The first Webinar in the Ag In Uncertain Times series focused on what led to the current economic crisis and credit crunch, and what the future holds for the agriculture.
The speaker, Dr. David Kohl, received his M.S. and Ph.D. degrees in Agricultural Economics from Cornell University. For 25 years, Kohl was Professor of Agricultural Finance and Small Business Management and Entrepreneurship in the Department of Agricultural and Applied Economics at Virginia Tech. The goal of his Webinar presentation was to examine the current domestic and global economies and how they will affect agriculture now and long term.
Kohl focused on some of the issues between borrowers and lenders and also addressed growers’ educational needs as they pertain to risk management. He pointed out that economic adversity hasn’t affected agriculture as much as the general economy, thanks in part to strong balance sheets. However, because farm balance sheets tend to be so dependent on real estate, they can be volatile. An average of 87% of a farm’s balance sheet is in real estate, and with the market fluctuating, that can often be a false number. “Land tends to be a wealth accumulator, but not a cash flow generator, and generally you will need cash flow from other sectors to justify the land values,” Kohl said. “It’s going to be interesting to see how this recession affects land values.”
Another concern in agriculture is that many growers rely on off-farm income. Seventy to 80% of U.S. agriculture is dependent on non-farm income, and with layoffs prevalent, that can have a major impact, especially on small- to mid-sized operations.
In addition, lenders are rationing credit, and when they do lend, they’re requiring more information and carefully scrutinizing it.
There is a disconnect between borrowers and lenders in agriculture, too, Kohl says. Borrowers who have equity don’t understand why they can’t get loans. The reason is that cash flow and earnings pay loans back — not necessarily equity.
Kohl says it’s more critical than ever to have a solid risk management program in place, too. He recommends doing a profitability analysis, following the 60%/30%/10% rule. Sixty percent of profits should go toward building efficiency, growing incrementally or paying down debt. Thirty percent should go toward building working capital. The remaining 10% is “funny money,” with which growers can choose to do whatever they please.
Also critical, Kohl says, is to develop a succession plan and pay close attention to personal finances.
To listen to the entire Webinar online, as well as the others in the series, go to http://www.farmmanagement.org/aginuncertaintimes/.