Only need to do the Risk and Mitigants section (highlighted in yellow).
Morris Farms LLC - Case Study.docx Rabo AgriFinance Case Study Presented to CSUMB March, 2021 Recently, Morris Farms, LLC approached Rabo AgriFinance about moving its lending relationship from its current lender, and Rabo AgriFinance’s Relationship Management Team has met with company management several times. Morris Farms is well known in the Salinas Valley and is a highly sought-after client. The company’s founder, Red Morris, is well respected in the farming community, and the entire Morris family is known widely in Salinas Valley agricultural industry circles. Morris Farms has requested two loans from Rabo AgriFinance: a $5,000,000 operating line of credit and $1,000,000 to purchase equipment. Morris Farm’s existing line of credit with its current bank is $5,000,000 and, per management, this has been adequate for them in the past. Morris Farms also has some existing debt secured by equipment and real estate, however, management is not now interested in refinancing that existing term debt. To support its requests, Morris Farms has provided the following information: · A Background and Management Overview, including analysis of the industry · Three years (2018-2020) of CPA compiled financial statements of Morris Farms · Personal financial statements provided by the stockholders Instructions: Using the information provided, complete a Credit Application for Morris Farms. Draw conclusions about the Company’s financial position and the risks associated with the deal. Determine whether the line of credit commitment requested is appropriate; if you believe it is not, you may recommend a different commitment that you believe is appropriate. You must also specify the key structural elements of both requested loans (or the loan(s) you determine are appropriate), including term/maturity, payment details, guarantor(s), “subject-to” conditions, reporting requirements, covenants, and so on. Remember, it’s less about getting it “right” and more about supporting your recommendation with your analysis of the information provided and identifying specific mitigants that you believe will lessen the impact of specific risks you have identified. Business Background and Management Overview - Provided by Morris Farms, LLC: Morris Farms, LLC (a Subchapter S corporation) was established by Red Morris in 1980 and is one of the largest growers in Monterey County. Morris Farms grows, markets, and ships a variety of vegetables including broccoli, lettuce, spring mix, romaine, spinach, and cabbage. Morris Farms ships to both food service and retail channels. Morris Farms sells its crops on both the open market and under contract. Contracts are generally fixed price, with buyers being responsible for all harvesting operations and costs. Some contracts include market triggers which give Morris Farms a share of market prices above the specified trigger points. All product that is sold on the open market is harvested by Morris Farms. Morris Farms does not transition to the desert region in winter, thus it cannot provide year-round employment to a field labor force, thus the Company uses an independent labor contractor to provide its labor crews. Morris Farms operates on both owned and leased acreage totaling approximately 5,500 acres during the three years covered by the financial statements. COVID19 has had only a minimal impact on Morris Farms’ operations. Although the original shutdown orders initially prompted major concerns, the company sold largely to the foodservice sector which, it turned out, continued buying throughout the pandemic. Morris Farms did receive a $900,000 Paycheck Protection Loan in April 2021 through Mechanics Bank based on applications it had filed during 2020. Management Team: Red Morris is gradually moving away from day-to-day management of operations but remains active in an advisory role. His sons, Ricky and Bobby, have assumed primary responsibility for operations and share in the company’s management. Ricky oversees farming operations and manages relationships with buyers. He also manages all customer collections and contracts. Bobby, a CPA, is currently the company’s chief financial officer (CFO), having taken on that role in 2019 after serving as company Controller for five years. Ricky and Bobby have only recently assumed full-time responsibility for company operations and management. A clear, written succession plan is not in place. Both Ricky (and his spouse Linda) and Bobby (and his spouse Tammy) do have children who might enter the management of the company in the future. The ownership structure of the company now is as follows: Industry Analysis: Fresh Vegetable Markets: Although fresh produce shipments to the foodservice sector stopped abruptly by the third week of March (2020), consumers rushed to the grocery stores, binge-buying, and resulting in escalated retail prices. Following that initial surge of about 30%, the demand for fresh produce shifted to categories with longer shelf-lives, that cook well, or are easy to snack on; evidenced by increases in year-over-year sales of frozen produce of 41% and of shelf-stable produce (such as potatoes and onions) of over 50% according to Produce News. According to Rabo AgriFinance’s internal research group, the surge in US COVID-19 cases near the end of 2020 and the dine-in restrictions in many states and cities appear troubling to some forecasters. Although these restrictions might weigh on consumer behavior for a short period, we expect US foodservice recovery to continue as many early COVID-19 hotspots show no resurgence during the current (early 2021) wave of increased cases. Between late March and July (2020) food service accommodation spending has rebounded; after being down 67%, it is now down only 34%. More encouragingly, food service retained most of its previous recovery, even as daily reported COVID-19 cases more than doubled. Also, consumer spending is largely unchanged in new virus hotspots which suggests that both businesses and consumers have adapted in ways unlikely to reduce Morris Farms’ sales in the near term. During this time of year, most lettuce and leafy green crops are coming out of desert regions (primarily Yuma, Arizona). Early reports indicate that winter markets were soft due to strong yield and favorable weather. Morris Farms does not farm in the desert region and the first calendar quarter generally is a relatively slow period for them as they will not start harvesting their earliest crops until late March/early April. Labor: The agricultural market is actively seeking solutions for rising labor costs and product demand. The supply of farm labor is a growing concern for California Ag operators in general. Increasing labor regulations also add to the challenge, including the recent passage of California AB 1066 (that imposes new overtime pay requirements). CPA’s Compilation Report Management is responsible for the accompanying financial statements of Morris Farms, LLC, which comprise the balance sheets as of December 31, 2020, 2019, and 2018 and the related statements of income for the years then ended in accordance with accounting principles generally accepted in the United States of America. We have performed compilation engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. We did not audit or review the financial statements nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. We do not express an opinion, a conclusion, nor provide any assurance on these financial statements. Management has elected to omit substantially all the disclosures, the display of comprehensive income, and the statements of changes in stockholders’ equity and cash flows required by accounting principles generally accepted in the United States of America. If the omitted disclosures, the display of comprehensive income, and the statements of changes in stockholders’ equity and cash flows were included in the financial statements, they might influence the user’s conclusions about the company’s financial position, results of operations, and cash flows. Accordingly, the financial statements are not designed for those who are not informed about such matters. /s/ Anonymous & Able, LLC, Certified Public Accountants Salinas, California February 24, 2021 Rabo AgriFinance Case Study Credit Application General Information Borrower(s): Owners, including %: Requests Requests: Provide a summary of what is requested for Credit to decision. 1. State the request 2. State the purpose of request/use of funds 3. High critical structural elements, as applicable · Borrower(s) · Amount · Term and maturity · Amortization (term loans only) · Payment details (type and frequency) · Interest rate · Guarantor(s) · Subject To Condition(s) · Reporting Requirements · Financial Covenants Business & Management Overview Business Background: Include a brief overview of the Company’s operations. Key points to consider include: · Type of operation – How does the business generate income? · Size of operation – Depending on the business this may be expressed in terms of production/throughput levels, asset size, market share, # of acres, or # of cows. How does this compare to peers? · Marketing strategy – How and to whom is product sold? Is there any reliance on key suppliers or off-takers? · Ownership structure – Who owns the Company? · Business strategy – Describe the plan for the operation on a go forward basis. Are there or will there be any changes to the business? Examples include expansion plan, new or shift in products, relocations, asset sales/purchases, etc. Management Team: Briefly summarize the owners and key managers and their relevant experience. Is the business dependent on only a few key individuals? Industry Analysis Industry Analysis: Describe the industry that the borrower operates in. State the near term and long term outlooks. Is the industry mature, stable, growing, or declining? Where available, reference recent industry studies or publications that can support analysis Financial Analysis Decision makers need to know your conclusions on the financial risks and mitigants in each section below. Conclusions should be supported by facts and contribute to an overall conclusion on the financial health of the entity being analyzed. Scope Description: At the beginning of this section, insert a brief paragraph in which you describe and summarize the entities being analyzed and the time period(s) covered. Discuss quality of financial statements, the basis of accounting (e.g. accrual, cash basis, etc.), and identify any implied information risk that results from financial statement quality or reporting basis choices that the entity(ies) have made. Using the borrower’s financial statements, complete the following sections. Summarize each factor’s overall trend and provide supporting evidence using key financial ratios. Borrower Analysis Profitability: Summarize the overall profitability trends of the entity analyzed. · Describe how revenues trended over the period analyzed and the underlying factors/drivers contributing to the trend (in other words, why are revenue trending this direction). Common drivers of changing sales include: change in growth cycle of a company, new or change in products produced/sold, change in pricing and/or rents, or change in volume/yields. · State how Cost of Goods Sold (COGS) changed and why. For example, was there a change in cost of raw materials or input costs? What is the resulting impact to gross margin? · How have operating costs (overhead/General & Administrative (G&A) costs) changed and what are the key drivers? · Specifically explain changes in net profits/losses. · Did profitability meet