Agricultural Lending

Production Loans

Perhaps the most volatile form of agricultural lending is short-term production credit. Normally, production loans are self liquidating, with repayment occurring shortly after harvest from sale of the crop for which the loan was made. When a bank has a reasonable process to analyze projected cash flow and the projected cash flow indicates the borrower has the ability to repay the operating loan, the current year operating notes are normally rated pass.

When operations have deteriorated and it becomes apparent that the current operating cycle will not result in sufficient production to cover the bank’s operating loans, the decision to classify the loan and the severity of classification should begin with a review of the primary collateral, the financial strength of the borrower, and any other sources of repayment.

The amount of collateral represented by cash crops being held for future sale is considered liquid collateral if the value is properly documented with a current market price, the lien is perfected, and the location is verified. Any loans, or portions of loans, covered by this collateral are normally rated pass.

The proper classification for any portion not covered by the liquid collateral will depend upon the borrower’s repayment capacity and the value of any other collateral.

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