Let’s go to the steamy South, to Baton Rouge, LA, home of Louisiana State University and Mike the Tiger who is housed under the football stadium. This was the setting for the 59th annual Graduate School of Banking with more than 600 lenders from 22 states and two foreign countries in attendance, and over 14,000 graduates over the years. While I taught the Rural and Agricultural Small Business Lending segment for my 19th year, I had the opportunity to interact with both students and faculty alike in classes, social hours, and, yes, even on the basketball courts. I found out what was top of mind in the banking world.
In the agricultural and rural sector, the red-hot real estate and commodity markets, particularly the grain sector, were of major concern. Many are concerned that the run-up in commodity prices is not sustainable, and long-term investment decisions and financial borrowing commitments are being made with rose-colored views of a new paradigm in farm profits. Many viewed the crop sector as potentially more risky than the livestock and poultry segments, which are experiencing margin compression because of flat prices and higher input costs. As one economist has stated, “If it grows too fast, it’s a weed” which he indicated could be representative of the red-hot grain sector.
Others were drawing wisdom from the sub-prime and real estate crash of the housing sector. More lenders and regulators are moving back to “old school” lending practices. That is, carefully scrutinizing cash flows, profit, and working capital, as well as collateral and overall strength of the balance sheet. The days of low documentation and little information are now becoming a pipe dream as many shore up lending underwriting standards. Maximum lending limits on farm real estate are being lowered to more conservative levels, and higher working capital thresholds are being built into loan covenants.
Lenders are wary of aggressive competitors in the agricultural field offering extremely low rates and lucrative lending terms just to get the business. As one lender stated, “Will these lenders who are building the business today with outside the box rates and terms still be around when the first crack of adversity strikes the agriculture industry?” How quickly borrowers and lenders forget the old lessons of sound banking.