Next week marks the end of the third quarter of 2024, with borrowers sending in their September year to date results soon. Lenders should anticipate a wide variety of results. Anticipating results will help lenders identify which borrowers require more attention.
Some of the trends we are seeing leading up to year end 2024 are:
Inventory levels and values are continuing to be stressed. Manufacturers are experiencing order delays often out 12 months or more. Inventory appraisals are seeing downward pressure on values. Car inventory levels are showing increases and prices are being pressured. Suppliers to automotive sectors are challenged by the changing demands of the automotive industry and related regulations.
Cost increases continue to impact financial performance. Payroll costs are a large part of any income statement, and wage increases have impacted profitability. Commodity and energy price changes have also stressed profitability.
Changing consumer shopping patterns are impacting retailers, with a continued shift to ecommerce and more interest in the buy now pay later (“BNPL”) plans offered.
It is important for lenders to address these issues head on, rather than allowing the excuses of the past to continue for 2024 results and into 2025.
In the ag sector,
Grain farmers are experiencing stress. Corn reached a low of $3.70 per bushel August 12, 2024, and as of September 23, corn prices remained low at $4.01 per bushel. Corn has not been below $4.00 per bushel since late in 2020. Soybeans reached a low of $9.82 per bushel August 26, 2024 and are at $10.39 as of September 23, 2024. These are also price levels not experienced since 2020.
Pork producers are experiencing continued stress related to prices and related to requirements for new facility layouts with additional space per animal.
There are also winners in the ag sector. Beef prices have been higher for several years.
Nut farmers have experienced some improvement over 2023 lows.
The impact of lower grain prices flows through to landowners who may not receive their full 2024 rent payments and may be receiving requests for reduced 2025 land rents. Providers to the grain farmers will also be seeing impacts with slower pay of operating lines, including lines made by feed, seed, and chemical providers. Lenders to pork producers are experiencing a second round of fall out after hoping to see prices rise in early 2024. Permanent planting changes are impacting per acre land values for existing plantings. Water accessibility continues to impact land values.
The challenge lenders will face is to anticipate the trickle-down impact of the weakness in various ag sectors.
Where to spend time and resources?
As lenders, it is difficult to decide where to invest time and resources in analysis. This Q4 2024 period gives lenders an opportunity to evaluate results and listen to the explanations borrowers provide.
Successful borrowers will be able to discuss analysis techniques they are using to evaluate:
Profitability by division, plant, product, contract or customer.
Price volume variance analysis is another technique borrowers should be able to explain.
Direct and indirect labor trends and production per labor hour are key metrics.
Standard costing updates in terms of frequency of repricing and use of various production levels.
Contract analysis for both vendors and customers.
If a borrower is experiencing performance stresses, that borrower should be able to discuss their plans and analysis for different outcomes – the typical Plan A, Plan B, Plan C analysis.
Successful businesses will be those that embrace and use financial analysis to inform business management decisions.
If your lender team would like to schedule an hour with the Focus Management Group to discuss trends we are seeing and techniques we are using to evaluate performance, please contact us. We would welcome an opportunity to share what we are seeing in real time.
Comentários