This summer I have been very active conducting ag banker and lender schools throughout our great nation. I have to admit: There are some less-than-stellar lending practices being discussed by attendees, particularly from the Midwest, that may be the foreteller of possible problems should the economic tide turn. The following are some of the informal conversations I have heard.
- My superior and CEO told me that if the net worth increases, make the loan. Wow, this sounds like the 1980s again! Granted, net worth change can be a variable to observe, but one needs to dig a little deeper. The change may have been due to the push of a computer key increasing land values. In contrast, was it earned net worth or retained earnings that caused net worth to increase? In this case, it was the former, which is a dangerous lending practice that is very pronounced in the Midwest.
- They always make their payment on the loan. While one cannot discount character and borrowers meeting their financial obligations, loans based solely on character often went south in the 1980s. With land values inflating and increased time pressures in lending to place loans on the books it is easy to fall into this trap.
- If you have the dirt as collateral, you cannot get hurt. Wow, people in Florida, Arizona and Nevada would laugh at this one! Collateral lending just based on asset or land values leaves both the lender and borrower vulnerable in deflationary periods or cycles of poor profits and cash flow. Be careful of this trap!
I will have more on this topic in the next edition.
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 firstname.lastname@example.org.