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Your Farm Business

Lenders prefer to say ‘Yes!’

February 10, 2012
From Wayne Schoper and Rich Baumann - South Central College

(This information is from the Feb. 1, 2012 issue of "The Ferguson Ag Report.")

One of the greatest misconceptions among U.S. farmers and ranchers is a widespread conviction that the vast majority of lenders just inherently prefer saying "no", particularly in agriculture. Reality, however, is that nothing could be further from the truth, especially in today's economic and business climate. Achieving just reasonable lender profitability is virtually impossible unless favorable responses are given to a preponderant number of loan applications.

Unfortunately, a substantial number of U.S. farmers and ranchers virtually guarantee against receiving positive reactions from their preferred lender[s] by submitting inadequate as well as conflicting financial information. The often-heard "justification" for providing poorly prepared financial data is some variation of, "They know me... I have been doing business there for years and years. My time is spent better in the field [or livestock pens] rather than wasting time with a pile of unnecessary financial forms which don't prove anything."

Another often repeated mistake involves minimizing after-tax profit as much as conceivably possible, even to the point of reporting operating losses with great satisfaction that paying income taxes has been "avoided cleverly." Then being "shocked" when a lender advises solemnly that the loan cannot be approved as it is being requested.

Borrowers whose financial records indicate they are on "thin financial ice" often complain "that the bank doesn't want to take any financial only wants a sure thing."

That's actually true for four reasons. 1.) Local banks are not supposed to be in the financial risk-taking business. That is the purview of venture capital firms. 2.) Unusually low interest rates during the past 2-3 years have resulted in the nation's ag banks averaging less than 1 percent return on assets. 3.) The average bank owns only 10-12 of each $1.00 that it loans to its borrowers - thus 88-90 belongs to outside depositors. 4.) Federal banking regulators closed 371 banks during 2009 through October 15, 2011, because each of them made too many unsound loans which could not be repaid. Despite the preceding reality, however, the vast majority of today's agriculturally oriented banks and the Farm Credit System are eager to make solid loans to profitable farmers and ranchers

who maintain accurate balance sheets, operating statements, and cash flow statements prepared according to Generally Accepted Accounting Principles (GAAP). But, what most are not willing to do is provide funds to potential borrowers who strive to keep their lender "in the dark" with poorly prepared, inadequate, and confusing financial information.

Working with agricultural lenders constitutes a significant part of each Ferguson Group Office's normal consulting activities. Unanimous conviction exists within the Group that today's agricultural lenders are extremely eager to "say yes" to sound loan requests. After all, lenders are in business to lend, not sit on a cake of ice repeating "no" ad nauseam.

Potential borrowers must recognize, however, that the present economic climate of uncertainty mandates that caution be exercised - by both lender and borrower. A key element involves how much financial risk, plus the type, that a potential borrower is either maintaining currently or is planning to undertake during the near future.

The two most prevalent types of financial risk in which today's farmers and ranchers become embroiled concern market prices and excessive current

liabilities stemming from acquisitions of big-ticket items of fixed assets such as land, buildings, and machinery. Acceptable solvency for many producers is directly dependent upon market prices for most agricultural products not falling below

present levels for a multi-year period of time.

A large number of commercial producers and their advisors are reportedly convinced that U.S. agriculture has entered permanently into a "new era" in which much higher commodity prices are a permanent norm. Thus, $6-8,000 per acre land; $5-7.00 per bushel corn; $10-12.00 soybeans; $7-9.00 wheat; plus

comparable prices for livestock, poultry, etc. are to be relatively constant instead of levels 40-60 percent lower as prevailed generally during the previous 20 years.

If the "new era" converts are correct, then U.S. and global agriculture will indeed experience numerous, vastly different, positive, financial relationships. But, what if today's contrarians are correct and agricultural prices decline precipitously

beginning this year to more conventional levels?

Adjusting production costs to significantly changing circumstances is obviously much simpler when commodity prices are climbing than when they are sinking. Those caught with just borderline excessive current liabilities would soon find themselves in a world of hurt. Anyone who has stretched personal finances thin to pay a stratospheric price for a substantial tract of land, could literally be facing financial disaster!

So, lenders definitely prefer to say "yes!' But, it's a borrower's responsibility to create financial circumstances which make a positive response virtually routine!



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