Things have been going pretty good, but nothing lasts forever and the bottom is a lot further from the top than it used to be. It would really hurt to fall at these levels, but the next downturn will happen.
Did we learn anything from the agricultural bust of the 80’s, or are we turning a blind eye to reality?
Today the numbers are bigger. A 10,000 to 12,000-acre operation can go upside down, 3 million to 4 million quickly.
Volatility is greater. Price swings, market factors — it’s all more volatile now. You need to be on top of this stuff before it gets out of hand quickly.
Livestock market planning has never been more important.
Concentration of debt is greater. Much of the debt is in fewer hands – we don’t have a farm debt problem, but rather, a debt concentration problem.
Trade and global risk: This is one of our biggest risks, like when the Ukraine problem arose, railcars switched to carrying energy and not grain, and China’s slowdown in corn imports has a large impact on prices.
Lenders are complacent about the build-up in collateral. The 5 C’s of lending are collateral, collateral, collateral, collateral, collateral. If it’s a one-year downturn in commodity prices, repayment of debt will be impacted, but if it’s a two or three-year downturn, liquidity will be affected. If we see ﬁve years of lower prices, collateral will be impacted.
The need for money management will be greater in the years to come. Instead of just borrowing money, producers will need more management advice and scrutiny of collateral. Lenders will be spending less time with the 4% of borrows that are in trouble and more time with the 96% of their borrowers that are current on their payments.
These are the people that will turn into the disastrous segment of our agricultural economy. They will be blindsided by unmanageable income.
Producers will need teachers, coaches, and facilitators. Problems start in the “go, go” cycle and education starts in the “whoa, whoa” cycle, meaning that most anyone can make it when everything is going good, but when it turns bad only the smart will survive. Issues will start before ﬁnancial reports reﬂect trouble, and that’s when you need to turn to someone like Knightro to make sure you have a livestock-marketing plan in place.
Education — not money will be the key to success.
Liquidity will be a problem. You will have debt that is not at all related to the functioning of your business. This is the debt that will be hard to liquidate when you should be growing working capital and making more money — instead of spending it all.
Some Of the Lessons Learned From the 80’s
Cut business cost. Get better before you get bigger, and attack your biggest expenses ﬁrst, such as the cost of livestock and feed. You don’t just get on the phone and order a thousand feeder calves or plant your crop base without a cost/proﬁt analysis, such as buying conventional seed corn or changing crop rotation. Designer seed corn stacked with traits will cost you twice as much, or a crop rotation of 2/3 soybeans and l/3 corn, which may double your crop income. Unfortunately, we get caught up in “keeping up with the neighbors” or meeting our own needs rather than that of the market. When you tighten the belt these things have to be taken into consideration.
Seek non-farm revenue. This helped in the 80’s but might not be as helpful now, as most livestock operations are too large. It’s hard to ﬁnd an off-farm job that will cover debt payments.
Cut living expenses. Get real; farmers say they spend $30-$40,000 on living expenses, but most are spending more like $60-$90,000. And according to statistics, one in ﬁve livestock producers spends more than $200,000 on annual living costs.
Off-farm debt. Debt totally unrelated to the farm will be the biggest threat to the next downturn. Million-dollar condos on the ﬁfty yard line or yachts and private planes will compound the debt recovery beyond the point of no return.
Did we learn from the 80’s, or will the next downturn make the 80’s look like a Sunday school picnic? It’s difficult for a cat to go from eating cream to eating skim milk — the cat will leave home.