In the last column I discussed financial shock absorbers because of general uncertainty and volatility. This article was the result of a young agriculturalist from Illinois who challenged me in a seminar in a very polite manner.
His premise was that a young producer is usually at a disadvantage in working with a lender because they do not have a number of years to build equity or inherit equity to be attractive enough for a lender in financially adverse times.
Yes, this young man was correct in many cases. The equity older producers have accumulated can be used as a financial shock absorber in a downturn. However, each refinance will often result in a loss of 5-10% of equity. This is particularly true in the economic down cycle where negative cash flows or losses are converted to the liability side of the balance sheet and financed over a longer term. A few years of repeating this exercise can result in substantial loss of the producer’s equity, which is often relied upon for retirement income in the form of farm assets.
The younger producer must have a risk-management plan to protect earnings or the profit margin of the business in the positive side of the cycle. These profits are first converted to working capital, and then long-term equity accumulation. The priority of financial shock absorbers for older producers is opposite of younger producers.
Frequent Priority of Financial Shock Absorbers