While not all of agriculture has experienced the economic freefall, there are proactive management lessons to be learned from the latest crisis.
There is a sixth “C” of credit other than the traditional five — capital, conditions, capacity, character and collateral. The sixth C is the cranium, or the mind. It takes a better mind to manage a $3-million loan as opposed to a $300,000 loan.
Clearly, a sound risk-management plan is necessary in these volatile times. Following are some of the teachable moments for farm businesses and families.
First, cash, liquidity and having a deep “war chest” of financial reserves is not an option, but a requirement. Lending sources dried up like a stream in the midst of a major drought. Jobs and overtime hours were cut back or eliminated, placing strain on households and businesses.
Financial gurus such as Suze Orman and Dave Ramsey recommend saving six to eight months of household cash or living needs to weather economic setbacks. I second their advice. Many livestock producers only wish they had built a financial liquidity cushion with prices declining to record lows while input costs remained high.
GRAIN PRODUCERS, ask yourself: “What if the grain industry goes into the same cycle as the livestock sector?” Have you built your financial and economic second team for the depth chart?
Do you use a marketing plan including options, hedging, crop insurance and other tools to mitigate and optimize the volatile swings in prices? You need to know your cost structure to allow for objective vs. emotional decision making. This will require a good set of farm records to help develop a plan. Don't be fooled by those who succeeded in topping the market. Often one year of success through luck will lead to five years of failure.
Next, do you have an input cost- or expense-management strategy?
Anyone who purchased fertilizer and other inputs when they peaked only to find that prices declined rapidly could benefit from this approach. Rather than a blitzing on cost management defense, a staggered approach to input cost management may be the best strategy.
Finally, debt management can either make or break your economic results. Don't get caught up in the current low interest rate environment. Failure to consider locking in some interest rates could result in an economic fumble with negative consequences.
Dave Kohl, PhD., Corn & Soybean Digest trends editor, is professor emeritus at Virginia Tech. He's published four books and over 500 articles on financial and business topics. You can reach him at email@example.com.
WHAT TO EXPECT
The recent American Bankers Association ag conference brought many insights for the near future, including:
Farmland prices will hold steady in many areas, particularly with low interest rates and relatively high commodity prices.
Ag bankers will focus on core deposits and core customers. Bank examiners are applying pressure on reviews, particularly poor quality information from producers and substandard credits.
One community banker's FDIC assessment will be more than a $4 million drain on profits. (Banks must prepay this assessment three years in advance.)
Larry Martin of Canada stated that there could be de-globalization through tariffs, trade sanctions and food-quality issues between countries if world economies struggle. Protectionism is rising with no long-term winners — only losers. There will be an increase of technical issues rather than tariffs to forestall trade.
Farm debt contrasted to the 1980s is very concentrated among larger producers who generate a majority of the revenue. A major issue may be that many producers are too large to finance, rather than too big to fail.