Recently I was a presenter at the National Agriculture Bankers Conference in Omaha, NE. For 37 years, this has been an annual stop during my Road Warrior travels. This year’s conference had over 750 agriculture bankers and lenders in attendance; the largest event in the past 20 years. To put this in perspective, my first conference in Nashville, TN in 1978 had over 1,900 in attendance, with a peak of 2,100 in Dallas, TX in 1981 just before the farm crisis. Then the farm crisis came, and 500 were in attendance in Kansas City, MO the following year. The agriculture banking world certainly changed over that time period!
Now, on to the topic at hand that was discussed in the last column. There are certain characteristics of borrowers who will struggle at the end of the agricultural commodity super cycle. In the last column I discussed how high debt, living expenses, and misallocation of profits and liquidity to non-liquid assets and equipment purchases for tax reductions can cause trouble. Now let’s dig a little deeper.
Borrowers who won the cash rent lotteries during the economic good times may struggle. Many have cash rent obligations that do not pencil out. Some producers, particularly younger borrowers, who have agreed to land leases are struggling with whether to request landlords reduce their rent or risk losing the land for a number of years. Often these decisions amount to hundreds of thousands of dollars of possible margin losses which can quickly erode liquidity and equity off the balance sheet.
This problem not only affects young producers, but is a problem for the go-go producers who have been going full speed ahead in the good years without considering liquidity and backup positions. These situations are particularly troublesome to lenders as they represent debt concentration in the agriculture portfolio. This was a topic of discussion at the conference not only for lenders but also regulators that provide oversight.
Another group of strugglers that may surprise you are grain producers who have high equity and have built wealth through appreciated paper assets, specifically land, but have been marginally profitable. While strong in equity, these borrowers will be the first to face repayment issues and problems paying everyday expenses. Remember, cash flow with a liquidity backup pays expenses and loans, not equity in land, or other less liquid assets.
Another set of individuals that may struggle are young ag professionals and rural Main Street businesses. It was amazing how many young first-time attendee bankers were in the conference audience. Will they have the institutional memory and coaching to handle the downturn or will they overreact?
Likewise, rural America will feel the pinch, as I have observed out my Hertz rental car windshield. I see mounds of grain and inventory buildup on machinery dealership lots. I am also hearing of an overall increase in accounts receivable with agribusiness firms.