By Craig Horsch, Consultant, Young & Associates

With Ag borrowers facing tight margins in 2025, financial institutions must carefully examine agricultural production revenue cycles to measure each borrower’s actual crop and livestock production against annual projections.

Additionally, measuring and testing each different revenue stream the farmer produces crops (corn, soybeans, wheat, oats, milo, hay, etc.) or livestock (beef cattle, dairy cattle, hogs, chickens, turkeys, sheep, goats or other livestock)

Financial institutions have historically analyzed the grain crops (corn, soybeans, wheat, oats, milo, hay, etc.) revenue production cycle very well; however, livestock revenue streams are not as frequently monitored to evaluate the borrower’s efficiencies within their respective revenue production cycles.

Analyzing the agricultural production revenue cycles

Measuring the revenue production cycles also provides the bank with an opportunity to identify the following:

• Assess the borrower’s management skills.
• The accuracy of the borrower’s projections.
• The efficiencies within the production cycle.
• The weakness within the production cycle.
• Financial trends (negative or positive) within the production cycle.
• Compare actual performance with projected revenue and expenses.
• Where did the production cycle provide a benefit to the operations?
• Where did the production cycle provide a detriment to the operations?
• Were there any surprises (positives or negatives) during the production cycle?
• Were projections within 10 percent of the actual performance?
• Were there any critical or unusual events that occurred during the production cycle that negatively impacted revenue?

When underwriting an Ag borrower, consider analyzing and discussing each of the borrower’s revenue streams that contribute toward the repayment of the loan, such as the number of livestock or acres they farm overall, acres owned and leased, the projections for the upcoming year and the percentage each revenue stream contributes to the overall revenue stream. If livestock, discuss the type of livestock (dairy, beef, hogs, chickens, turkey, sheep, goats, etc.), the number of head, if a cow/calf (beef or dairy cattle) or dairy operation, a farrowing only, a finishing only or a farrow to finishing (hogs), a poultry or other livestock operation.

Discuss production projections for the upcoming year or the number of turns per year (hogs & poultry), etc. By completing this analysis, the bank may be able to identify which revenue stream is the strongest and weakest and which is the largest and smallest contributor to the overall revenue stream.

Identify the sources of revenue, such as grain, dairy, beef, hogs, poultry, sheep, goats or other livestock. Indicate each source’s share of total production in dollar amounts or percentages and explain how often the cycle for each source is completed. It is important to confirm that the producer is accurately capturing pertinent data for each revenue stream.

Projections vs. reality in agricultural production revenue cycles

Compare the production cycle actual performance with the borrower’s projections for the ag related cycle being measured.

• Are they very accurate based upon the conditions of the respective cycle?
• Is their revenue production within 10 percent of their budgeted projections?

1. 1. This is a way to assess the borrower’s budgeting capabilities
   2. Farm management skills
   3. Knowledge of costs
   4. Are they realistic pricing costs & selling commodity prices?

• Do they know their costs?
• Provide a look-back period: Are their projections reasonable compared to their actual costs?

Stress Test the borrower’s projections by 10 percent on price and 10 percent on yield to determine where the projected cash flow would be if a major adverse event occurred during the crop or livestock cycle, such as drought, bird flu, hoof & mouth, mastitis, etc.

By analyzing each revenue cycle, banks can identify strengths and weaknesses in a borrower’s management, budgeting, marketing and knowledge of costs and markets, thus improving the credit risk analysis of current or requested facilities.