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A lender's view of risk

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What could lead to poor decisions on your farm?

Six decades of working with agriculture lenders has been very rewarding, with many being former students in a university or lending school environment, or both. Now, some of the more senior level individuals are in the role of educator at schools, on webcasts, and as speakers at various conferences. In a recent webcast, it was enjoyable listening to two lenders, one a banker and the other a Farm Credit employee, who worked side-by-side discussing perspectives on the new risks in agriculture lending. This view from the other side of the desk may be useful as you work with your agricultural lender.

New risk

Human resource risk has become a bigger factor as more zeros and commas are being observed on the financial statements of larger, more complex operations. Employee management and overall business management can have a tremendous impact on operational efficiencies. While both lenders admitted that there is no magic ratio or formula, a gut feeling for the work culture of a business can be verified by bottom line results.

Recency bias

Another risk mentioned was recency bias, which subconsciously gives greater importance to more recent events over historic ones. This risk can result in a recent adverse or positive event causing irrational decision-making. For example, the recent run-up in grain prices caused by China rebuilding its protein sector and stockpiling commodities, the devaluation of the dollar, and weather challenges have brought prosperity that may lead to poor decisions. The risk is whether producers make long-term decisions based on non-recurring income, which can result in financial adversity if economic conditions are not sustained.

Speed

The speed of change is now a major risk in the lending equation. Financials must be monitored monthly or quarterly, rather than once a year. A good cash flow projection with financial sensitivity shocks of prices, costs, and production can provide the parameters to keep one out of the financial ditch. The speed of volatility, in both positive and negative directions, has been observed as a result of supply and marketing chain disruptions, trade negotiations, and shifts in consumer and societal preferences.

Around the corner

Recently, there has been much debate focused on inflation. According to the Federal Reserve, the inflation rate is low overall. However, some segments and industries such as agriculture are in the crosshairs. Feed, fertilizer, machinery, and cash rent increases are just a few of the risks that are driving bottom lines.

The next time you meet with your agricultural lender, ask what their views are on the current and future risks in agricultural lending.

Source: Dr. David Kohlwhich is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. 

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