Financial Analysis
From A Lender’s Perspective
Editor’s Note; This is the fifth of a seven part series to explain how
Farm Credit analyzes farm and ranch businesses. A different aspect
of financial analysis is addressed in each issue.
Analyzing loan
repayment how we
estimate future crop and
livestock income
he most important factor in deciding to
loan money is a reliable analysis showing
the loan can be repaid from future income
generated by the farm or ranch operation.
Since that analysis includes income from
crops or livestock not yet grown or marketed,
it's necessary to make some assumptions to
project future income. This analysis involves
projecting both yields and prices.
Yields
The primary source of information for a
lender's projections on crop or livestock yields
is the operator's records for the last few years.
In addition, the lender must understand the
operator's production plans for the future as
well as current conditions, such as drought
affecting the area. Future projections for
yields will be consistent with the operator's
historical yields, unless other factors clearly
support increased or reduced yields.
Prices
Price and yield projections depend on the
terms of the loans being analyzed for repay-
ment.
Near-term prices and yields are used to
project repayment for annual operating loans.
A near-term price or yield is the price or
output expected over the budget or marketing
cycle. These figures reflect the status of the
industry and area (surplus or shortage, drought
or wet conditions, etc.) as well as the
producer’s ability to consistently obtain above
6r below average prices and yields. Projecting
repayment with near-term prices and yields is
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a reliable method to analyze expected income
and changes in working capital over the next
operating cycle.
Normal prices and yields are used to
project repayment on intermediate- and long
term loans. A normal price is the price which
the market is not expected to fall below for a
sustained period during the next three to five
years. Normal yields are minimum yields
which the producer is expected to produce over
the three- to five-year period. Normal prices
and yields are used to determine the customer's
ability to service all debts over the life of the
loan. They are also used when:
• Expansion or changes in an operation
make use of information from the
operator’s records inappropriate.
• A new operator or enterprise without
history is being financed.
• The operator’s records reflect periods
considered unusual, either above or below
average for reasons such as weather,
health, or other uncontrollable circum
stances.
Lender projections
To determine near-term or normal prices, a
lender must understand the history and project
the future of commodities produced by its
customers. The lender must also understand
individual customers since the ability to both
produce and market commodities can vary'
greatly among producers.
Analyzing loan repayment is not an exact
science but an art that is most correct when
reliable records are combined with an under
standing of the customer’s operation and the
industry.
Next week we will look at net
earnings.
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UNIVERSITY PARK (Centre
Co.) Dr. Herschel A. Elliott,
professor of agricultural engineer
ing and coordinator of the en
vironmental resource manage
ment program at Penn State, has
received the 1993 College of
Agricultural Sciences Alumni So
ciety’s Excellence in Academic
Advising Award.
Elliott will receive the award at
the College of Agricultural Sci
ences 1993 Spring Commence
ment on Saturday, May IS, at 9
a.m. in Eisenhower Auditorium on
Penn State’s University Park
Campus.
The award recognizes faculty
with outstanding skills in academ
ic advising, career planning, and
personal counseling. Advisers in
the college are nominated by
alumni, faculty, students, and ad
ministrators.
“Dr. Elliott exemplifies what an
adviser should be,” said colleague
Dr. James R. Pratt, assistant pro
fessor of aquatic ecology. “He is
available to students, he is aware
of career needs and the state of the
job market, and he has the experi
ence and caring attitude needed to
help students through difficult
situations.”
As coordinator of the interdisci
plinary environmental resource
management (ERM) program, El
liott is the first contact for students
entering the college’s largest pro
gram. He provides transitional
counseling, often to students in
search of career goals. Elliott also
advises the student ERM club and
coordinates internships for ERM
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'Elliott Receives
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students.
“Beyond the mechanics of
course selection and scheduling, I
derive great satsifaction from
counseling students at the cross
roads, helping them to define and
choose among various paths,” El
liott said.
Because ERM is an interdisci
plinary program, Elliott oversees
advisers and faculty in several de
partments. He works to assure that
each adviser has the most current
information needed by students.
He also bears the largest share of
advising responsibility in the
ERM program, advising more
than ISO students.
“To me. Dr. Elliott personifies
the ideal academic adviser,” said
one advisee. “He has been a friend
as well as an academic adviser and
career counselor. He has helped
me on numerous occasions be
cause of his availability and wil
lingness to talk.”
Another advisee said, “Dr. Elli
ott attempts to develop the whole
student. This kind of advising is
remarkable when one considers all
the responsibilities placed on the
coordinator of an ever-changing
and growing program.”
Elliott joined Penn State as an
associate professor in 1984 and
became a full professor in 1990.
Before joining Penn State he was
an associate'professor of agricul
tural engineering at the University
of Delaware. Elliott is a registered
professional engineer and a mem
ber of numerous honor societies
and professional associations, in
cluding Tau Beta Pi.
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