As the saying goes, "everything old is new again." Here we are—back to farm enterprise economic margins similar to those of 15 years ago. In many ways, times have changed the agricultural industry via the deployment of new production technologies, big data management, advances in crop and livestock genetics, and so forth. However, some things that have not changed are proactive farm financial management and the fundamentals of sound credit analysis. Thus, "good credit" never goes out of style.
As we work through another farm loan renewal season, let's revisit some key fundamentals and leverage them for the benefit of our farm clients and for our banks that steadily serve the agricultural industry.
1. Balance Sheet Construct
Compiling a complete and concise financial statement at a farm's fiscal year-end is the mostly timely predictor of financial progress. Cash-based accounting systems have distinct benefits aligned with convenience and tax planning but are a bit flawed if used to gauge true profitability for that crop year or livestock production cycle. Tracking crop and livestock inventories, receivables and hedging accounts, prepaid inputs, payables, and capital expenditures require asking the right questions of our clients to fill in the puzzle pieces for a complete financial picture. When we ask these questions, we are not only strengthening our credit analysis, we are helping our clients become better financial managers.
2. Trend Analysis
"One year does not a trend make-eth" means we do not hang our hat on just one year of financial progress (or decline). Rather, we learn that "the trend is our friend." We study multiple years of numbers, the directions they are tracking, the outliers, and the patterns and themes that help tell the farm's financial story. Multiple balance sheets and earnings statements help identify strengths and weaknesses in the farm business. Thus, we can help our clients better identify challenges and opportunities that lie ahead and how they can prosper through tough times and good times.
3. Realistic Forecasts
Making long-term investment decisions using short-term production and financial results can be a recipe for disaster. We want to use that solid trend data paired with an eye to the future and build realistic projections that factor in volatility in commodity prices, production cycles and seasonality, and planned changes in the operation. We should also consider any unplanned or random events that could occur to help us frame up a Plan B or even Plan C. Charting alternative plans when our minds are clear and emotions are even is much more beneficial than charting them when Plan A is not working out as we had hoped. Including your client in the forecasting process is important and helps ensure all parties are aware of the potential risks and rewards associated with an investment and related financing. It also invites transparency, new ideas, and respect as your farm clients' trusted financial advisor.
The WBA hosts many learning opportunities throughout the year for both new and experienced agricultural lending staff. Check them out!
Keller is SVP of ag banking at Town Bank in Clinton.