Korkow opinion: Farm/ranch/bank business conditional commitments for operating renewals
January 22, 2019
For those of you who rely on a lender for capital to operate, you need to pay attention more than ever to your current financial condition if you want to survive. This can be a very anxious and stressful time, especially if you have or are running with carryover debt from last year's operation. It is anticipated 50 percent of the farmers will be turned down for operating credit this spring. Bankers are running scared of agricultural credit. Between the feds raising interest rates, lack of trade agreements abroad, and economists providing dismal reports of continued low commodity prices and higher input costs, they don't have much faith in the ag sector as being a "good risk" when it comes to lending. Recent reports of record bankruptcies filed and farm sales throughout the ag community has further depressed land and equipment values, further aggravating balance sheet ratios in the banker's analysis for credit renewals this spring.
So what can today's ag producers do to help themselves during times? Every producer needs to be able to analyze their own financial condition and anticipate the banker's decision. If you are carrying forward an operating debt from the previous year and you do not have any liquidity left, the lender is relying on secondary sources of collateral such as intermediate or long term assets as security, for that debt. If carry over debt is NOT "termed out" with a payment structure against those hard assets, you are more than likely not going to pay it off from 2018 production, and may even add to that carry-over debt. Many operations now are running with two years of carryover operating balances, and are looking at a third. I assure you, your future of obtaining additional credit for 2019 crop inputs are bleak. Your hope to salvage the operation at this point is either filing bankruptcy or liquidation of part or all of your business.
Do NOT trust your banker to give you financial advice. You need to understand, the banker serves his master, and that is the company writing his pay check! Reputation and the "good ole boy" status will get you nowhere in today's lending environment if your ratios and past financial trends are upside down. You need to obtain independent analysis of your financial condition if you are unable to perform this task on your own. This will be the best money you spend, I assure you.
Beware of the banker urging you to sell your assets to pay down the debt before committing to 2019 operating. If you have provided them with a current balance sheet, and/or if the bank has been out recently to do their chattel inspection and update their inventory lists, they should be able to make a decision of whether or not to renew an operating line conditional upon sales. If they refuse to provide you with a "conditional commitment" in writing for renewal, I suggest you DO NOT take your production income in until you get one. I will tell you that the banks have been conditioned over the years to believe they are "in charge" and put all the conditions on their customers denying any responsibility of their own. Having written many bankruptcy plans, I assure you the banks create over half the problems in failed credits! The concept of having to write a "Conditional Commitment" letter to you will be new to them, but they are able to provide you this assurance if they have had the chance to view your current financial condition. Without this assurance, you may well be stepping into a trap!
There are telling signs your lender is not going to renew your operating credit line. If you hear your banker say things like "why don't you sell your grain/calves and bring in the money, then we will take a look at it" or "maybe you need to think about selling off some of all of the cows to get your debt paid down, then we will see where you are at" or "have you thought about selling off some land to reduce your debt?" and the final one "have you considered maybe just selling out and retiring?"
A typical move by nearly all lenders that have made up their mind to end their relationship with you is to collect money from past production, cut you off from further loan advances or releases, and get you to sell off income producing assets such as land or cattle, all the while leading you to believe they are going to work with you. Then when you are in the most helpless state, they will demand payment of outstanding balance due at their bank. If they have all your assets tied up under their lien, what power do you have at that point? Their foot is on your neck.
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Banks know that if they can get your production income from you, you have no means to operate with. It is your source of funds in which to operate with should you file for bankruptcy reorganization. Without those funds, it will be difficult to continue your business while going through a Chapter 12 reorganization, and they know that. With equity in land to ensure full collection in foreclosure, the bank will try to force a dismissal in bankruptcy by trying to prove you would not be able to operate without adequate funding.
To recap, you as producers should get a written commitment letter from your lender if you are seeking credit for 2019, BEFORE handing over 2018 production income. If you cannot obtain a written commitment, then it would be wise to get further counsel regarding your financial condition and discuss your options before handing over your money.