The lender conference season has been in full force in recent weeks. Conferences from the East Coast to the West Coast and from our southern to our northern borders have provided engagement and many questions from participants. Margin compression as a result of declining prices, increased input costs, and higher interest rates on variable interest rate debt is resulting in operating carryover debt and some late payments. This will often result in difficult conversations with owners, managers, spouses, partners, and, of course, the agricultural lenders. Where does one start with these difficult discussions if you have not experienced this type of situation in a number of years or never encountered it?

Symptoms versus problems

A symptom that often triggers these conversations is the inability to pay down operating monies. In some situations, a producer may be out of compliance with metrics established in loan agreements. It can be very intimidating to receive a notice, either written or orally, that you are not performing up to the lender’s standards. Many producers will immediately seek a debt restructure, often using land equity to bridge the financial gap. The issue today is that interest rates are substantially higher than they were a couple of years ago so the debt service will also be much higher.

Before one seeks a lender relief package, due diligence must occur on the actual problem. The current ratio or working capital may be out of compliance, but what caused it?

This is where a self-analysis must occur. Sometimes nonfinancial factors such as weather or life events including the deadly D's (disease, disability, death, and divorce) are the root of the cause. Recently, some lenders have stated family living costs are an issue. Inflation is impacting family living expenses, but the number of families living out of the business could also be the culprit.

The capital expenditure plan for items such as machinery, equipment, buildings, and land may have gone haywire. Cost overruns and unplanned expenditures can attack the profit picture, increase the debt load, and reduce the financial liquidity backup.

After the self-analysis, one must have a written plan with specific and measurable metrics to turn a lemon into lemonade. For example, it could be eliminating unprofitable enterprises, following a family living budget, developing a capital expenditure plan, or eliminating some of the rented ground. The key is to move quickly while options still exist.

Communication

In a workout situation, written documentation of loan covenants and expectations is a key element for recovery. Open communication between the lender and borrower is critical throughout the recovery process. This part of the economic cycle will require your “A” game to channel your business energy for a positive outcome.