While everyone has been discussing the impact of Wall Street on Main Street, let's go beyond that to the farm gate.
Many of you deal with community banks, the Farm Credit System, FSA and other financial institutions. Is your money safe and will they continue to loan money?
Many of the lenders involved in this crisis were shadow bankers, who are apart from the mainstream regulated lenders that must play by the rules. However, some banks have invested in financial instruments or made loans in areas facing a major correction of asset values. These institutions may face challenges.
Expect more paperwork and documentation to be required. Government unfortunately will attempt to step up oversight on all institutions, possibly under one regulation. Many of these oversight agencies may not have an understanding of agriculture and rural areas. Producers must make their lender better by providing the financial statements and detail necessary to tell the story to the oversight agencies.
Credit will become more scrutinized and possibly much more conservative — you had better know your five Cs of credit. Liquidity, cash and financial sensitivity testing will be very important in developing salable financial packages.
For producers in the grain enterprise who experienced red-hot markets and strong profits, watch for 2009 and 2010 margin compression because of increasing input costs. Another barometer to measure upcoming economic health will be the economic health of the Asian economies. Growth must be near 10% to maintain strong food and fuel demand.
The final word is that Wall Street will ripple to the far corners of the globe and to farm and rural communities. A proactive plan is your best remedy, but that may not stave off some economic damage.
Many in 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.
Next, if your lender requires more financial information and documentation this renewal season, it may serve you well in the long run. 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 are 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.
Dave Kohl, PhD., Corn & Soybean Digest trends editor, is professor emeritus at Virginia Tech. He's published four books and over 500 articles on financial and business topics. You can reach him at [email protected].