Well, I have not gone retro on you — having images of Bo Derek who was considered a perfect 10 in the movies. This article is about making yourself marketable to your agrilender.
Let's face the facts. The subprime lending crisis will ripple into agriculture. Expect more financial documentation and information requests. Agrilenders will tighten collateral requirements. One major lender in the Midwest has reduced the maximum loan on land from 80% to 60-65% of market value.
Agrilenders will require credit scores above 650. Check your credit report and obtain your scores. Check your reports for any errors and work with bureaus to make corrections. Seek out advice on how to raise your scores.
Updating financial statements with reasonable land values and other asset values will be another component of becoming a 10. Three years of tax records along with accurate accrual-adjusted income statements taking into account changes in prepayments, inventory, account receivables, account payables and other expenses will become a requirement in making sound management and financial decisions. Personal and family living expenses will be judged along with objective reasonable expansion and adjustments in the business.
Expect more field inspections and strict financial regulations going forward. Why all the hassle? Pragmatic and proactive agrilenders are attempting to get ahead of the curve in case of a downturn.
The past few weeks have resulted in treks through Nebraska, Kansas, Utah, Minnesota and Wainwright, Alberta. Everyone wants to have an update concerning the status of the U.S. economy.
First, the housing market is imploding on both coasts. Housing inventory is exceeding 10 months' supply. This trend appears only to be in the beginning stages, and there is an increasing probability it will result in long-term adjustments lasting multiple years.
Experts have failed to consider the demographic trends of home purchases. The next generation (Gen Xers,) doesn't want fancy homes and second homes.
In the next six months, observe jobless and unemployment rates. Should the rate increase to 5.5% or greater, the U.S. could be in for an old-fashioned recession starting on the coasts and moving toward the heartland.
The year 2007 will go down as a year of heavy turbulence from an economics perspective. Alan Greenspan's book, The Age Of Turbulence, develops a good subplot to the agriculture industry's short- and long-term future. Following are some of the interesting views from the road that encompassed my 230,000 air miles and 70,000 rental car miles on the back roads of agriculture this year.
Land values in northwest Iowa that were $3,000/acre are now trading north of $8,000/acre. The low value of the dollar is encouraging export markets and modest interest rates, and strong profits are being capitalized into land values. A change in any one of these variables will dampen expectations on the paper value of land.
With both fixed and variable input costs nearly doubling over the past three years, bottom-line margins are becoming more like the pre-boom era. A business that does not have a strong risk management program had better be prepared for severe economic shock concerning losses.
According to FinPak, the high 20% of producers generated a 14% rate of return on assets (ROA), while the low 20% generated -2.7% ROA. Some farmers and ranchers know how to strategize and execute, while others just don't get it.
People issues are becoming a major force facing most of agriculture. Knowing how to work with and through people will be one of the most important attributes of management success.
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].