What are bankers thinking about these days?
While I recently taught the Rural and Agricultural Small Business Lending segment at the Graduate School of Banking at LSU, I had the opportunity to interact with both students and faculty and I found out what was top of mind in the banking world.
In the agricultural and rural sector, the red-hot real estate and commodity markets, particularly the grain sector, were of major concern. Many are concerned that the run-up in commodity prices is not sustainable, and long-term investment decisions and financial borrowing commitments are being made with rose-colored views of a new paradigm in farm profits. Many viewed the crop sector as potentially more risky than the livestock and poultry segments, which are experiencing margin compression because of flat prices and higher input costs. As one economist has stated, “If it grows too fast, it's a weed,” which he indicated could be representative of the red-hot grain sector.
Others were drawing wisdom from the subprime and real estate crash of the housing sector. More lenders and regulators are moving back to old-school lending practices. That is, carefully scrutinizing cash flows, profit and working capital, as well as collateral and overall strength of the balance sheet. The days of low documentation and little information are now becoming a pipe dream as many shore up lending underwriting standards. Maximum lending limits on farm real estate are being lowered to more conservative levels, and higher working capital thresholds are being built into loan covenants.
Lenders are wary of aggressive competitors in the agricultural field offering extremely low rates and lucrative lending terms just to get the business. As one lender stated, “Will these lenders who are building the business today with outside-the-box rates and terms still be around when the first crack of adversity strikes the agriculture industry?” How quickly borrowers and lenders forget the old lessons of sound banking.
PERSPECTIVES FROM YOUNG PRODUCERS
This summer in a young- and beginning-farmer/rancher institute, I put the junior generation on the spot. After a grumpy older producer gave his perspective that there is very little future in the agricultural industry, I let the younger folks counter him. Here are their perspectives.
First, agricultural businesses can be profitable if operated as a business with sound planning, strategy and execution.
Second, the younger generation indicated that this industry allows you to work with new technology and cutting-edge sustainable practices. You are a scientist, economist and entrepreneur, all wrapped into one.
Third, they stated that being their own boss allows them flexibility in scheduling and an opportunity to integrate family into the business. This presents opportunities for the younger generation to develop skills that are very valuable in life development.
Others felt that agricultural markets are wide open for market opportunity. You can focus on niche markets, commodities or the international market. Your imagination is the only limit.
Finally, I chimed in that agriculture is producing not only food and fiber, but also fuel and products for the life sciences and life experiences, which create unique opportunities for agricultural producers.
Regardless of the economic outlook, there is always someone out there using new and innovative ideas.
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].