A long run of prosperity has allowed Upper Midwest agriculture producers to strengthen their bottom line. But plunging crop prices threaten future profitability, and ag bankers need to keep that in mind, a North Dakota State University professor said.
"They (farmers) have been establishing a strong financial position," said Ryan Larsen, NDSU assistant professor of agribusiness and applied economics. "But you still have to be cautious going forward that you don't abandon these proven credit principles."
Larsen spoke Oct. 30 in Grand Forks, N.D., at an outlook conference for agricultural lenders. The event, organized by the NDSU Extension Service, drew about 100 people, primarily ag bankers from northeast North Dakota. Similar conferences were held previously in Bismarck, N.D., and Minot, N.D., with the fourth and final ag outlook conference scheduled for Nov. 3 in Fargo, N.D.
Though the material presented at the outlook conferences was geared for North Dakota, most of it applies to agriculture in the rest of the Upper Midwest, as well.
Larsen presented hypothetical balance sheets for two "typical" farms in central North Dakota. One of the farms raises both crops and livestock, the other only crops. Both of the farms have strong balance sheets, with their assets far outweighing operating loans and other liabilities.
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The farm that raises both crops and livestock is projected to show a modest profit in 2015, thanks to strong livestock prices that will allow the operation to overcome weak crop prices, according to its hypothetical balance sheet.
But the other farm, the one that raises only crops, is projected to show a substantial loss, according to its hypothetical sheet.
Recommendations
Some farmers will weather current low prices just fine. "You probably know exactly who they are," Larsen told the ag lenders. "But we've got a lot of these marginal borrowers, and these are the ones you need to monitor closely."
He recommended that ag lenders conduct "stress tests" and "what-if scenarios" that anticipate how a borrowers' ability to repay a loan would be affected by things such as declining land values.
Ag lenders also might consider making greater use of loan covenants, Larsen said.
A loan covenant is a clause in the lending requirement that requires the borrowers do, or not to do, certain things.
"We may need to revisit how we use these loan covenants," he said.
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Effective communication between lender and borrower becomes even more important, he said.
"If you're not communicating with your borrower, if they can't communicate with you the issues they have, you're on a fast road to trouble," Larsen said.
But there's no reason to panic.
"It's a good time to be in agriculture," he said. "There are still a lot of positives in agriculture that changed. The opportunities are immense.
"There's a slight downturn, but that doesn't mean it's time to abandon ship," Larsen said.
