Agricultural Lending

Inspections and Re-evaluations

Ideally, inspections and re-evaluations will be performed by a qualified person other than the lending officer who was responsible for the credit decision. However, when such a separation of duties is impossible or impractical, every effort should be made to periodically re-affirm inspection results by independent means. Methods that banks have used to accomplish this include periodically rotating the inspection duties among bank personnel other than the primary lending officer, using outside directors as inspectors/re-appraisers, and contracting the services of an independent third party. Moreover, as with any confirmation process, greater credibility is placed on the results of inspections conducted on an unannounced basis.

Short-term production loans require varying degrees of collateral monitoring in addition to financial analysis and initial collateral perfection. This typically includes periodic inspections and re-appraisals/evaluations. Depending on the type of collateral and the operating cycle, the lender should inspect and re-evaluate short-term collateral at least once during the term of the loan. In general, most agricultural lenders are aware of the growing conditions in their trade area, which gives them a sense of what to expect of borrower crop conditions.

Breeding stock normally should be inspected at least annually. Some livestock, such as those being fed to market weight or the offspring from reproduction, are under the borrower’s control for less than one year. In these cases, the lender should inspect and appraise the collateral at least once during the period of ownership. Many banks maintain an in-house running inventory of livestock bought and sold which they compare with the results of the inspection.

For stored commodities, third-party warehouse receipts in the possession of the bank normally provide suitable evidence of the collateral. On-site inspections, however, should be performed when products are stored in the borrower’s own facilities or in other non-bonded facilities.

Non-real estate collateral supporting term debt should be inspected and valued on a periodic basis. Collateral condition and marketability should be included in the documentation.

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