the pandemic, the senior generation is re-examining their priorities. Many are ready to quickly turn over the reins. In some cases, the next generation is reluctant to encumber the responsibility, accountability, human resource administration, and high level of financial management which can lead to a potential risk for the lender. In addition, spouses and partners may be creating issues if they do not want to take on the responsibility of larger debt levels.

In conclusion, it is not the 1980s again, but the risks and challenges are still very prevalent, even in the best of times.

To checkout the first part of Kohl's series, check it out here.

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