Incorporating forward information in credit analysis

Evaluation of a borrower's credit worthiness often rests to a large degree upon historical information gleaned from credit reports, financial statements, and past repayment performance. The underlying assumption is that if borrowers were good enough to make it through previous periods of low commodity prices, they must represent good future credit risks. With the phasing out of program commodity payment and elimination of other programs such as ad hoc disaster payments, farmers and their lenders will be reintroduced to the marketplace. Here they will find that global production, fostered by freer trade, coupled with removal of federal supply management policies, will lead to greater annual price and income variability in the future. This evolving environment raises serious doubts as to whether past term debt repayment performance is a good predictor of future term debt repayment capacity.