A Lender’s Eye View of the Ag Economy

A corn, grain, and currency.

August 22, 2019

The following is from a blog post by Dr. Dave Kohl, Professor Emeritus, Virginia Tech University, as it appeared in Corn & Soybean Digest.

My summers are often spent teaching three-day or week-long classes to agricultural lenders with varying degrees of experience. The opportunity to interact and engage with lenders at these various schools provides a unique perspective of the lender’s view of the agricultural economy.

At three different schools, agricultural lenders completed surveys with various questions to provide insight concerning their loan portfolios. Approximately 40 percent of their customers are generating negative profit and cash flow.

Interestingly, the surveys indicate that the prevalence of negative profits and cash flows is about 15 percent higher in the Midwest compared to the coastal agricultural economies. When examining the data among industry segments, the incidence of negative profit and cash flow was the worst in the dairy industry.

The proof is in the pudding concerning net worth losses on the balance sheet in the last three years. In many cases, up to 50 percent of the agriculture portfolio has experienced losses in earned net worth. Again, the losses are most prevalent in the Midwest with the dairy industry leading the way. Many of these operating losses are being cushioned by the strategy of refinancing or restructuring debt. Where and when appropriate, operating losses have been termed out over 10 to 20 years using existing equity.

It was interesting that of the lenders surveyed, up to 40 percent of their customers were in a gradual expansion mode. The keywords are gradual, slow, and incremental!

The following are some additional perspectives from the lenders.

  • Nontraditional lenders that are not regulated are providing more operating monies. Some fear that the new, nontraditional lender offering up to $200,000 of credit over the internet with minimal information and documentation may be a problem in the future.
  • Some lenders are finding more customers engaged in off-farm jobs for health benefits, fringe benefits, and a little extra cash flow.
  • Others are concerned that the government payments in recent months, while really boosting the bottom line for some, may create complacency and some customers may assume that it is going to be recurring. Remember, the government can give, and the government can take it away!

Finally, agricultural lenders are very concerned at the loss of expertise in recent years. A strong stock market and a financially stressed agriculture industry are a combination for accelerated exit by agricultural lenders.


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