Regulators’ impact on ag lenders

Regulators’ impact on ag lenders

The great commodity super cycle is now unraveling and the economic reset is in place. The length and duration of the reset is unknown, but global economic forces, oil and the strong dollar, are major headwinds currently devaluing commodity prices. Globally, financial stress is growing. Areas of the oil industry are beset by massive layoffs, credit-rating firms downgraded some commodity companies due to falling profits, and the energy and natural resource industries are on the defense. 

As beneficiary of the great commodity super cycle, the agriculture industry now feels the weight of reduced economic expectations. The grain industry was the first to experience the impact of the reset, but now effects are expanding into the livestock sector including hogs, dairy, and those producers with animal feedlots. The wildcard in this economic reset will not be your lender, the agribusiness industry, or government response; it is the regulator. Yes, the regulators that oversee the economic and financial health of over 6,000 banks and approximately 75 Farm Credit Associations and others will determine a great deal of what is yet to come in this reset. Notably, these associations and institutions extend a large amount of credit to the agriculture industry.

Like many others in the industry, regulators are readying for headlines and stories of economic stress within various commodity groups. Their reaction to these headlines, however, will largely determine the ability of an individual producer or agribusiness to successfully obtain credit.

In general, many balance sheets of U.S. producers exhibit  strong equity. Still, much is locked up in non-liquid assets, such as land. The real impact of the regulator will be seen in your lender’s flexibility to extend operating credit. In other words, several factors, if present in a lender’s portfolio, could prompt a regulator to restrict or deny that lender’s ability to grant credit.  Such factors could be negative profit margins, insufficient debt coverage ratios, less than timely payments, or exceeding debt covenants, even if established during the more favorable economic times of the super cycle. In such cases, the lender’s flexibility may be removed and credit denied.   

Recently, one of my lending students in the online Farm Credit University course asked me, “Do you see stricter regulations on lenders impacting flexibility to make agriculture loans?” The answer is yes! As a producer, it is critical to get your financials and family living accounts in order and then, work closely with your agricultural lender to magnify your positive trends and build a strong case for obtaining credit. 

Remember, in defense of the regulators, they have an important role to preserve the safety and soundness of our financial system. Like agriculture, many industries are globally interconnected and play an integral role in economics. A disaster in one sector can easily and quickly trigger others with a waterfall effect, as we have seen. My major concern is an overreaction because the financial sector faces extreme change internally as well as economic volatility across the globe. In order to successfully obtain credit, good financials are your road map and vehicle. Be proactive in highlighting the trends in your business over time. Arm yourself with thorough, accurate, financial information and work with your lender to explain variances. Today, the old adage still applies, “the best defense is a good offense!” 

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