1. Agriculture and Ag Lending Perspectives and Trends
Dr. David M. Kohl
Professor Emeritus, Agricultural and Applied Economics
Member of Academic Hall of Fame, College of Agriculture & Life Sciences
Virginia Tech, Blacksburg, VA
(540) (Alicia Morris) | (540) (Angela Meadows) |
Macro Clinic Video Blog:
Road Warrior of Agriculture:
Ag Globe Trotter:
Dave’s GPS & Dashboard Indicators:
February 4, 2019

2. Views from the Road agriculture is in the 7th year of economic reset
low margins, high volatility
manage & manage around strategy
Business IQ will be a requirement

3. Economic Radar Screen international trade
USMCA
China’s Belt & Road Initiative
synchronized global economic slowdown
China- slowest growth rate in 28 years
Japan- negative growth rate
Germany – negative growth rate
Central Bank’s stimulus in China
high debt levels in urban real estate in China

4. North America’s Economic Power Block
28% of the global economy’s GDP
energy & oil
U.S. #1
Canada #6
Mexico #8
450+ million people
47% of Mexico’s population is under 25
ag trading partners:
Canada #1
Mexico #3

5. Lender Perspectives
many institutions have more reserves toward stressed credits “4 X Rule”
higher short term interest rates
larger number, more zeros and commas
increased consolidation, concentration risk
increase in vendor and non traditional lenders
agribusiness credit issues, third party counter party risk
emotional stress for producers/lenders
unpriced grain/livestock in inventory

6. Producer Cost Concerns
interest rate increase impacting cost of production
family living expenses leveling off- too many generations of people living out of the business
off farm employment and health benefits
working capital- now into equity
bottom third of accounts need accrual adjustments- how quick are they to cash?

7. Drivers of Change on Land Values
interest rates
investor funds
refinancing cycle
baby boomer farmer
relatives who inherit land
supply and demand of commodities

8. U.S. Economy Watch real estate Federal Reserve interest rates
fixers and flippers
LA/Bay area
Federal Reserve interest rates
2 increases/1 decrease
stock market
other

9. Top Five Economic Indicators
Growth
Neutral
Recession
LEI/Diffusion Index
Positive
Flat/Decline
Decline 0.3% for 3 consecutive months AND >1% overall
Consumer Sentiment
>90
80-90
<80
Housing Starts
1.5 Million
Million
<1.0 Million
PMI
>50
<41.7
Stock Market
10% increase
Flat
>30% decrease

10. Yield Curves and Recessions
Source: Federal Reserve

11. Is the New Normal the Old Normal?
Time Period
Approximate
Net Farm Income
In Constant Dollars
Era Name
$35,000
Agricultural Economic Reset
$50,000
Asian Tigers Boost Commodity Demand
$54,000
Pre Agricultural Super Cycle
$125,000
Agricultural Commodity Super Cycle
Source:

12. Median Net Farm Income

13. Mega Trends 2008-2018: Technology & Production
Metric Tons Increase Since til 2018
Country
Corn
(Percent Change)
Soybeans
U.S.
21%
55%
China
48%
1.1%
Brazil
85%
108%
Argentina
174%
73%
Canada
36%
125%
Europe
-9%
Paraguay
168%
Source: Kirksville, MO presentation - University of Missouri

14. Net Farm Income, 2017

15. Why Some Businesses Are More Profitable Than Others
These businesses are a “little” better at:
production
marketing
cost control
asset and capital efficiency
utilize the 5% Rule

16. Business IQ: Management Factors Critical Questions for Crucial Conversations
Customer Checklist
Green (3-4 points*)
Yellow (2 points)
Red (1 point)
Knows cost of production
Written
In head
No idea
Knows cost of production by enterprise
Goals- business, family & personal
Record keeping system
Accrual
Schedule F (one & done)
Projected cash flow
Sensitivity analysis
Understand financial ratios, break evens
Work with advisory team and lender
Yes
Sometimes
Never
Marketing plan written and executed
Risk management plan executed
Modest lifestyle habits, family living budget
Non existent
Written plan for improvement executed & strong people management
Transition plan/Business Owner plan
Working on plan
Non existent/controversy
Educational seminars/courses
Never attend
Attitude
Proactive
Reactive
Indifferent
*Extra Points:
Progressive Business may receive 4 points for #2,6,7,8,14
Struggling Business attempting turnaround may receive 4 points for #3,5,8,11,12
Score
Overall Analysis
35-50
Strong management rating & viability
20-34
Moderate risk & viability; will most likely show previous refinancing
<20
High risk & lack of long term viability

17. Character Counts Critical Questions & Observations for Customers
Customer Checklist
Yes No
Are they honest, ethical & trustworthy?
Do they report all assets & liabilities accurately?
Do they use borrowed funds as agreed upon?
Have they managed through adversity?
Have they followed through on educational opportunities?
Have they saved for lifestyle pursuits & balance with business growth?
Have they had minimal surprise purchases & not obtaining credit after the fact?
Have they used profits and windfalls properly for cashflow?
Have they been willing to work with advisory team?
Have they considered coaching and constructive advice?
Totals
Total Yes
Character Assessment
8-10 Yes Answers
Strong
4-7 Yes Answers
Fair
<4 Yes Answers
Weak

18. Trouble Shooting Matrix
Insufficient Repayment Capacity
Cut Business Cost
Reduce Four Largest Expenses: Crop, Feed, Labor, ??
Job Stability/Availability, Job Cost
Job Earnings, Skills, Time Management
Non-Farm Revenue
Sell Capital Assets, Deferred Taxes,
Increase Production, Increase Price
Increase Income
Cut Living Withdrawals
Purchase Financial Software, Small Cost Containment
Longer Term, Interest Only,
Principal/Interest Deferred
Restructure Debt
Equity Capital, Family Capital,
Supplemental Cash Flow
Capital Infusion
Voluntary, Involuntary,
Chapter 7, 11, 12, 13
Bankruptcy

19. The Burn Rate – Working Capital Adversity vs. Opportunity
Defensive “Adversity Oriented”
Current Assets: $2,000,000
-Current Liabilities: $1,000,000
= Working Capital: $1,000,000
Projected Loss: $500,000
Working Capital = 2 Years
Projected Loss
Red < 1.0 Year = Vulnerable
Yellow Years = Resilient
Green >3.0 Years = Agile
Offensive “Opportunity Oriented”
Current Assets: $2,000,000
-Current Liabilities: $1,000,000
= Working Capital: $1,000,000
Debt Service(Existing & New) Payments: $200,000
Working Capital = 5 Years
Total Debt Service Payments
Red < 2.5 Years = Vulnerable
Yellow Years = Resilient
Green >5.0 Years = Agile

20. Burn Rate on Core Equity Adversity vs. Opportunity
(Assume $500,000 Earnings Loss & 20% land value decline)
Assets- Market Value
Estimated Value
Loan Maximum
Collateral Position
Remaining Principal
Equity Excess Reserves
Long Term (20% Decline on Land)
$6,000,000
$4,800,000
X 70%
= $4,200,000
= $3,360,000
$2,200,000
= $2,000,000
= $1,160,000
2. Intermediate
$3,000,000
X 60%
=$1,800,000
- $800,000
= $1,000,000
3. Current
$1,650,000
X 80%
=$1,320,000
- $860,000
= $460,000
Burn Rate: Land & Long Term Equity Reserves= Excess Reserves= $2,000,000 = 4.0 Years
Earnings Loss¹ $ 500,000
20% Decline
Burn Rate: Land & Long Term Equity Reserves= Excess Reserves= $1,160,000 = 2.32 Years
¹ Assume Earnings Loss of $500,000
Red < 4.0 Years = Vulnerable
Yellow Years = Resilient
Green >7.0 Years = Agile

21. Bridge or Pier Concept Before: Term Debt = $1,000,000 = 4 to 1
EBITDA $250,000
After: Term Debt = $1,250,000 = 5 to 1
no improvement in EBITDA
refinancing using land equity
debt levels higher
owner equity loss, more debt service
water is deeper near the end of pier
the longer the pier, then the narrower the pier

22. What Great Bankers Do:
maintain contact with the customer for variance analysis & projected/actual analysis
go out to the farm for face to face visits
provide expertise in planning & monitoring of business performance
provide sound counsel to preserve wealth in adverse situations
provide facilitation to retain economic & emotional stability
provide tools & education to assist them in preserving equity
have the courage to initiate tough conversations
implement the Six “C’s” of lending
burn the free fuel “A.R.E.”

23. Questions