Should Lenders Renew Their Ag Producers’ Lines of Credit?
Agricultural producer borrowers provide lenders with calendar year financial statements, with some suggesting fiscal year financial statements allow the lender to evaluate crop year performance. Is that enough for a lender to determine if the production based line of credit should be renewed for the next year? Can a lender know if their borrower is making money producing its annual crop?
Let’s Consider Calendar Year AND Crop Year Financial Statements
Let’s divide financial reporting into:
Cash, Accrual, and Crop Year reporting
and consider the additional variable of:
Calendar Year, Fiscal Year, and Crop Year
Ideally a lender should request both calendar year / fiscal year and crop year financial statements produced on an accrual basis. Most agricultural software programs available today provide the opportunity to code revenue and expenses into a crop year analytic, and these programs are able to generate both fiscal year performance reports and crop year performance reports.
Many farmers do not use this capability and may not understand why it is beneficial.
There’s a risk of hiding performance issues when having cash-basis accounting methods coupled with calendar year/ fiscal year reporting. However, when having accrual-based accounting and crop year performance reporting it is much more difficult to hide those same problems.
Our perspective, after dealing with agricultural producers for years, is financial performance is best evaluated by financial statements produced in this order:
Cash based calendar / fiscal year financial performance.
Accrual based calendar / fiscal year financial performance.
Crop year financial performance.
The best combination of reporting is accrual based income statements and balance sheets based on the calendar or fiscal year coupled with crop year financial performance.
Fiscal year end statements do not equate to a crop year performance analysis.
Cash basis statements do not provide the impact of working capital management.
If the producer does not provide crop year reporting, what can a lender do?
Request the following for the previous two years and going forward:
Monthly reporting of working capital components
Cash balances, book and bank balance.
Monthly account statements for key suppliers.
Consider requesting purchase order reporting for key components for production.
Ask for inventory reporting details:
Quantity (by grade or quality)
Value per unit
Ask for monthly hedging reporting.
If you have concerns about a producer and would like to discuss options, contact us. We are able to perform an abbreviated working capital and financial performance analysis in a matter of weeks.