The Most Important Factor Impacting Agriculture And Ag Lending
At the last ECI Agricultural Lending Technology conference, one of the attendees asked, “What is the most important factor impacting agriculture and ag lending?” Let’s examine this from the perspective of an agricultural producer’s financial statements. Concerning the balance sheet, the number one factor would be the value of land. Ag lenders need to do an earned net worth analysis. In recent years, what percent has come from appreciated vs. earned net worth? My best estimate would be at least 75 percent appreciated net worth vs. earned net worth, which has given both producers and lenders a false sense of security.
From the income statement, the most important factor has been rising input costs, in many cases at twice the rate of inflation, while margins are being compressed by global competition. Many producers truly don’t know their bottom line because accrual adjustments in investments, prepaid expenses and payables have been ignored in their analysis. This has not been a problem in recent years because losses have been capitalized through a refinancing strategy; however, times are changing.
Cash flow has been impacted by increases in living and management withdrawals combined with compressed margins. A statement of cash flows that examines operating, investing, financing and withdrawals is critical in these challenging economic times.
As credit scoring and quick processes to assess risk heat up, due diligence in analysis is imperative, particularly on large commercial agricultural operations.
The Road Warrior of Agriculture
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Editors' note: Dave Kohl, The Corn and Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups.
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