Kohl's Notes
You work a lot with agricultural bankers. What’s on their minds these days that a producer should know about?
In my work, I get to meet a lot of farmers and a lot of bankers, on both sides of the Canada-U.S. border. In Canada, I travel widely as part of RBC’s Agricultural Speaking Series. In the U.S., for the past 19 years, I’ve taught Agricultural Small Business Lending at the Graduate School of Banking at Louisiana State University.
Here are four banker-related themes I have taken note of recently.
Hot markets are a concern. In the agricultural and rural sectors, the red-hot real estate and commodity markets, particularly the grain sector, are of major concern. Many are concerned that the run-up in commodity prices is not sustainable, and long-term investment decisions are being made with rosecoloured views of a new paradigm in farm profits. Many view 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, with regard to recent problems with U.S. real estate, “If it grows too fast, it’s a weed.”
“Old-school” lending makes a comeback. Others were taking lessons from
developments in 2008 in the U.S. real estate market, that is, problems with
sub prime lending and the real estate crash of the housing sector. More lenders
and regulators are moving to “old school” lending practices. That is, they are
carefully scrutinizing cash flows, profit and working capital, as well as collateral
and overall strength of the balance sheet.
The slowing world economy affects agriculture. Concern about government policy, including the U.S. Farm Bill and its implications in compliance of the WTO, was top of mind. Others were wary of the speculation driving up oil and commodity prices, which is distorting customers’ cash flows and profits. Today, many North American farms rely on non-farm income. These farms will feel the impact if there is a protracted and deep economic recession.
Bankers question commitment of fair-weather lenders. 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 said, “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?” It’s a question both lenders and borrowers should be mindful of.
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