Following 5-6 years of consecutive cash flow shortfalls for many producers, ag lending standards are tightening across the Midwest.
That means more banks are doing more on-farm inspections verifying assets and collateral.
“It’s not that they don’t trust you, but it’s just good credit administration and underwriting. We kind of got away from that when times were good,” Lynn Paulson, Bell Bank’s director of agribusiness development, told producers and others in agribusiness who attended Bell’s recent ag symposium with Dr. David Kohl, one of the nation’s leading authorities on ag economics.
Unfortunately, fraud is alive and well in agriculture, Kohl told audiences.
“It’s happening with bigger agricultural producers with bigger concentrations of debt, so more lenders will be asking for proof and documentation,” he said.
The New Normal
When times were good and crop prices soared during the super-cycle years of 2006-2012, Paulson said 60% of producers did well, 30% did okay and 10% struggled. Now the numbers have flipped somewhat, with 10% doing well, 60% doing okay and 30% experiencing significant financial stress.
“I would say we’re back into the old normal – the way things were before 2006,” Paulson remarked. “We just haven’t figured out how to adapt and adjust to the current environment.”
The best way to adapt is to follow what Kohl calls the 4 pillars of management: plan, strategize, execute and monitor. Both Kohl and Paulson emphasized the importance of spending as much time and energy on financials and marketing as on production.
“The main difference between the top 20% and bottom 20% of producers is their amount of working capital and operating efficiency ratio,” Paulson pointed out. “Hope is not a marketing plan. It’s not enough to hope the markets go up.”
In fact, Kohl said barring a major weather event, it’s unlikely commodity prices will rebound.
Kohl stressed the importance of making sure all assets – including human assets – are fully employed, calling it the “bird poop principle.”
“If you have equipment that has a lot of bird poop on it, it’s not being used efficiently,” Kohl affirmed.
Then and Now
Many compare the 1980s – the last major downturn in the ag economy – with the struggles producers face today.
“The 1980s took out average and below average production managers,” Kohl noted. “This cycle is taking out average and below average business managers.”
The main differences between then and now are today’s lower interest rates and higher land values.
“The only thing that’s keeping us from a full-fledged crisis is land values have stayed up,” Kohl remarked. “The balance sheet’s holding us up right now, but I’ll be candid with you. Land is 83% of the balance sheet.”
Among those at most risk are young producers who don’t have much family help. Paulson still said he would recommend starting in farming today, but farmers have to know what they’re getting into.
“They should start on a small scale, and they need another income source, maybe a side business,” he remarked. “They can’t expect instant gratification, and they need to be willing to make significant sacrifices for the farm. You’re not going to be a big dog right out of the gate. It’s also important to find the right partners.”
For young farmers planning to work on a family operation, Kohl recommended learning a skill they can bring back to the farm and reviewing the financials, including 3-year trends, an assessment of assets, and plans for what their parents are going to live on in retirement.
“The kiss of death in a lot of farm businesses is they don’t get the younger generation involved in the numbers,” Kohl announced.
Those who are seriously struggling may need to consider an exit strategy that includes:
Paying income taxes
Paulson asserted that getting out before you’re forced out is not failure – it’s a good business decision.
“What keeps me awake at night is the stress of having difficult and honest conversations with good folks,” Paulson commented. “But we all need to think from the head and not the heart. I don’t know of a single lender who got into ag lending with the goal of putting farmers out of business. And I don’t know of a single farmer who wanted their business to end with a liquidation.”
Going forward, Kohl noted, “You will see more change in agriculture in the next 10 years than we’ve seen in the last 70 years. The consumer and technology are going to change it.”
It’s important to be up-to-date on those changes, Kohl noted, and to remember that consumers want transparency, personalization, customization and an experience.
“Successful producers keep educated and informed and sweat the small stuff,” Paulson said. “Adversity for some is opportunity for others. For those who can make the adjustments needed to remain viable, there likely will be future opportunities for success.”