Road Warrior

Views of Risk From Your Lender’s Perspective

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Let’s go to the other side of the desk, or in today's world, the iPhone or the iPad, and view risk from the perspective of the institutions that lend you money. This perspective was drawn from a recent Farm Credit University Commercial Ag Lending class, which had participants from all across the nation.

One of the biggest risks lenders see is higher input cost, both variable and fixed. One lender was quoted saying we are now playing “triple jeopardy” and one slip-up by the farm manager could take a considerable amount of money off the balance sheet in the form of financial liquidity and equity.

Another risk discussed by the class was collateral risk as the result of the super cycle’s duration that has influenced land values through agricultural commodities, but also oil, mineral, gas, and other natural resource-based commodities. The worrisome matter is if and when the super cycle corrects, much wealth destruction with the decline of paper or appreciated assets could change balance sheet equity and ratios very quickly. More lenders are conducting scenario shock testing to asset values, particularly land, and are utilizing conservative advance rates on loans for land purchases.

Of course, interest rate risk was top of mind with this group of lenders. There is a small probability interest rates will decline. On the other hand, as one lender stated, when interest rates increase, they could increase rapidly and catch all of the businesses by surprise.

The biggest risk discussed by these lenders was concentration risk, or third party/counterparty risk. A considerable amount of farm debt is concentrated within large agricultural entities in a growth mode. If adversity should occur, this could have wide implications to their communities and those affiliated and dealing with these large agricultural entities. Closer scrutiny of these customers and their loan performance will be a high priority in the agricultural lending industry.

For example, a North American lender had loans outstanding with one of their grain and livestock customers of $6 million. However, due diligence conducted on all their business alliances, contracts, and partnerships with this customer found over $30 million in total exposure by the bank’s agricultural portfolio. The bottom line is if you are a larger ag customer, you are in the crosshairs for more intense scrutiny of your loans and those with which you conduct business.

 

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 sullylab@vt.edu.

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Dave Kohl is an ag economist specializing in business management and ag finance. He can be reached at sullylab@vt.edu.

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