What to do When the Ag Bubble Bursts (Some Say it Already Has)
Anyone reading current articles on agricultural issues will notice the concerns raised by those who track farm prices, economic trends and statistics. Reports are that Midwest farm real estate prices have declined by 5% in the last six months. Commodity prices have slipped by about 30% from what they were two years ago.
As those prices drop, signaling what many say is the end of the so-called “Ag Bubble”, lenders should asses their loan portfolios. We recommend the following items be assessed and updated as appropriate:
- Update real estate values so that loan-to-value ratios are current. You may not need a full appraisal, depending on when the last one was completed. A market valuation from a local, reliable realtor may be sufficient. . If as a result of a new appraisal or valuation, you discover that your real estate collateral is worth significantly less than you were counting on, that could be an additional consideration when determining, for example, whether to renew the loan or whether to seek additional collateral upon renewal or at other times.
- Conduct a farm inspection. Inspect the major equipment, note changes in the farm operations, assess livestock and crop or cultivation progress, and generally look for signs that things are different than in the past. Change may be either good or bad, but the lender needs to be aware of the change. Is there more or less equipment than you thought your borrower owned? Has the dairy operation been discontinued? Is the customer now raising hogs in addition to other livestock?
- Order a lien search on the mortgaged property. This should reveal judgments against your borrower, other mortgages or deeds of trust, and other filings which may warn you of problems.
- UCC filings should be kept up to date and properly filed. Check especially whether they were filed under the correct legal name and whether that person actually owns the collateral. We continue to see cases where the lender used a nick name or “doing business as” name for the borrower. This practice may result in the complete loss of your collateral if another lender comes into the picture, or the borrower files bankruptcy.
- If the borrower uses more than one lender, work to reconcile the collateral lists so each lender is aware what collateral is subject to the respective mortgages and security interests.
- Check on the borrower’s overdraft history. Repeated overdrafts are usually a sign of financial distress, and borrowers sometimes use overdrafts as an emergency line of credit. Those debts may not be secured by your collateral and in any event are difficult to manage and can be problematic.
Watching for changes to these items and taking simple steps to address them will help your bank stay ahead of potential problems that could emerge if the agricultural sector proves less buoyant than it has in recent years.