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Agriculture and Ag Lending Perspectives and Trends

Agriculture and Ag Lending Perspectives and Trends

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Agriculture and Ag Lending Perspectives and Trends

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  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) 961-2094 (Alicia Morris) | (540) 719-0752 (Angela Meadows) | sullylab@vt.edu Macro Clinic Video Blog: www.compeer.com/education Road Warrior of Agriculture: www.cornandsoybeandigest.com Ag Globe Trotter: www.northwestfcs.com Dave’s GPS & Dashboard Indicators: www.farmermac.com 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 • fixers and flippers • LA/Bay area • Federal Reserve interest rates • 2 increases/1 decrease • stock market • other

  9. Top Five Economic Indicators

  10. Yield Curves and Recessions Source: Federal Reserve https://www.newyorkfed.org/medialibrary/media/research/capital_markets/Prob_Rec.pdf

  11. Is the New Normal the Old Normal? Source: https://finbin.umn.edu/

  12. Median Net Farm Income

  13. Mega Trends 2008-2018:Technology & Production Metric Tons Increase Since 2008-2009 til 2018 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 FactorsCritical Questions for Crucial Conversations • *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

  17. Character CountsCritical Questions & Observations for Customers

  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 CapitalAdversity 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 1.0-3.0 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 = 5Years Total Debt Service Payments Red < 2.5 Years = Vulnerable Yellow 2.5-5.0 Years = Resilient Green >5.0 Years = Agile

  20. Burn Rate on Core EquityAdversity vs. Opportunity (Assume $500,000 Earnings Loss & 20% land value decline) 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 Earnings Loss¹ $ 500,000 • ¹ Assume Earnings Loss of $500,000 • Red < 4.0 Years = Vulnerable • Yellow 4.0-7.0 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 EBITDA $250,000 • 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