In the past few weeks my speaking engagements have transitioned from producers to ag lenders in the audiences. Lender conferences and training are in full gear as producers are now in the field and lenders are past renewal season. Let’s draw on some of the perspectives and insights being observed from the lenders’ side of the desk.
Transition in Gear
Lender audiences, as with producers, are in a demographic transition. Stops in Kearney, NE; York, PA; Pierre, SD; and College Station, TX find that your new lender is likely to be less than 40 years of age, and possibly a female or minority. Fewer will have farm and ranch backgrounds and agricultural majors than in the past, while some lenders will farm part time on the side. Experienced lenders, who are becoming few and far between, act as these young lenders’ mentors by passing on the wisdom of the 1980s farm crisis and other lessons learned thru the years.
Front Porch and Backroom Lender
Many lending organizations in agriculture have implemented the hunter- skinner approach. Some lenders are relationship managers, seeking business development, while the back office folks analyze the financial risk. With larger businesses, expect more financial documentation requirements, as the Dodd-Frank Act requires a higher degree of documentation for compliance. Some of the more progressive lenders are requiring the back office underwriters, who primarily analyze information, to make farm visits at least once a month with the relationship managers as a team approach. Be prepared to be patient and explain basic agricultural terminology, particularly to the back office people who may not have had much exposure to agriculture.
Interest Rates, Land Values, and Cash Flow
Interest rates, land values and cash flow are top of mind topics in the agricultural world. Expect ag lenders to financially shock test your cash flow statement for a 1%, 2% and 3% rise in variable interest rates. Lenders will be much more conservative now when lending against land values particularly in the red-hot land markets of the Midwest and the upper Midwest. Expect to invest more equity and cash in your growth and expansion projects. Cash flow backed up with liquidity or assets that can be turned to cash are the new areas of emphasis in agricultural lending analysis.
Many lenders are now documenting farm business transition plans as a section of their loan narrative, which is basically an executive summary write-up justifying why a loan should be made. Changing demographics, prevalence of divorce, and family business transition are potential business killers and are seen as major risks to repayment, similar to weather, global markets, marketing plans, and risk management.