Strategies For The Economic Downturn

At the recent American Bankers Association Ag Bankers' Conference in Indianapolis

Dr. Dave Kohl, Globetrotting Emeritus ag econ professor from Virginia Tech compared the last several years of difficult commodity prices to a baseball game.

Kohl: "Now we are what about three years into this Economic Reset and what is happening is — it is like a baseball game. Initially innings one, two and three it impacts cash and profits. Innings four through six, we start burning through working capital. Now we are coming into that aspect of the cycle where they are beginning to burn through core equity. Core equity is the excess land — or the excess equity in the land. So when it starts getting into land and that core equity then ag producers, particularly bankers and also regulators that oversee the lenders take a critical look."

Dr. Kohl says that many producers and bankers are doing a burn rate on core equity. You value your land and consider the loan maximum on that land — for example, two million, say the loan maximum is 70 percent — so that would be about $1.4 million. Say you have $700,000 against it — that means that you have $700,000 excess equity - then what you do is to divide your losses into that. In that case, they would have four years before they burned through their equity. The lower the burn rate, the more urgent the farmer's strategy to move towards their breakeven point."