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The One Universal Factor in Evaluating Farm Loans

Hannah Barthels

October 11, 2021

From year to year – even month to month – and certainly from farm to farm, standards for production and efficiency, means of generating revenue, and family dynamics are so vastly different. So, what standards do lenders use to evaluate farm loans in 2021?

A panel of three ag lenders with more than 90 years of combined experience shared their insight during the World Dairy Expo seminar, “How We Are Evaluating Farm Loans.” Sam Miller of BMO Harris, Roger Murray of Farm Credit East and Matthew Wilson of Rabo AgriFinance alluded to several factors unique to each business, but one key, universal element is taken into consideration for every loan. And unfortunately, it’s something that a producer has no control over: it’s the economy.

The state of the economy carries a heavy weight not only in the evaluation of a loan, but also in the investments a producer should choose to make. Miller said land has been a fantastic investment and can outyield the stock market in the long run. “It’s a good long-term investment,” he said. “With interest rates low and commodity values high, that’s what’s driving land values higher.” Wilson added that current low interest rates for CD’s and other “safe” investments are so low, money is being driven into farmland. “The troubling thing is if interest rates rise and commodity prices drop, we could see a drag on land values.”

Looking at other investment opportunities such as new buildings, animals or technology, the current economic state is a leading consideration, but experienced ag lenders also address factors that are specific to an individual business. Murray said with production caps from processors, we’re in a paradigm shift away from being able to add cattle and production to cashflow an expansion or addition of technology. “It’s all about getting the farm in sync. The data that comes from the new equipment has been really helpful for a lot of customers, but it’s all about staying in balance.”

Apart from economic factors, Miller boils key considerations down to strength of the balance sheet, cash flow, profitability, working capital and collateral. He said, “The quality of those metrics can change from year to year. The way we analyze them hasn’t changed, but what we do depending on where you fall in those categories can change how the loan looks and how it’s analyzed year to year.”

When it comes to the size of the farm, Wilson says there are pros and cons either way. “Smaller farms may not have the size and scale, but they’re also not exposed as much to issues in the labor market. It really depends on how the business is structured.” All three lenders agree that whether your farm is considered large or small, the whole operation must be in sync. Murray says, “Size does matter, but some of the most profitable farms are still small. They’ve figured out the right formula and gotten everything in balance.”

The panel also described a set of characteristics they see among their most successful customers: they plan well, keep good records, adapt, communicate well with their lender, involve a team in their financial decisions and take their entire operation into account when assessing opportunities. Many producers are finding opportunities for profit in new technology, including renewable natural gas, genomic testing and semen sales, beef sales, and changes to cover crop methods. Even so, Wilson said there is no magic bullet. “You’re looking at pennies and small percentages of change to glean a sustainable future and manage uncertainty.”

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