Jeff Gruetzmacher headshotCorn. Soybeans. Cattle. Dairy. Heifers. Equipment. Dairy Buildings...

As we all know, if cash flow doesn't pay the loan back, the collateral will have to.

We all follow land prices with a keen interest, being able to rattle off land sales for this-and-that soil type on a per acre basis. The general public and the Fed also closely track it. So far, at least in Wisconsin, land has shown to be very resilient. But what about other non-land assets on our customer's balance sheets?

It used to be valuing our farm customer's ag assets was easy. In fact, for many years, our customers didn't really change asset prices from year to year on balance sheets. All that changed were unit counts, acres, and liabilities because the underlying asset prices didn't change a lot.

However, with uncertainty abounding in every corner, and even more volatility (as if that were possible) in the commodity markets, how can you really put a "market value" on assets on the balance sheet? On what day? Should you change your strategy? 

If you start adjusting asset pricing to current values, you are going to introduce extreme volatility into balance sheets, requiring you to do equity reconciliations and accrual adjustments all the time, not just on medium to larger credits. Sometimes accounts will be given earnings credit for unsold inventory when it's not justified. Accrual adjustments to earnings, while favored by accountant types, can also be used to hide real cash flow problems as inventory is rolled and rolled.

On the other hand, if you leave asset pricing stagnant and only adjust unit values and liabilities, you might be short-changing your customer's true equity position by ignoring increasing prices—or worse, by overstating their equity position in declining markets.

Even if you're diligent and make changes to the market value every year, there is an elephant in the room many want to ignore: highly improved building sites. While we can all wish the dairy economy was better, it does nothing for the fact that the desirability of existing highly improved dairy units has been waning. What used to be a building's 50-70% contribution to the overall value now seems to be a lot less.

Regardless of how balance sheets are constructed, an honest look in the next year at asset pricing is essential for the customer and financial institutions to weather this cycle of volatile and low prices.

Gruetzmacher is senior vice president at Royal Bank in Lancaster, Wis. He is a board member of the WBA Ag Banking section and serves on the national ICBA Committee for Ag and Rural Affairs.