The autumn season is often when lenders begin strategic planning, budgeting, and forecasting for the next fiscal year. This period is a time of reflection, renewal, and regeneration that helps lenders stay competitive in a marketplace that is chaotic, with surprises around every corner. As an educator, business owner, consultant, and speaker serving the agriculture and lending industries, I find that the mailbag of questions from audiences offers thought-provoking engagement. These questions and perspectives provide an opportunity to explore broader themes, some new and others that have weathered the test of time. Among them is a wide range of views on competitiveness, particularly in today’s unpredictable agricultural marketplace. Those who have generously shared their thoughts and experiences have helped shape some of the insights and conclusions explored in this article.
Organizations across industries, including farm operations and agribusinesses, often have a natural tendency to add layers of management oversight and adopt a more formalized organizational structure as they grow or consolidate. This can lead to the “bad ABCs,” which hurt customer experience and productivity.
A is for arrogance. An organization can become a collection of fiefdoms and kingdoms, stifling creative and critical thinking. External customers and employees (internal customers) can be overlooked, often in pursuit of short-term or bottom-line results. An ego-driven culture, rather than a collaborative one, can be a symptom.
B is for bureaucracy. As layers are added, people may operate with a silo mentality without awareness of the unintended consequences for the broader operation or organization. Administrative paperwork, duplication, and unnecessary processes can contribute to unproductive work environments.
C is for complacency. Organizational success and an entrenched culture can create a risk for employee complacency or a “that’s not my job” mentality. Common symptoms include failed customer service, slow responsiveness, and risks that are not identified in a timely manner and addressed with corrective action.
Try the “3-3-3 Rule.” A fun and productive first step for any organization, including a farm operation or agribusiness, is to determine whether it exhibits these characteristics. During the next planning session, apply the 3-3-3 Rule: Identify three strategies or actions to continue, three to improve, and, most importantly, three to eliminate. The toughest action may be elimination in a society that continues to pack more onto the agenda.
Many lenders and producers ask me, “What do you think separates agricultural producers who adapt and grow from those who struggle? How should lenders adjust the way they evaluate and support these operations?”
Own the Financials
Producers who thrive in both profit and lifestyle take ownership of their finances. They know that developing and understanding their finances, both the business and the household, goes beyond complying with a lender’s request or managing taxes at year-end. They develop and monitor their finances throughout the year, including cash flows and working capital positions.
Know the Break-Evens
Thriving business owners and management teams know their cost of production and marketing on the margin, and they realize that in a volatile economy, break-evens are a moving target. Thus, spreadsheets and financial sensitivity analysis that test price, costs, interest rates, and production are critical.
Lenders and producers alike ask me, “This next renewal season for operating monies and the refinancing of low-interest-rate COVID-era loans are likely to create some crucial conversations. Do you have any advice?”
Start the Conversations Early
Delayed conversations between lender and borrower can send a signal that creates a false sense of comfort. This can result in shrinking options, both in time and alternatives, if a workout or refinance is needed.
Run the Numbers
A good set of spreadsheets analyzing how a 50- to 100-basis-point increase on operating monies affects cost of production, break-evens, and cash flows can be a starting point. The sticker shock is most likely on intermediate- and long-term, low-interest-rate COVID-era loans that need to be refinanced. Refinancing could double the interest rate, so implications for the life of the loan and business viability must be considered.
Look Past the Restructure
If working capital is replenished through restructuring but corrective actions have not addressed the losses, how long might the new working capital last?
Expect Emotion and Set Clear Expectations
Some borrowers may become emotional and may threaten to leave, only to return when other lenders prove less accommodating. Clarity in expectations, along with scheduled monitoring of covenants and financial parameters, is critical.
One of the hottest topics at agricultural lending schools and conferences is the use of artificial intelligence (AI). AI can process large amounts of financial information quickly, identify trends in financial ratios, and flag exceptions and inconsistencies. Some lenders are using AI to draft loan narratives and documentation.
Where Human Judgment Still Matters
Unlike a human, AI currently cannot fully analyze management and nonfinancial factors, such as divorce, medical situations, and other circumstances that can quickly affect credit risk. Without human discretion, AI often cannot accurately judge assumptions, a borrower’s capacity to manage more debt, the pressures of an expansion, and other gray areas.
The Optimal Blend
The optimal blend is the analysis of the numbers combined with human judgment to connect the dots, balancing high-tech and high-touch.
As a side note, some lenders report a shortage of credit analysts because people considering these positions fear that AI may soon eliminate these jobs. That fear may be misplaced. AI can speed up the analysis, but human judgement remains crucial, so the credit analyst who combines both may be more valuable, not less.
In what areas do agricultural lenders need to be vigilant? Watch carryover debt and, more importantly, the reasons behind it. If profits and cash flow are a concern, how are they affecting working capital and equity erosion? If problems persist, what is the backup operating plan? Is it reasonable? Can both the borrower and the lender execute and monitor it with a sense of accountability?
Here are five reasons for agricultural lenders to be positive:
1. Stable Balance Sheets. Farm equity and land values have remained stable in most regions of the country.
2. Gradual Credit Stress. Credit stress is rising slowly rather than abruptly.
3. Structural Adjustments. Producers with a strong management mindset are making structural adjustments.
4. Transition and Estate Planning. Transition management and estate planning needs are accelerating, and a good agricultural lender must be at the table.
5. Beginning Farmers and Ranchers. Do not forget this group. Recognize that they are often older than many lenders expect and include more women than in the past. Never forget that a small loan can morph into a large, lifetime business relationship.
As lenders plan for the coming year, they should expect surprises, start the tough conversations early, keep the numbers sound and never lose the human touch.
My economic update is based on my engagement this year with bankers, small business entrepreneurs, and thought leaders across thirty states. While expectations vary across sectors and demographics, the majority of businesses and households remain guarded in their approaches to investment and spending. This caution results from a combination of factors:
● Persistent inflation, both core and headline, is squeezing margins, particularly for small businesses, farms, and ranches that often lack pricing power: Households and individuals at the lower and middle segments of the K-shaped or E-shaped economy are experiencing financial pressure. This is evidenced by the buildup of credit card and personal debt and rising delinquencies. Employment, while remaining strong with modest wage growth, is less influential on spending than the wealth effect experienced by those who own assets such as stocks and real estate, where paper wealth gains fuel spending and investment. This wealth effect is particularly evident among the nation’s most affluent households. The top 10% of income earners represent a small fraction of the population, but account for nearly 50% of total economic consumption.
● High energy and food prices have driven inflation higher across all sectors: These pressures carry longer-term risks stemming from the ongoing military conflicts, supply chain disruptions, the destruction of vital infrastructure, and a chaotic geopolitical environment. Planning and forecasting at all levels are shifting from a just-in-time approach to a just-in-case mindset to address extremes in economic volatility.
● The short- and long-term impact of inconsistent tariffs, sanctions, and trade agreements with major trading partners is creating extremes in the availability and prices of inputs, as well as revenue volatility: Businesses that are export- and import-driven may continue to feel these effects, which erode purchasing and pricing power, reduce confidence in long-term decision-making, and raise risk.
● Elevated short- and long-term interest rates and a higher cost of money for government, businesses, and households are likely, due to a confluence of events: First, the inflationary pressures noted above will remain persistent. Second, unsustainable federal fiscal policy, deficits, and the national debt will continue to exert pressure on the cost of capital. Third, competition for capital resulting from the AI buildout, along with productivity expectations and the lag effects that often accompany new technologies, will influence capital markets. Compounding these pressures are high debt levels among major global economies. These conditions are reflected in 10- and 30-year bond and Treasury yields, affecting the housing sector as well as businesses seeking expansion, investment, refinancing, and restructuring.
While modest growth in the U.S. and global economies is evident, a number of factors could affect economic forecasts, as well as profit and cash flow projections for customers and the health of the loan portfolio at any time.
Autumn 2026 brings plenty of uncertainty on top of the economic drivers described above. The midterm elections add another layer of policy uncertainty. As a result, leading and lagging indicators may have less predictive power than in the past. With this caveat in mind, let us examine the indicators on the dashboard.
LEI and Diffusion Index
The Leading Economic Index (LEI) and its diffusion index are essentially neutral, with changes of 0.2% or less in recent months. These movements do not suggest a major economic downturn or robust growth. The diffusion index, which tracks how many of the 10 components are rising, has shown 50% to 75% of them moving in a positive direction, providing further evidence of a modest-growth economy.
PMI
The Purchasing Managers’ Index (PMI) has been in growth mode, registering above 50 (the dividing line between expansion and contraction) in recent months. This reflects the AI buildout, which is fueling investment and growth in manufacturing. Both the PMI and factory utilization (which has shown some positive movement) suggest modest strength in the economy.
Housing
As noted above, increases in 10- and 30-year Treasury yields have slowed the housing market. While housing starts remain above recessionary levels, they are trending lower. The overall market is experiencing tepid growth. Existing homeowners with low COVID-era mortgage rates are staying put. Mortgage rates in the 7% range are limiting affordability for those seeking new homes or needing to relocate for a job.
Decades ago, the ratio of median home prices to median household income was under 3-to-1. Now, it is above 6 to 1, stretching the finances of existing and prospective homeowners. Housing is a major driver of the U.S. economy and has significant implications for agriculture, particularly the forestry industry.
Unemployment
In recent months, job numbers have declined when adjusted. Unemployment rates have increased slightly, led by the U-3 rate (the headline measure) at 4.2%, while the U-6 rate (which also counts discouraged and part-time workers) has declined marginally to 7.6%. The “no layoffs, no hires” environment appears to reflect uncertainty in the economy and what the AI buildout could mean for the workforce.
Consumer Sentiment
Consumer sentiment, as measured by the University of Michigan survey, shows a pessimistic consumer. That pessimism persists despite growth in consumer retail spending, particularly at the high end of the K-shaped economy. Close monitoring of credit card debt, personal debt, and delinquency rates can provide early signals of the direction of the economy, particularly for consumers at the lower end of the K-shaped economy.
Inflation
Headline and core inflation, along with the factors driving them, were discussed above. Whether in agriculture or the general economy, it appears that inflation is not transitory, but rather persistent and sticky.
Downside Risks
Should economic growth slow due to shocks, such as a 20% decline in the stock market lasting more than six months or a spike in Treasury yields on 10- and 30-year maturities, the economy could slip into stagflation, similar to the 1970s: modest to high inflation and slow economic growth.
Dr. Kohl’s Year-End Watchlist
As the year closes, these four developments deserve close attention:
● Direction of the 10- and 30-year Treasury yields.
● Declining job numbers, which could reduce the likelihood of the Federal Reserve increasing interest rates.
● Narrowing stock market leadership, concentrated in technology, and the risk that a decline could hurt investors trading on margin.
● Potential black swan events tied to AI (sudden, unpredictable shocks) and their impact on U.S. and global consumer spending, investment, and economic activity.
Dr. Dave Kohl is an academic Hall of Famer in the College of Agriculture at Virginia Tech, Blacksburg, VA. Dr. Kohl has keen insight into the agriculture industry gained through extensive travel, research, and involvement in ag businesses. He has traveled more than 10 million miles, delivered over 7,000 presentations, and published more than 2,500 articles throughout his career. His experience and engagement across all levels of agriculture provide a unique perspective on emerging trends and the future of the industry. Dr. Kohl is a valued and longstanding contributor to Farmer Mac's commitment to helping agricultural lenders, producers, and rural stakeholders navigate opportunities and challenges in a changing market. He writes exclusive articles for Farmer Mac that are published bi-monthly, offering timely insights on agricultural markets, rural economies, and business management strategies. In addition, Dr. Kohl regularly joins Farmer Mac's webinar program as a featured guest, sharing his expertise with audiences who are dedicated to supporting the long-term success of rural America.
Follow Farmer Mac on LinkedIn to receive the latest Dr. Kohl GPS article and stay informed about upcoming webinars featuring his insights and perspectives on the agricultural economy.
Opinions, forecasts, estimates, projections, and other views in this report constitute the current judgment of the author as of the date of this report, do not necessarily reflect the opinions of Farmer Mac or its management, and should not be construed as indicating Farmer Mac’s business prospects or expected results. The information contained in this report has been compiled from what Farmer Mac regards as reliable sources. Farmer Mac does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose and Farmer Mac disclaims any responsibility for the information, third-party opinions, and data included in this report. Farmer Mac has no obligations to update, modify, or amend this report or to otherwise notify a recipient thereof if any opinion, forecast, or estimate contained herein changes or subsequently becomes inaccurate. Information from this report may be used with proper attribution. Alteration of this report or its content is strictly prohibited.