Agriculture Industry Financial Risks - By Dr. David Kohl

By Dr. David Kohl

As an educator, it has been a privilege working with producers, lenders, and agribusinesses, often simultaneously at seminars and conferences. Decades of travel and engagement around the globe have brought many challenging questions. One frequently posed question is, “Are we heading for another financial crisis like the 1980s?” A follow-up question is, “If we are not in a 1980s situation, what are the current financial risks in the agriculture industry?”

The farm financial crisis of the 1980s caused economic and financial trauma for the agriculture industry, but is like a nightmare fading in the past. It is eerily similar to growing up on a dairy farm listening to the old timers discuss the Great Depression and World War II and the trials and tribulations of surviving those turbulent times. To have a full-fledged 1980s farm crisis in the decade of the 2020s would require a collapse of farm and ranch land values of at least 50 to 60 percent. Prolonged negative margins as a result of market demand collapse with elevated costs and interest rates would be the factors that could create a depression-like situation in the agriculture industry like what was experienced in the 1980s.

Moving to the question of the day, what are the financial risks that raise their ugly head in certain instances, but do not create an overall industry financial downturn like the 1980s?

Fraud and greed

One of the more prevalent risks occurring in recent years during the economic times of the pandemic has been fraud. And, of course, fraud's cousin is greed. Numerous situations have dotted the farm news networks and lenders have also been sharing stories. For example, when an inspection was conducted, 90,000 head of cattle listed on the balance sheet were found to be only 10,000 head. In another situation, 40,000 bushels of corn in the bin were actually only straw and sand disguised by being topped off with 9,000 bushels of corn grain. One lender calls this problem “ghost collateral” because “now you see it” and then you do not.

Greed showed its ugly head when a large dairy used the pandemic relief checks to build a $2 million lake house. To top it off, another portion of the proceeds were used to purchase a travel coach and a new pickup to the tune of $500,000. This misuse of funds has resulted in input suppliers and custom hire operators that have gone unpaid with no collateral backing. Of course, these vendors are the dairyman’s neighbors. Often good economic times get you into trouble, not the downturn part of the economic cycle. As a result of these situations, farmers, ranchers, and agribusinesses can expect more inspections and due diligence on equipment serial numbers, livestock accounting, and warehouse receipts.

Third-party counterparty risk

As the agriculture industry consolidates, this increases the potential for third-party counterparty risk. For example, one bank loan of approximately $10 million that was experiencing financial difficulty had over $60 million in total exposure for the bank. This was a result of 28 producers having formal and informal contracts with this business that was experiencing difficulty. Currently, the hog industry integrators are facing difficult times and the elimination of farms are prime examples of this counterparty risk. In the past, this type of risk has occurred in the agriculture industry with poultry, dairy, and, to some extent, the grain industry with some of the ethanol plants and elevators that were experiencing financial issues. Conducting due diligence on firms and businesses you are dealing with can help to prevent the “October surprise.” Accounts receivable gone bad or prepaid expenses that were not fulfilled can take years of revenue with profit margins to overcome.

Side ventures

Diversification is alive and well in the agriculture industry. Some producers will spin off into other agricultural enterprises where others will start or purchase a business outside the industry. In some cases, the monies can be transferred to the other entities. However, if there are too many entities and too much money, one can become a “road rocket” and not provide the attention needed to each business, which may result in negative margins and be a cash drain on the profitable businesses. Sometimes letting go of an ego, being able to admit to a mistake, and failing fast and moving on is the best remedy. In the 1980s, the ability to simplify and conduct enterprise profitability analysis was often the key to success.


As businesses become larger and more sophisticated, scalability of management must follow suit. This often requires one to move from an entrepreneur and technician to a manager or a chief financial officer (CFO), chief executive officer (CEO), or chief operating officer (COO). The key for the senior or the “vintage” generation is to pass the necessary attributes and skill sets to the next generation along with the ownership, responsibility, and accountability that comes with transition. More instances of the next generation not desiring the increased amount of ownership and debt load are becoming prevalent not only here in the United States, but globally. Given work-life balance challenges, failure to have spouses and partners on board can result in personal and family issues that can increase financial and business risks. As the senior generation ages out, this will become a major challenge as the agriculture industry approaches the third decade of the 21st century.

The ego

The ego of individuals or a team of owners and managers can result in financial risk to the business entity. “Shoot from the hip” marketing strategies aiming for the highest price without regard for breakeven points and the cost of production can be a challenge. These producers can get caught up in the sprint, or the short-run outlook, and fail to realize that success in marketing is a marathon or a long-term viewpoint. Today's hypersensitive markets fueled by headlines of geopolitical fanfare can quickly get one into an emotional, rather than objective, mindset for both prices and input costs which increases risk and affects the financial viability of the business.

Ego can play a role in family living expenses and personal withdrawals. Yes, $2 million of profit can quickly be spent depending on the number of families enjoying the fruits of the labor, or one family cashing in on the windfall profits. Often the first signs of financial issues are the run-up of credit card debt and increasing accounts payable. Some businesses may seek to refinance operating debt as a result of one or more family members living beyond their means.

Having a financially risky situation or crisis does not require a full-fledged downturn like the 1980s. Prudent financial and business management practices can be proactive and preventive actions to thwart the aforementioned factors that create financial risk.