Many in the agricultural industry, particularly the grain sector, are still on the island of prosperity while the rest of the agricultural economy and general economy are circling the wagons. What are some lessons learned from the recent financial crisis that need to be heeded in the agricultural segment?
First, in the quest to improve the short-run bottom line profits and quickly grow credit portfolios, low documentation and no documentation loans were “en vogue” in the go-go days. These drive-by acceptances of credit performed well when the economy was humming and assets values were strong and headed north. How quickly stress cracks emerged in loan portfolios when the economy slowed and adversity surfaced in the marketplace.
If your lender requires more financial information and documentation this renewal season, it may serve you well in the long run. The days of drive-by loans with very loose underwriting and financial standards are quickly abating in the general economy and will disappear quickly in the ag sector. Loans with no documentation of earnings and cash flow were a financial bomb ready to explode. Cash flow and earnings with back up liquidity and collateral is necessary for a lender to remain with a customer in good times and bad. Isn’t it interesting how quickly credit dries up in times of adversity? Having the documentation and track record of business profits and cash flow is a critical step to handle possible adversity in the agricultural industry.
Editor’s note: Dave Kohl, Corn & 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. He can be reached at [email protected].