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18 nov 2013

HOW HIGH-TECH IS HELPING LENDERS IMPROVE AG RISK MANAGEMENT


Ag Lending Technology

New technology is helping agricultural lenders get a better handle on their customers’ marketing strategies, which is leading to improved risk management for farmers and a deeper understanding of the farm’s profitability throughout the year by both lender and farmer.

Software such as Ag Yield and other programs allows farmers to enact more sophisticated marketing plans. By combining variables such as crop insurance, futures and options positions, crop size and current market prices, the software shows the outcome of different marketing strategies. The software can be tweaked throughout the growing season as crops develop to help protect bottom lines in ways not possible before, say both lenders and farmers.
Jason VanLanduit, vice president at Central Bank in Princeton, Ill., says these new software programs allow the farmer and his or her broker to consult on different marketing risk management strategies. What’s new is that the banker can also see those different marketing strategies.
“Any given day I can go in and see, based on what the market is doing today, (the farmer’s) profit or loss potential given the different positions the farmer has on,” VanLanduit says.
It helps to erase some of the uncertainty that has been part of agricultural lending, he says, particularly during the most risky times of year, like July or August, just ahead of harvest.
“Say a guy requests $2 million to buy real estate. Your bank board is interested in where your guy is going to be profit-wise at the end of the year. Well, with today’s technology, I can pull up and see what options spreads he has on, where he is cash market-wise for sales. I can get a pretty good idea of what is his profit potential … and what he’s guaranteed through the federal crop insurance program,” VanLanduit says.
Essentially, an agricultural lender can work with the farmer on a day-to-day basis, rather than on an annual review basis. “It takes a few more of the ‘what ifs’ out of the equation,” he says.
Scott Friested farms about 1,900 acres of corn and soybeans about 60 miles southwest of Chicago with his father. He says the new technology can figure out sophisticated marketing strategies that he and his broker might not have considered otherwise.
“The profitability matrix is pretty amazing to show you the overall picture of … your revenue. You can throw in crop insurance, options, futures, cash sales and different price scenarios, different yield scenarios. It’ll tell you exactly where you’re going to be under each one of those. That’s something we’ve never seen before.  To put everything together in one picture is extremely important as far as marketing goes,” Friested says.

100 Percent Hedged

He calls it “revolutionary.”
Before using this type of software, Friested says he would only be able to hedge a certain percentage of his crop and had to market the rest. “I’ve used options for 20 years, but I did it in a limited way because I didn’t know where I’d be if prices really took off in one direction or another,” he says.
Now he can modify his marketing plan as prices change and as his crop grows. Friested says it has definitely helped his bottom line.
“In a year like this year (a bumper harvest that weighed on prices), we did a very good job with our marketing. Without this program we would have a lot more bushels to market at a lower price right now. We don’t have that because we’re basically 100 percent hedged,” he says.
Using this type of software also shows the lender how the farmer is using his margin account since the lender can see the marketing strategies. That means greater transparency.
“It’s one more tool that I can use to verify that the money I’m being asked for is being used for a risk management plan, not a speculative plan,” VanLanduit says.
Being able to include crop insurance as part of the marketing strategy helps to plan for a worst case scenario, he says. “The insurance guarantee provides them with a floor. Your more market-savvy farmers can get a higher profit probability by putting on different hedge spreads that could allow them to make more than what the insurance guarantee is,” he says.
VanLanduit says he gets more calls now by farmers asking to move funds into margin accounts in order to place strategies to protect a crop position, something that used to be very rare.
He can look at the hedging strategy and see what the farmer’s profit potential is before the trade is executed. “I know if they’re spending $30,000 in margin money, they may be protecting a profit potential of $150,000,” he says. “It’s easier to explain (to the bank’s approving committee) that margin money, which had that label of being money you throw out the window, now its protecting a risk management plan.”

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