At a recent agricultural bankers school in Spearfish, SD, an agricultural lender expressed that his biggest challenge was maintaining discipline of sound lending procedures and practices during good times. What is he talking about?

Some lenders in these good times, particularly on the grain side of agriculture, are resorting to collateral lending. That is, if you have the collateral, particularly land, the credit is extended. In today’s environment with escalating land values it is easy for producers and agri-lenders to get caught in this trap. However, cash flow and earnings pay loans back.

Another practice agri-lenders are struggling with is a complete understanding of the farmer’s commodity marketing program, margin calls, input cost control strategy, and forecasting. Particularly worrisome is the practice of prepaying for the cost of 2009’s crop expense to the local agribusinesses to assure inputs. If these firms experience financial adversity, the prepayment could be in jeopardy affecting the borrowers’ bottom line. Denny Everson, who heads up First Dakota National Bank in Yankton, SD, recommends conducting sensitivity analysis as a proactive risk management strategy. With today’s software programs, sensitivity analysis can be done quickly and easily on earnings, cash flow, liquidity measured by working capital to expenses or revenue, equity, and collateral analysis. He suggests scenarios be laid out with possible strategies by both the producer and the agri-lender. I would also add to Denny’s comment by suggesting an open line of communications in these volatile times.