Posts

Cycles

Cycles

/0 Comments/in , , , , , /by

“It’s cyclical.”

This statement applies to so much in our world. From interest rates to fashion trends, from climate to markets, so much of what we see, hear, do, say, and feel is cyclical.

In meeting with commercial bankers recently, here are some of the points I took special note of in the conversation:

  • Many of our clients are struggling through a slow-down right now.
  • Very few applications are for growth. Most are to restructure, especially in preparation for increases to interest rates.
  • So many of our clients do not understand their balance sheet or how it affects their business.

The first bullet above led to a longer portion of the total conversation. The banker who made this statement went on to describe how the boom years we have recently enjoyed led many people (entrepreneurs and employed folks alike) to create some bad habits, such as not preserving cash (working capital) and increasing their debt. When things slowed down and business got tight, the debt payments still need to be made, as does payroll, and utility bills. Somehow, the elevated lifestyle expenditures that cycled up during times of easy prosperity did not cycle back down when profitability and cash flow did.

A similar sentiment was gleaned from an ag banker (who asked to remain nameless while granting me permission to include the response below) serving North West Saskatchewan and North East Alberta. When I asked about what the trend has been in that part of the province for farm land prices and rent rates, the response included the following:

“Profitability and cashflow has been squeezed the past 3 years, due to a combination of the weather anomalies (in most cases, more moisture than needed), increase in production costs, and financing needs (and in some cases may be “wants” vs actual “needs”).  Those producers/files with the stronger balance sheets and working capital positions, have fared better through this, compared to some others.”

For any of you who think that your business (or industry) is the only one to have to manage cycles, please understand that cycles are industry agnostic. The market does not care what you’ve been through, what your plans are, or what your name is. Your business plan needs to include M.O.C. – Management of Cycles.

Long time readers of my commentaries know that I have referenced Moe Russell of Panora, IA on more than one occasion. It was from Moe that I first heard the term M.O.C. – Management of Cycles. Moe tells the story of how he picked it up during a chance conversation in an airport with Matthias Grundler, the then Head of Procurement for Daimler. When asked, Grundler admitted that M.O.C. (management of cycles) was his greatest concern.

What cycle are we headed into right now? If we knew, if anyone truly knew, business would be so much easier! The risk, of course, is that we tend to get caught up in recency bias:

Recency bias occurs when people more prominently recall and emphasize recent events and observations than those in the near or distant past.
www.morningstar.co.uk/uk/news/…/why-recency-bias-is-dangerous-to-investors.aspx
By putting more credence into recent successes rather than recognition of impending change, we set ourselves up for what is happening in many small to medium sized businesses right now: financial stress leading to major upheaval in the business.

Plan for Prosperity

Trying to fight against the market cycles (or industry cycles as it may be) is like trying to fight gravity. Like it or not, it will affect you. Cycles have been happening for a lot longer than you’ve been in business, and will continue to occur long after you are gone!

“Bullet proof your balance sheet during the good times, so you can catapult ahead of your competitors during the bad times.
If you get greedy during the good times, you’ll likely be on your knees in the bad times.”

Moe Russell
President, Russell Consulting Group

Look back to the response above from my ag banker colleague; those (businesses) with the stronger balance sheets and working capital…have fared better through this…” The businesses that built a balance sheet to protect them during a down cycle are the businesses that are ready, and as such will take advantage of the opportunities presented by a down cycle. Those opportunities range from additional labor (that may have been laid off from a financially weaker competitor), picking up assets (land, equipment, or buildings) that may have been relinquished during the down cycle (and are likely far cheaper now,) or possibly even buying out a competitor who has been left in a weakened state by the market cycle.

“Market cycles will hurt some, but offer opportunity to others.
The difference between who suffers and who prospers is…Who’s Ready.”

– Kim Gerencser (March 2013)

Which side of that line do you want to be?

ThinkingMan

Thinking Time

/0 Comments/in , , , /by

This is following through on something I sort of dared myself to do in a tweet recently:

Thinking Time

I smiled at Danny’s tweet about about the lack of bites while ice-fishing and how it was contributing to crop plan changes for this spring’s upcoming seeding season (or “planting season” as it is also called.)

Thinking time is something that we seem to have less and less of these days. With the constant bombardment from numerous social media platforms, phone calls, text messages, and emails, it is amazing we are able to get anything done. Quiet time, disconnected from our “devices” is not only critical to staying sane (disclaimer: I am not a psychologist and that is not a psychological prescription) it is also required for some thinking time.

Consider the many aspects of your business, and the thousands of decisions you make every day. This doesn’t even touch on the “major” business decisions that need to get made through the course of the year. Many of those daily decisions are reactionary because the situation is something you’ve been through many times before, or you may have prepare for the decision with some planning. Other situations require that you stop what you’re doing to make the decision, whether that be from the situation being something you’ve never dealt with before, or possibly because you just hadn’t considered it and you’re therefore not prepared.

For me, thinking time happens all too frequently; it’s just how my mind is (always grinding away on something.) The challenge for me is that if I’m not prepared to record or act upon (what i think is) a brilliant thought or idea, it can get lost. It’s been suggested that I keep a note pad or recording device with me all the time. A great theory that is tough to enact when I”m driving, or when I’m laying awake in bed trying so hard to fall asleep; both are situations when my quiet time, my thinking time, seems strongest.

My new strategy is to dedicate a portion of each day to thinking time. It’s not scheduled, nor is it rigid in practice. I allow myself the time, possibly a few times each day, to do the creative thinking I need to do in my business when the juices begin to flow. This allows me to take notes of my brainstorming, to elevate my confidence in that I have captured what are (in my mind) brilliant thoughts and ideas, and reduces angst over the “I had a great idea on _____________, and I lost it!” <insert curse words here>

When I was farming, some of the best opportunity for thinking time was in the tractor; I’m sure it’s the same for many of you. The problem is that thinking time in the tractor while seeding is too late to be crop planning. Although, it is a terrific time to give thought to your financial reporting from the previous year and tactics to improve for the current year.

To Plan for Prosperity

There is an almost immeasurable amount of information coming at us from the virtual world and from the plethora of farm shows scheduled across the prairies all winter. To sort out all of the information available to you, and not be overwhelmed in the process:

  1. Set aside some designated thinking time on a regular basis (unplugged, no devices, no distractions;)
  2. Enlist the guidance of advisors who experts in their field;
  3. Give yourself the leeway to make mistakes. Perfection is unattainable.

Thinking time should not be limited to current issues or the next three months. Also include the next three years. Your business is an ocean freighter, not a speed boat; changing course and making adjustments cannot happen quickly, they take time and deliberate action.

CYFF

CYFF (Canadian Young Farmers’ Forum)

/0 Comments/in , , , , , , /by

Greetings from CYFF

The Canadian Young Farmers’ Forum brings together farmers from across Canada. This past weekend in Ottawa, they held their annual convention and invited me to speak as part of their agenda.

There were many takeaways from the event; here are a just a few, with my perspective following in brackets.

  1. Agriculture is incredibly diverse right here in Canada. (We shouldn’t just stay in our little echo chamber with others who produce the same as what we do.)
  2. Even with such diversity, young farmers face similar challenges across all sectors and across all provinces & regions:
    1. Building and protecting adequate working capital is difficult (I’ll keep preaching the importance of this;)
    2. Profitability is cyclical (we may have heard this before;)
    3. Competition is increasing for land, labor, etc (and they’re stressed out trying to figure out how to handle it;)
    4. Small farms struggle to compete with large scale & well capitalized operations (yes, there are large potato, berry, vegetable, dairy, poultry, & egg farms like there are large grain and cattle farms, and competing with them for land and labor is just as tough;)
    5. Young farmers feel lost when trying to determine if/how their parents ever plan to slow down/retire (this also applies to every other family business, not just farms.)
  3. The desire to learn more and be better is strong (learn, unlearn, relearn.)
  4. The desire to take part in something bigger, such as industry groups with lobby or policy influence, is significant.

CYFF is for farmers under 40. Based on the passion of these young farmers, and their desire to learn & be better at everything they do, I think the future of agriculture in Canada is in good hands.

To Plan for Prosperity

The issues you face, the challenges you struggle with on your farm are the same as almost countless other farms. The relief and comfort seen on the faces of these young farmers when that became evident was obvious. They felt less stressed and less alone when they realized that they are not the only ones feeling the angst, the despair, or the helplessness that dogs their personal situation at home.
Don’t sit alone and wallow in your own anguish over what challenges you in your business. Sharing your trials and tribulations will not only help mentor the passionate successors to our industry, it may help you find comfort in knowing “you’re not alone.” It might even turn up a solution.

iconic backstop

Backstop

/0 Comments/in , , , , /by

What’s your backstop?

Recently, I read an article from some economist on interest rates. The premise was that interest rates have to rise in the short term, even though the economic signals aren’t yet supportive of an interest rate increase. The rationale: if the economy hits another pothole, and rates have remained at their historic lows, then there is little in the way of monetary policy options available to kick-start the economy. In other words, if rates stay low and the Bank of Canada (or the US Federal Reserve for that matter) needs to reduce rates to stimulate spending, how can they reduce rates that have no more room to go down? Do we toy with the idea of negative interest rates? It appears we have no backstop.

The challenge now is how to prepare for a potential future trouble spot when there is presently no wiggle room. To increase rates now will all but guarantee that our fragile economy will stumble. By not raising rates now leaves no room to reduce rates in the future (if needed) and all but guarantees that a potential trouble spot will be far more than a spot, it would be a huge stain. Damned if you do, damned if you don’t. I do not envy Governor Stephan Poloz’s job at all…

Does it seem as though there was too much confidence from policymakers, thinking like it can’t happen to me? Some might say that the policymakers didn’t want to to what it took to prevent fire and now may have to fight fire.

This thinking can also apply to child rearing. Kids who typically get what they want, especially after whining, usually fall into tantrums when parents offer a firm “No.” Without laying a baseline for what is acceptable and tolerable behavior from their children, tantrums ensue. In other words, the parents have left themselves with no backstop.

An effective backstop for your business can apply to many different facets: personnel, equipment, agronomic, risk management, etc. From the financial perspective, your backstop should be made up of several key pieces:

  1. Working Capital (especially cash)
    Strong working capital solves many problems, and prevents even more. It reduces cash flow risk, takes significant pressure off of market risk, and best of all it creates growth opportunities.
  2. Equity (and its relation to debt)
    If your business is weak in working capital and strong in equity, these low interest rates offer the best opportunity to recapitalize your farm. On the other hand, I smiled at a comment made by a client late in 2016 when he was postulating how fun and profitable farming would be without burdensome debt obligation weighing (him) down and pressuring (his) cash flow.
  3. Management Strength and Discipline
    Too often I’ve seen farm businesses that were strong in working capital and equity whittle away at their backstop to satisfy their expansion desires. Strength and discipline is required to not get caught up in the euphoria of more and more assets. It is also required for the business to keep growing (not just in size and scale;) large cash holdings and significant equity can sometimes be a sign of poorly allocated capital. Strength and discipline refers to avoiding both (opposite) extremes, and staying on task and on point with your strategic business plan.

Ideally, your financial backstop is a balance of all 3 points above. Too much, or too little, of any one point will be far less effective as a functioning backstop.

To Plan for Prosperity

Knowing your risks and actively managing them is the key step to understanding how much of a backstop you need. Under-emphasizing your risks or over-emphasizing your backstop both have potential to be detrimental to your business’ health.

Your 2017 Plan

Your 2017 Plan

/0 Comments/in , /by

If it’s not done yet, you’re already behind.

They say to be a successful chess player, one must always be thinking 3 or more moves ahead, each with one or more alternatives on how your opponent will respond. The same can be said for business. Successful business owners are already thinking about 2020 and 2023, with a big picture vision of 2027 (that’s three, five, and ten years out.) They know that the decisions made today will affect their circumstances not only next year, but beyond.

This is a difficult focus to maintain when trying to get through the day to day challenges while under fire. Weather, break-downs, employee or family bickering can all make your days’s best plans worthless is a blink. And when days roll into weeks, weeks into months, and months into years, it is easy to not have the time (or not take the time?) to plan because we’re just trying to survive the daily onslaught, and maybe find time for an evening or weekend off…possibly even a short holiday in summer.

The most common objection to planning that I’ve heard over the years goes something like this: “Things change so much and so often that any plan is worthless in a month, or less!” That is an example of the mindset that I won’t work with (I’ve just given a hint at how I vet any prospective business engagement.)

A plan is not a binding document; it is more like a road map that you’ve built yourself.

Like a map:

  • your preferred path to your destination is clear;
  • your options, should you need to detour from your preferred path, are laid out;
  • what lies beyond your destination is illustrated for your consideration.

Unlike a map:

  • you’re not taking someone else’s word for what lies ahead because you build your own route.
  • you have the power to create your own alternative options, not just accept what is already there;
  • you can rewrite your plan if it isn’t working well; good luck trying to rewrite a map.

Understand that the total package of planning for your business is actually 4 parts: Strategic (what), Tactical (how), Operational (execution), and Financial (results & growth). Don’t let this scare you! To form a habit of planning, one does not need to complete all 4 tiers. Start with what you know (for most farmers, that is “operations.”) While you likely have your entire operations requirements in your head, putting it on paper and sharing with your team is highly likely to reduce inefficiencies and frustration this spring.

To Plan for Prosperity

Choose your destination (goals.)
Set your course (strategy.)
Decide who is driving, who is support, etc. Provide your team with the training and resources they need to do their job (tactical.)
Execute, but have preparations in place for the unexpected (operational.)
Be informed on how each alternative action will affect your results and growth potential (financial.)

There’s truth in the old saying, “If you don’t know where you’re going, how will you know when you get there?”

My First Tractor

Why Tractors are Sexier than Spreadsheets

/0 Comments/in , , , , /by

Blame Kenny Chesney. He didn’t sing “She thinks my spreadsheet’s sexy.” Across all genres, I’d bet there is no one immortalizing accountants, bankers, and financial analysts in song.

Chesney’s 1999 release, She Thinks My Tractor’s Sexy is one of my favorites. At a time when farming didn’t get much attention and wasn’t garnering a lot of respect, it was a feel good jam that pumped me up every time I heard it. Seventeen years later, it still does.

Please realize that my opening statement above is tongue-in-cheek. I do not hold Kenny Chesney accountable for why tractors are sexier than spreadsheets. But the question still begs, why are spreadsheets unpopular when compared to tractors? Both are tools with specific uses. Both tools are effective, highly powerful, and multi-functioning. Both can create efficiency that is almost immeasurable.

Business owners can hire someone to run either tool, the tractor or the spreadsheet. If you were to follow one of the cornerstones of my advice, “Do what you do best, and get help for the rest,” then you’ve already likely hired someone to drive the tractor, right?

A long tenured ag professional, who will remain nameless, recently during a conversation with me describing one of his frustrating client experiences quipped,”If driving tractors is more important than running the business, we’re very near the end.” We laughed at the absurdity of the words, yet were stymied by their truth.

In a meeting with a client recently, we were discussing their growing ability to gather data from their operations. They shared the question posed by their equipment specialist “What are you going to do with all this data?” I instantly shot back,”Just collect it; we’ll figure out how to use it.” The goal is to make data collection a natural part of business activity, a habit, not a challenging task on the ever growing “To Do List.”

What we will do with that data, collected in part by/from the tractor, is more than likely import it to a spreadsheet. In that spreadsheet, we will be able to delve into the figures, sort them into a usable format, and ultimately make decisions that are more informed than ever before.

Direct Questions

Does running the tractor take priority over running the spreadsheet? Why?

If you’re not running your spreadsheet, who is? Does this pose a risk in your mind?

Do you make equipment purchase decisions without consulting the spreadsheet?

From the Home Quarter

Informed decisions lead to higher profitability. Higher profitability has a way of reducing risk. Reducing risk increases confidence.

Since spreadsheets make for informed decisions which ultimately increases confidence, and since confidence is sexy, doesn’t that make spreadsheets sexy?

Back to you Mr. Chesney…

 

 

3-circle

3 Circle Model in Transition (Succession) Planning

/0 Comments/in , /by

Twice in the course of a week, I was able to partake in a Canadian Association of Farm Advisors (CAFA) Succession Update following the 3 Circle Model http://johndavis.com/three-circle-model-of-the-family-business-system/
The three circles represent each of Ownership, Business, and Family: the critical components that hinder any business transition process. I was speaking in the business circle.

Working with family can be as incredibly rewarding as it can be incredibly challenging. The nature of living with those you work with, grew up with, and hang out with, leads itself to challenges just from being in such close continual contact. Throw in the communication challenges that every family must deal with, and it is truly amazing more family businesses don’t fail.

The illustration of the 3 Circle Model is a simple yet accurate depiction of why there can be challenges in family businesses. The root of the challenge, when tapping into the experience of experts who consult family businesses, is the relative inability of family members to separate the three circles. Issues that belong in the “business” circle often end up in the “family” circle; issues in the “ownership” circle often have heavy effects on the “business” circle; issues in the “family” circle usually ripple outward to affect both the “ownership” and “business” circles.

Success in separating the circles can only be had if all family members are conscious and intentional in their effort to recognize the tendency to let issues bleed from one circle to another and proactively manage their behavior to not let it happen. This is easier said than done.

3-circle-with-a-twistI especially like this graphic that Jim Snyder, National Director, Agricultural Practice Development with BDO, used in his opening presentation to describe the 3 Circle Model. When you think about torque, a planetary is a tremendous bit of engineering (a nice plug for all you gearheads.) Separating the three circles in the model creates a strong business and stronger family. A family affected by the crossover of issues between the circles will be in a constant state of damage control.

Direct Questions

How do you separate the issues you deal with in your family business between three distinct circles: family, business, and ownership?

When you become aware of family issues affecting business, or ownership issues affecting family, etc, how do you stop, reset, and refocus to deal with the issue and not let it “creep?”

Family business is the backbone of our nation’s economy. Are you a “family business” or a “business family?”

From the Home Quarter

There is a distinction between a family business and a business family (please contact me to discuss further.) Neither is bad, but there is a difference in mindset and approach to family, business, and ownership. Knowing which type you fall into will help you understand the challenges to be managed as you eventually navigate through the 3 Circle Model of your future business transition. Because, whether you acknowledge it or not, one day your business will need to transition. You might as well be ready for it…

inadequate working capital

Critical State – Maintaining Inadequate Working Captial

/0 Comments/in , , , , /by

I’ve gone on record many times saying that I believe that the lack of adequate working capital at the farmgate presents the greatest single risk to the future of many farm businesses.

Working Capital is calculated by subtracting your current liabilities from your current assets.

wrkgcap-graphic

It is important to calculate working capital correctly, not only to satisfy the requirements of your creditors, but for your own management information as well. Overstating your working capital will give false confidence. Understating your working capital could cause you to unnecessarily inject capital into the business, or to miss out on taking advantage of business opportunities.

Maintaining inadequate working capital carries many risks, both direct and indirect, such as:

  1. Relying on operating credit and trade (supplier) credit.
    Heavy, or total, reliance on outside credit to provide access to the capital necessary to run your farm is as great a danger as a reckless crop rotation. There is no guarantee that these credit vehicles will continue to be available in the future as they were in the past. How will the crop get seeded next year if there is no working capital, and no operating credit, available?
  2. Using debt to pay debt.
    Many businesses have plead their case by illustrating that the debt payments were always made on time. What they failed to recognize was that the debt payments made were sourced from an operating line of credit, and therefore using debt to pay debt.
  3. Loss of profit potential.
    By leaning on outside credit, many farmers are forced to sell grain when they need cash to make payments, revolve credit lines, etc. instead of selling grain at a point of opportune profit. Selling grain when you have to instead of when you want to can mean the difference between profit and loss.

In regards to building and protecting working capital, here are just a few of the tactics I offer:

  1. Know your Unit Cost of Production.
    This goes beyond crop inputs. It includes ALL costs to run the farm from fuel, to insurance premiums, to paperclips for the office. Knowing UnitCOP allows you to clearly understand where your profit is made.
  2. Stretch loan and lease amortization periods.
    Interest rates are low, and recently there are hints that it might go lower yet. Stretching your payback period allows you to enjoy making lower payments. This is especially helpful in a year when cash flow & profitability will be tight. Accelerate payments in years when cash is abundant.
  3. Plan with Strategy; Discipline in Tactics.
    Far too often, we see businesses that operate without a plan by simply focusing year over year on operations (getting the work done) and as such, most decisions are made in reaction to a need or want. By building a clear & well-thought out plan, decisions become proactive when employing discipline through the execution of the plan. Deviating from the plan (IE. a great deal on a new pickup!) can jeopardize working capital and future profitability.

Direct Questions

How often do you calculate your working capital? (HINT: it should be monthly at a minimum)

What is your minimum level of working capital to have available? (HINT: it should be 50%-100% of your annual cash costs)

What is your strategy to increase and maintain adequate working capital?

From the Home Quarter

Inadequate working capital causes business owners and managers to make decisions they otherwise wouldn’t. It forces their hand. It takes away their control.
Abundant working capital creates opportunity, allows flexibility, and puts control of the business in the owner’s and/or manager’s hands.
Critical State can be only a breath away when working capital is inadequate.

ready-for-harvest

Change, Risk, and Fear

/0 Comments/in , , , , /by

Change brings risk. Risk brings fear.

 

“Risk and the appearance of risk aren’t the same thing.

In fact, for most of us, they rarely overlap.

Realizing that there’s a difference is the first step in making better decisions.”

Seth Godin’s Blog – Apr 18, 2016

 

Change is the only constant in life. Charles Darwin is often credited with saying, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.”  There is no question that when it comes to production practices, farmers’ ability to change is very apparent.

Now if that would only apply everything…

There is a change on the horizon that almost every farmer will face: how to adapt to life when he or she is no longer farming. That tune has been sung, and will continue to be sung until the message gets through. Yet, by the relative inaction of most farmers to address succession, or transition as it is often called, it is easy for those of us beating the drum to ask, “Why aren’t they getting the message?” I’m less sure that the message isn’t getting through; I’m more convinced that it is the act of facing change that harks fear into the farmer.

Risk, on the other hand, is something every farmer has an appetite for. Without it, one cannot farm. The act of dryland grain farming in its simplest form carries more risk than most non-farmers could even comprehend. Contrast that to the risk that many farmers take in relation to cash flow and debt, and I have to question their comprehension of risk.

One will not fear what one perceives as zero risk. Lacking appreciation for the financial risk from decisions that will strain cash flow and debt levels is why there is little fear of that risk. Lacking action on addressing farm transition is based on a perceived risk.

“Risk and the appearance of risk aren’t the same thing.” The financial risk that many farms put themselves in stems from the LACK of the appearance (inability to fully grasp) of risk. The avoidance of the farm transition discussion is a result of the appearance (created in one’s own mind) of risk. In both cases, the real risk is not considered, but the appearance of risk, or lack thereof, is given full credit.

Direct Questions

What is the REAL risk of farm transition activities? That the next generation won’t do it as well, or the same as you…? (HINT: your dad felt the same way when you took over and you did just fine!)

If you believe a risk does not exist if you do not acknowledge it, explain how that same theory would work with your spouse or children?

Fear is a very real motivator, or demotivator. How do you go about understanding the risk to mitigate the fear?

From the Home Quarter

With change, there is always risk. Risk has an effect on everything we do, whether the risk is real or perceived. The fear of negative (or undesirable) outcomes can be crippling. It is easy to see how change can bring immediate crippling fear now that the connection has been made.

Change the way you look at risk, and you’ll have less to fear.

 

borrowing-binge

Borrowing Binge: At The Farm and Beyond

/0 Comments/in , , , , /by

Last week, I was emailed an article by Rob Carrick of The Globe and Mail. Carrick writes about Canada’s borrowing binge; no not our federal government deficit and growing debt, but Canada’s household debt. Let’s see how it applies not only to household debt, but farm debt.
**NOTE: Carrick’s article is below in italics, with my comments inserted in bold.

“It’s getting harder to see anything but a messy ending for Canada’s household debt binge.

This isn’t the beginning of a lecture on reducing your borrowing. It’s more a resigned observation of human behaviour. You can warn people to act now to avoid a potentially bad outcome in the future, but they’re not likely to do anything unless they see trouble dead ahead.

The second quarter of 2016 was a vintage moment in debt accumulation. Incomes rose, as Statistics Canada puts it, “a weaker-than-normal” 0.5 per cent, while household debt growth clocked in at 2 per cent. This is the Canadian way – keep debt levels growing ahead of gains in income.

On two counts, this is bad personal finance. Your household spending flexibility is negatively affected in the short term (you have less money to save, for example), and you’re more vulnerable to financial shocks ahead, such as rising interest rates or an economic decline that kills jobs. Clearly, most people aren’t worried about these risks.”

What risks make you worried about your debt load? Can you control them (ie. fusarium, sclerotinia, excess moisture, interest rates, commodity prices?)

“The explanation starts with the fact that we live in a world in which conditions for borrowing are as good as they can ever be. Interest rates are low and the economy, while tepid, is producing enough jobs to prevent unemployment from becoming a big issue.

In the field of behavioural finance, there’s a term called “recency bias” that describes what’s happening here. People are looking at recent events and projecting them into the future indefinitely. So far, it’s working. We’ve had low rates and a slow-moving but stable economic for years now, and there’s no sign of imminent change.”

“Recency bias” describes the not so distant thinking that canola wouldn’t go below $10/bu, meaning that “$10 was the new floor” (circa 2012.) There were many other behaviors and attitudes that came with that thinking. How quickly forgotten are the years of poor quality and inconsistent yields…

“Under these conditions, there’s no reason to heed the repeated warnings from the Bank of Canada, economists, finance ministers, credit counsellors and personal-finance columnists about the dangers of taking on more debt. And so, the ratio of household debt to disposable income hit a record 167.6 per cent in the second quarter, up from 149.3 per cent in the second quarter of 2008.”

Is there a reason to heed the warnings from ag economists, management advisors, and creditors about the dangers of taking on more debt….? Depends how much debt you currently carry. 

“Recent warnings about debt levels give us an idea of what could happen if there are any economic shocks ahead. The credit-monitoring firm TransUnion said earlier this week that more than 700,000 people would be financially stressed if rates went up by a puny quarter of a percentage point, and as many as one million would be affected if rates went up by a full point.

The Canadian Payroll Association recently surveyed 5,600 people and almost 48 per cent of them said it would be tough to meet their financial obligations if their paycheque was delayed even by a week. Almost one-quarter doubted they could come up with $2,000 for an emergency expense in the next month.

These reports highlight some of the risks of the borrowing binge we’ve been on for the past several years, but not all. Decades down the road, we may find that people didn’t save enough for retirement in the 2010s because they were so burdened by debt. Student debt levels might rise in the future because parents weren’t able to help with tuition costs.”

An interest rate sensitivity test would answer this question for your particular operation. But more important that interest rates, which in reality are unlikely to experience any significant increase in the short-medium term, is income volatility. The debt payments won’t change, but a farm’s ability to make those payment will. If the debt payments can only cash-flow when yields and price are at high points, there is trouble ahead.

“That second-quarter data from Statscan show clearly how deaf people are to warnings about the dangers of debt. In the worst three-month period since the recession, economic output fell by an annualized rate of 1.6 per cent.

The reaction of employers to this economic dip can be seen in the fact that income growth was weaker than normal in the second quarter. Consumers barely flinched, though. They’re impervious not only to warnings about the dangers of high debt levels, but also to periodic bouts of economic volatility like we saw in the second quarter. Only a big shock will get their attention.

There’s no point trying to forecast when a shock will happen, but what we do know for sure is that the financial and economic conditions of today will change. We remain in an adjustment phase following the financial crisis and recession late in the past decade and it’s far from clear what the new normal will be.

Things could get better for the economy, or they’ll get worse and jobs will be vulnerable. Either way, people are going to have to make stressful adjustments that they could have avoided by reducing debt today. This could get messy.”

From the Home Quarter

It has been well documented that farm debt in Canada is high. In the next breath, there is all kinds of spin added to the argument such as stating current debt in 1982 dollars so as to compare to the carnage that was beginning 34 years ago. Not to try to deflate the validity of constant dollar comparisons, but the cold hard reality is that existing debts, today’s liabilities, need to be paid back. Compare the situations all we like, describe how “things are different now;” either way, no matter how you slice it, current farm incomes need to pay present day debts.

So when I hear of lentil yields often coming in at half of expectation, when I hear of wheat and durum crops again decimated by fusarium, when I hear of malt barley crops grading as feed because of all the rain, I can only hope that those farms who experience such production results this year are not over-leveraged. Is this a hint of “the big shock” Carrick wrote about, as it would apply to agriculture? Or is that big shock something already on the radar like China slamming the door on Canadian canola that doesn’t meet spec?

The borrowing binge at the consumer level, as Rob Carrick wrote about, could have drastic implications on the Canadian economy; his words also apply to agriculture. We could be in for a rough ride, “this could get messy” as Carrick wrote.

Sage words from a 30+ year farm advisor: “Take your worst net income over the last 10 years and measure it against today’s debts. How do you feel?”

If you don’t feel good from that experiment, please call me or email for strategies to help ease the discomfort.