Goals and Strategy _corn rows

Goals and Strategy

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Never trade what you want most for what you want at the moment. It only leads to failure.

Those are profound words. While “failure” is not absolute, I believe in this perspective failure means “failure to reach your goal.”

What is your goal in business? What are you working for? Some business-people in primary production agriculture have defined their goals: one aggressive young farmer I know has made it clear that his goal is “to leave the land for the next generation in better condition then when he got it.” His desire for a newer tractor or more land never trumps his goal, and therefore his decisions reflect his goal.

I often speak to farmers who describe their goals as ” reducing debt” and “improving profitability” yet they trade those goals, whether consciously or unconsciously, for what they want in the moment (typically additional equipment)…which usually increases debt and can often have an adverse effect on short term profitability.

Does that mean the farm will fail? Does that mean the farmer is a failure? No. It means that there is failure is reaching the goal of reduced debt and increased profitability.

This leads me to circle back; ” What is your goal in business? What are you working for?”

We touched on this a few weeks back in Growing Farm Profits Weekly – Eat to Live or Live to Eat. It is no one’s place to tell you your goals are wrong. Just be honest with yourself about what’s really important, and expects results accordingly.

I work with farmers who acknowledge the need to have strong business goals that align with their personal goals. All of them are grateful to have some help to clear the air when making decisions and to take the emotion out of the equation. I have done the same in my own business: I have an advisor who I’ve hired to help me wade through the issues, and the emotional roadblocks, that could potentially affect my business.

Here are the Growing Farm Profits™ 3 Keys to Reaching Your Goals:

  1. Start with with a goal in mind, and set tactics later. Starting with tactics enters into a never-ending cycle.
  2. Plan for adversity, strategize how to adjust, and respond as required.
  3. Stay on course; get any and all help you need to keep from straying off the chosen path.

Direct Questions

What information do you need to allow you to clarify your business and personal goals? Who is helping you get it and sort through it?

Who do you lean on to help strategize when mapping your business and personal goals?

How do you manage the desire to trade what you want most for what you want in the moment?

From the Home Quarter

It is not unusual for farmers to get caught in the cycle of “head down, shoulder to the plough, get the work done, plant the crop – harvest the crop – sell the crop – repeat.” And after 20-odd years of doing just that, and finally looking up, most find that they’ve built something they never expected or planned for. Now facing the thought of planning for life after farming, many are asking “What now?”

Beginning with an end goal in mind is a critical key to successfully reaching that goal. Stay on course, and do not trade what is wanted most for what is wanted now.

failure to communicate

Critical State – Inability to Communicate

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A few weeks ago, we opened a dialogue on Critical State which is defined as “the point at which something triggers a change in the basic nature or character of the object or group,” or to paraphrase: something can be referred to as being in a critical state when at the point of significant change.

Inability to communicate is, in my opinion, the greatest single cause of breakdown in relationships of all types and sorts. While many other factors come into play, and often bear most of the blame, the primary cause is communication and its lack thereof.

There are virtually countless books, courses, and resources dedicated to improving communication in almost any circumstance: marriage, parenthood, employee, co-worker, sibling, etc. etc. I have only read a minute fraction of what is available on this topic, so I cannot offer insight as to which are most beneficial. But, like you, I have a lifetime of experience in communicating with others. It is fair to say that all of my communication experiences could use improvement, because to say otherwise would indicate that there was, at times, perfection in my communication interactions. Let’s be honest, there is always room for improvement.

Here are some of the most important relationships in your business that need solid communication:

Bankers/Lawyers/Accountants

Often times, when hearing banker-ese or legalese, we tend to not ask that which we do not know or understand for fear of appearing, well let’s say it, stupid. Many people have signed onto something that they did not want, nor did not understand because they were unable to communicate their questions, their fears, or their outright disagreement. The future ramifications of a lack of clarity in matters of borrowing or of law can be monumental.
When I was still in banking, I had a husband & wife client where the wife would apologize for asking what she called “stupid questions” about the terms and conditions of their borrowing package. She could have silently signed her name to the documents and fretted over her lack of confidence in what she just did, but instead she chose to ask. For her own clarity, her own comfort, and her own peace of mind, she asked. For that, I was grateful; it strengthened our business relationship. When I told them I was leaving the bank, she hugged me saying “I’ve never hugged a banker before!” I replied with a wink, “I’m not REALLY a banker; just a farmer who’s working at the bank!”

Employees

Everybody is rowing their own boat in life. It does your business no good whatsoever if your employees are not rowing in the same direction as you. Setting goals and expectations for your team, and sharing the overall business goals with your team can carry significant weight in efforts to get everyone “rowing the same direction.”
I’ve learned about a number of farm businesses that have taken the proactive approach: involve the team in goal planning, provide regular feedback, reward good performance. The most successful farms treat their employees not like employees, but rather like trusted partners who have a vested interest in the success of the business, and communicate with them accordingly.

Family and/or Primary Relationship

I will go on record saying that all “problems” in family and/or primary relationships will trace back to communication. Whether communication be the final straw or not, communication likely led to the behavior that became the final straw.
I was very impressed in meeting a young farmer earlier this year. When he came home to farm a decade or so ago, with his would-be wife, his father made clear with him and his non-farming siblings how the farm would transition. There was no ambiguity; no one could complain; there are no hard feelings today. Consider how things could be today when we acknowledge how successful this farmer now is, and how much wealth he has built in his operation…lack of communication could lead to unreasonable demands from family members, and the potential for critical state.

Direct Questions

Does fear ever affect your communication? How do you manage it?

How would you rate your ability to share positive feedback versus negative?

From the Home Quarter

Lack of communications, or an inability to communicate, will lead to critical state in a sneaky kind of way. If one doesn’t notice that communication is breaking down, over time it will snowball into a major issue. Everybody has a breaking point. It’s usually wise not to let things get that far, not matter which relationship we talk about.

 

hide and seek

Hide and Seek: How Perfection Kills Success

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While on holidays in early July, I watched our group of 3-5 year olds playing hide and seek. They were having a ball because each of them is learning to count so being the seeker was their chance to show everyone how high they could count, because the thrill of the chase is invigorating, and because the risk of getting caught (found) adds an element of excitement.

What I found consistent while watching these children play was how all of them, no matter how long the “seeker” counted, kept moving from one hiding spot to another. Yes, these are small kids, aged 3 to 5; yes, they are too young to grasp the strategic concept of the game; yes, they were actually hoping to get found. It appeared as though they would hide, then identify a spot that looked better, so they’d leave their first hiding spot to go to another. Once there, they’d realize that it either wasn’t as good as it looked, or that they see yet a better hiding spot elsewhere. And the cycle continued until the seeker was done counting.

The point is not meant to be critical because it applies to older kids who do understand the strategy of hiding stealthily so that the seeker can’t use his other senses to pick up a hint where the hiders might be. Either by making noise while hiding, or by wasting their precious lead time looking for the ideal place to hide, they often leave themselves vulnerable by trying to find the perfect hiding spot.

These children were exhibiting a behavior that we, as adults, emulate far too often. We regularly short-change ourselves by seeking perfection, or our personal idea of it; we jeopardize success in the now because we we see something that we “think” is better.

The young children playing hide and seek spent their entire hide time, while the seeker counted, their entire hide time was spent moving from spot to spot, often giving up a great hiding spot for a poorer one. The older kids playing hide and seek waste their hide time by trying to find that perfect spot that no one has thought of, and when they can’t find it by the time the seeker announces “Ready or not, here I come,” the hiders are usually not ready and end up settling for a terrible hiding spot just so that they actually hide and aren’t caught just standing there in the open…

How does this apply to you or your business?

  • How much time over the winter is spent researching the “perfect” seed variety to grow?
  • How much time is invested into monitoring equipment prices and inventories to feed the desire of owning a seed tool (sprayer/tractor/combine) which might be “that much better” than the one on farm now?
  • How much time is spent in frustration thumbing through all the resorts available to choose from in the Caribbean so that your winter vacation will be “perfect?”

Direct Questions

Is there more analysis put into short term decisions than long-term or even permanent decision?
(It took 3 months to decide what canola to seed…but we’ll just expand that bin yard over there!)

Is there more analysis put into what we find fun and less into what we don’t enjoy?
(I know precisely how many combines like mine are for sale in Manitoba right now, but I haven’t bothered to consider if I could reduce my interest rates.)

Have you passed by a really good hiding spot because you were trying to find the perfect one?

From the Home Quarter

“Paralysis by Analysis” is a not so old adage that I lean on regularly. It is a challenge for detail guys like me because we want to be sure we’ve got everything right and in place before we take the next step. “Paralysis” because sufferers never take the next step; they justify their inaction because the “analysis” isn’t complete. News Flash: it is never complete!

I have made great strides in shucking that condition. It pokes its head out occasionally…I treat it like “Whack-A-Mole!”

Your farm will succeed if your canola variety yields 3 bushels less, but stands better than the other variety you desired. Seeking a marginally better sprayer probably won’t make enough difference in your overall profitability to cover the added cost. And take the damn vacation…you deserve it, you’ve earned it! Stressing over picking the “right resort” kills part of the fun. It’s like trying to pick the juiciest apple on the tree by looking at them from the ground.

family succession

Critical State – Lack of a Succession Plan

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I have been incredibly impressed with the service and quality of work at Queen City Glass. I stumbled onto them a number of years ago when I got a stone chip on my truck’s windshield right at the the beginning of a November cold snap. I knew that tiny chip would spider-web in a big way the first time I cranked on the windshield defroster. Going to the glass shop I had frequented up to that point and being told to come back in 3 days or so, I was about to accept the fate of my front glass when I drove by Queen City Glass. With nothing to lose, I whipped in to see if they could help me out.

They took me right in without an appointment and did a great job of repairing my windshield. I didn’t have glass coverage at that time so the fee would be coming out of my wallet. Not knowing what to expect, having never paid for a windshield repair before, I was happy with what they took from me.

While I was waiting for the work to be done, I learned that they do all kinds of glass, almost anything that one might custom order. The guys in the back were sharing stories of building display cases for jewelry stores and fighting with 10′ high panes for shopping mall store fronts. They admitted to doing a lot of work for antique cars, as well as farm equipment.

Coming back from a recent client meeting, my windshield got hit by a rock which left a chip. Almost as big as a quarter right away, I knew I had to get the damage repaired soon or it would be too big to fix. I pulled over on the highway at about 2:20 pm and called Queen City Glass. They told me if I could get there by 3, they’d have me done in time to get to my 4pm obligation. One of the owners was doing the work on my truck. After he shared with me the story of the company’s ownership,how his father acquired the business in the 1960s and has since passed it down to him and his sister, I asked him what was his succession plan. He replied, “Freedom 85, man!” I clarified that I didn’t mean his retirement plan, but the plan for the future of the business when he and his sister no longer want to work it (sometime after he turns 85 as per his declaration.) He admitted that there is no interest from the 3rd generation to own and operate the business and that if it couldn’t be sold, it would probably close.

As I stood in that shop and considered all the amazing glass work that would have been done there over the years, including a turn-of-the-20th-century hand carved piece of furniture in which they were installing a custom mirrored back that very day, I realized what a shame it would be to not have this business carry on what is most likely a storied legacy. As the late great George Jones once sang, “Who’s gonna fill their shoes?”

Direct Questions

Family business is the backbone of Canada’s economy, and farms are often the most enduring of all family businesses. What is your plan to ensure the progression of your farm carries on?

With family or without, you have opportunity to transition your business without selling everything. What options do you have beyond immediate family?

Whose gonna fill YOUR shoes?

From The Home Quarter

Queen City Glass will be at the point of critical state when one or both of its current owners decide they’ve had enough work, and want to retire. I would argue they are at the point of critical state right now, if not very close to it. With no succeeding generation currently involved in the business, should either of the 2 owners become disabled or killed, the business would likely face an immediate upheaval and could be forced into a final closure. Any family business in any industry without a succession plan faces a similar potential fate; none are immune. If you are the beneficiary of a proud family legacy, what are you doing to ensure that legacy continues?

 

 

go fishing

If You Are Happy Just Floating Along, Go Fishing

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I wasn’t trying to be funny when I quipped what is the title of this commentary while in a meeting with an excellent banker and the exciting young prospective client he introduced me to. It just sort of rolled off my tongue in the moment. It was a hit; both men enjoy fishing.

The premise of that particular conversation was profit. In my work as a lender and a consultant, I venture to say I’ve looked at hundreds and hundreds, maybe thousands, of financial statements. Those statements have told a vast array of stories, from the depths of successive and devastating financial losses to the opposite end of the spectrum with profits that make you wonder if your’re drunk when reading it. Many hang around the middle, somewhere south of an impressive profit , but still north of a fundamentally adverse loss. It is sad to discover than many farmers create this break-even situation by choice.

The choice is often centered around tax and the great lengths taken to avoid payment of income tax. The list is long and arduous; it won’t be found here.

Let’s put this in real terms. Most farms I’ve analyzed range from approximately $250/acre on the low side to $400/acre (or even higher) as the figure that represents whole farm cash costs. That is the amount of cash required to operate the entire farm for one full year. Now, I got my math learnin’ in a small town school, long before calculators were allowed in the classroom, back when cutting edge computer technology was the Commodore Vic 20, but math is math, so if we consider a 10,000ac farm with $400/ac costs, we’re looking at $4,000,000…each year!

Granted, there aren’t too many 10,000ac farmers who are happy to break-even each year, but they are out there. At the end of the day, I don’t care if you’re 400 acres or 140,000 acres, expect a profit!

Farmers take far too much risk each year to not expect a profit. If you walked $4,000,000 into any bank, could you get a better return than 0%? Of course! You could get a risk free rate in GICs that would probably approach 3% (or maybe 4%…any bankers reading this what to comment???) So I ask why, if you could get a risk free rate of 3% or 4%, why would you take a sh_t-ton of risk to accept a 3% or 4% return farming?

Direct Questions

Investing $4,000,000 in GICs and getting a risk-free 3% annual return grosses $120,000 per year before tax. Could you live on that?

Land owners/investors demand a rent that mimics 5% return on the value of the land. If you invested $4,000,000 in land, you could earn upwards of $200,000 gross in rent, plus enjoy the long term capital appreciation…could you live on that?

What is an acceptable return to demand from your business…based on the amount of risk you take each year?

From the Home Quarter

Farming is not for the faint of heart. Farmers accept the financial risks that come with farming because they understand them. The opposite if often true of stock markets: farmers aren’t typically investors in equity markets because generally they don’t fully understand the risks. But savvy stock investors who do understand the risks still expect a positive return, they aren’t happy “just getting by.”

If you’re happy just floating along, go fishing.

If you expect to get well paid for the risks you take, call me.

 

despair

Critical State – Disability or Loss of Life

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Frequently over the next several weeks, we will delve further into the many factors that can lead your business to a “Critical State.” To refresh your memory, one reaches critical state when at the point of significant change. The significant change can lead to a state that will have a profound effect on you, your family, or your business. Thus the term “critical.”

Disability or Loss of Life: whether it be one of the major stakeholders in your business, a member of your family, or one of your employees, this is often the most catastrophic change.

Although disability is not guaranteed to happen, the end of one’s life is certain. Arguments have been made as to which is more difficult to manage through. I have experienced both in my family.

What is your strategy, your back-up plan, if someone in your family or your business suddenly became disabled or was killed? How would you continue? Who else knows what that person knows so that the only hardship you must deal with is the emotional one?

  1. Financial: if control rests with only one person, everything financial is instantly in limbo if that person passed away. Secondary signors can be established. Power of attorney should be in place (applies during disability.) Something as simple as writing down account numbers and passwords in a notebook stored in a locked safe can be incredibly beneficial to those who are left behind, struggling to carry on while dealing with their grief.
  2. Operational: “Were those peas on the west half sprayed? When? With what?” A crop could be lost, and subsequently a farm could be lost, if important operational information is not recorded and readily available if/when the person with that knowledge in his/her head is hurt or worse. The importance of managing your business information has been raised here on many occasions.
    What about grain deliveries? Who authorized those holidays for the staff? Etc…
  3. Personal: too often, major crises such as death or disability can lead to a personal “critical state.” Relationships break down under the stress, families fighting on the way to the funeral home, etc. Conversations with family, a current and well prepared will, and preparations for crisis are all required to bring everything back down from “critical state.”

Direct Questions

Do you have a will, and is it current?

Health care directives (also known as living wills), financial power of attorney, and final wishes should all be laid out so that the decisions are not left to those left behind. These are your decisions and the appropriate legal documents allow you to have some control while you’re not able to take control. Have you put these in place, and if not, why not?

 

Early on in most new business engagements, I ask about wills, powers of attorney, life and disability insurances, etc. The answers are as varied as the people I work with. Most have these fundamental pieces in place, and many more have already begun some very intriguing and creative ways to facilitate business succession. From Joint Ventures, to funded buy-sell agreements, to estate freezes, and share purchase plans, there is no right or wrong way to plan, only a series of possibilities that can be “more right” than some others.

I celebrate the plans that are already enacted, and push hard on those who have none.

From the Home Quarter

Not taking action to plan for the inevitable does not delay the inevitable, it only creates extra hardship for those left behind.

 

inadequate working capital

Eat to Live, or Live to Eat

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This week’s title is common phrasing when dealing with people who struggle with weight loss. While there are many factors that come into play for those who struggle with weight, a person’s caloric intake is often a major contributor. Making smart decisions about what to eat, when to eat, and how much to eat can be challenging for many people who are trying to do a better job of managing their health, not just those with weight issues. The question of “why” they eat gets into the psychology of the issue, which, coincidentally, leads into the real topic behind this week’s commentary.

Spending time at Canada’s Farm Progress Show in Regina each June has been something I’ve looked forward to for as long as I can recall. Remember, I knew I wanted to farm since I was less than 10 years old, so the Farm Progress Show was a more tantalizing buffet to the teenage me than even an actual buffet! (BTW, I still have an appetite like an 18 year old farm boy.)

The desire for more and new farm equipment seems almost insatiable, and begs the question:

Do we have all this equipment so we can farm, or do we farm so we can have all this equipment?

  • I recently met a young farmer who, while struggling to establish adequate cash flow, explained why another 4WD tractor on his 2,000ac farm will make him more efficient (he’s a sole operator with no hired help…how one man can drive more than one tractor at one time is something I can’t quite wrap my ahead around.)
  • You may recall from a few months ago the fictional story about “Fred” and how he NEEDED another combine. Despite his banker’s advice, he forged ahead.
  • Conversely, another farmer I speak with frequently is feverishly trying to rid himself of the over-abundance of iron on his farm.
  • Another is protecting his farm’s financial position by keeping the absolute bare minimum amount of equipment on his farm. Nowhere is there a “nice to have” piece of equipment on that farm; everything is “fully utilized.”

During the week of the June show in Regina, I read a tweet from an urban, non-farming young lady who was seeing the Farm Progress Show for the first time; it said (something along the lines of) “all this big beautiful equipment makes me want to go farming!”

Direct Questions

What circumstances must be present for you to consider additional equipment?

Does any equipment deal have to make for a sound business decision, or simply fill a desire?

Is your equipment a tool to operate your farm, or is it the reason you farm?

From the Home Quarter

In these weekly editorials, you have read about Mindset, about Strategy, and about Focus; these topics (and many of the others) challenge the conventional thinking in the industry today.

Those who bow to the mistress that is their farm equipment are only enjoying short term excitement. The mistress entices her suitor, subservient to the raucous cycle, and she soon becomes the one in charge.

Just ask anyone trying to get out of multiple leases…

toe the line of critical state

Critical State

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Critical State…it’s a subjective term, but is often defined in science literature as “the point at which something triggers a change in the basic nature or character of the object or group.” To paraphrase: something can be referred to as being in a critical state when at the point of significant change.

How many triggers of change do you, your family, and your business face each day, each month, and each year that could cause significant change? How many ways are you riding on or near the line of a “critical state?”

While there is little doubt that the list could be far longer, here are ten of the most important circumstances (many of which are ignored) that could put you at, or beyond, a critical state:

  1. Disability or Loss of Life: whether it be one of the major stakeholders in your business, a member of your family, or one of your employees, this is often the most catastrophic change.
  2. Lack of a Succession Plan: see point #1 above.
  3. Inability to Communicate: with family, partners, employees, vendors, etc.
    Does any more need to be said on this one?
  4. Debts Get Called: sometimes lenders make adjustments to their portfolio to manage their risk. If your debts get called, how do things change for your business?
  5. Overspending: cash in the bank is a good thing. Spending it because it is there is the scourge to many farms’ financial strength. Do you believe cash is king?
  6. Crop Failure: do you have the financial strength to survive a crop failure?
  7. Timing: trying to time the commodity markets is almost like trying to pick winning lottery numbers; both are nearly impossible. Regarding major purchases, there clearly is a right time and a wrong time to be taking on more debt, investing in more or upgraded assets, expanding, etc.
  8. Inaction: not monitoring bins, too cold to haul grain, we’re at the lake (can’t scout for bugs/disease,) etc. Poor excuses that can quickly create a critical state.
  9. Maintaining Inadequate Working Capital: believe it or not, but the chronic dependence on operating credit from lenders and vendors leaves a farm at the precipice of a critical state. Operating credit should not be counted on year over year. What if it isn’t there when you needed it most?
  10. Unwilling to change and adapt: “We’ve always done it this way,” are the 6 most deadly words in business.

Direct Questions

How many of the 10 points above might apply to your farm?

How would you gauge your ability to critically analyze your own business relative to the 10 points above?

What is your strategy to remain “well back” of the line that crosses over into critical state?

From the Home Quarter

In the battle against weather, insects, disease, market prices, etc, it is easy to get caught in a routine. When we succeed at managing through the day to day, the “extra” stuff, the “other” issues seem like they can wait. “It’ll never happen to me” are some of the most famous last words.

Too often, we operate at the very brink of critical state. Too often, we get away with it, which allows to be become “something we’ve always done.” So I’m left to ask,”Isn’t it better to avoid a crisis than deal with one?”

 

dichotomy

Dichotomy

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Here is a throwback to an article I wrote in August 2015 titled Is Data Management Really Important? where I highlighted a conversation between a friend and I that included his opinion that even large corporations let their “focus (be) primarily growth & profits and how to accomplish it, with information management being thrown together afterwards.”

While I believe that statement to still be true both for large corporations and farms alike, there is something in that statement that opens up what seems to have become the dichotomy of prairie grain farming: growth or status quo.

Let’s not get hung up on “growth’ as a single definition. In March 2015, my article Always Growing…Growing All Ways clearly described a few of the many ways we can achieve growth in our businesses that does not have to be pigeon-holed into the category of “expansion.”

So let’s clarify the dichotomy as “expansion or status quo.”

Now let’s compare a couple different scenarios.

  1. In the spring of 2016, I met with a young farmer who started out in 2000 with nothing but an ag degree and desire. As he prepared to sow his seventeenth crop this spring, he showed me his numbers while admitting that he felt good about his financial position, but didn’t really know if he was good or not. He lost almost 20% of his acres from the previous year, and was happy about it because the cost to farm that land was too high and he knew it.
    When I told him that I’d peg his operation in the top 10%, maybe even the top 5% of all grain farms on the prairies, he paused and said,”OK, so what are the top 5% doing that I’m not?”
  2. There is a farmer who has been calling me off and on for a couple years now. By all accounts, it is quite a feat that he is still operating. Although he’s been farming for well over 20 years his debts are maxed out, leases are burning up cash flow faster than the Fort McMurray wildfire is burning up bush land. He spends more time running equipment that his hired men; he has no clue what his costs are; he has aggressively built his way up to 10,000ac and wants to get to 20,000ac; one of his advisors told me that his management capability was maxed out at 4,000ac.

The first scenario has the farmer focused on growth of profitability, control, and efficiency.

The second scenario has the farmer focused on growth of the number of acres on which he produces.

One would be the envy of 95% of farmers.

The other will never in his entire career get to the point of financial success that the first farmer has already achieved.

Direct Questions

Which are you more like, the first farmer above, or the second farmer?

Which farmer do you want to be like?

What are you prepared to do to get there?

From the Home Quarter

What has been described above is actually a false dichotomy. We’ve been led to believe that farms must get larger in order to survive and that small farms were doomed. What that message failed to deliver was “At what point is a farm large enough?” I am not decrying large farms or the continued expansion of farms…as long as it makes financial sense! The false dichotomy of expansion or status quo need not be black or white, left or right, mutually exclusive. Farms that are not expanding today could be expanding next year, just like farms that are expanding today may not be next year. Some farms that have expanded over the last few years might even be looking at reducing acres in the future.

Growth (expansion) at all costs can often come with the heaviest of all costs.

trickledown effect of too much debt

The Trickle-Down Effect of Too Much Debt

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One would think we learned something from watching the US housing market collapse at the end of the previous decade. Yet, here we are, seven or so years later and many are making the same mistakes that were made by countless US homeowners.

Granted, the macro factors that helped to create the US housing crisis are not prevalent here in Canada. My favorite term from the US crisis was “NINJA” Mortgage: No Income? No Job? …APPROVED! Lending criteria in Canada isn’t quite that liberal.

What exacerbated the problem in the US was how homeowners were using their homes as a personal ABM, taking cash out whenever they wanted for whatever they wanted from the rapidly growing equity they had in their homes because the house values just kept increasing. They leveraged the “found” equity they had in their homes to feed their consumer appetite.

Here in Canada, and specifically farms on the Canadian Prairies, we’ve seen something similar. Rapidly appreciating farm land is being used to secure more borrowing, and often to secure the consolidation of other loans. The renaissance of farmland value appreciation, especially in Saskatchewan, added a dangerous amount of fuel to a fire of pent up demand. Land “equity” was used for the feverish acquisition of equipment, buildings, and more land.

In the US, while sub-prime mortgages kept payments low, everyone was happy to be ticking along with borrowing and spending to their heart’s content…until the sub-prime period ended and the piper needed to be paid. With a property fully leveraged and no ability to repay the debt, many homeowners resigned themselves to foreclosure. Those who may have had an ability to pay the debt saw the value of their fully leveraged property start to decline because of all the other foreclosures, so when they found themselves underwater, they too went the route of foreclosure.

No one is arguing that things are different here. True. Borrowing criteria is more stringent in Canada. What is similar, however, is the experience of a rapid appreciation in the value of real estate and the leverage of said appreciation to support more (other) debt.

I was talking with a 17,000ac farmer recently who was very aggressive in expansion over the last several years. He has increased the size and scale of his farm in every way: land, equipment, labor, and debt. He made no bones about continuing to leverage all assets, including the appreciating land and his depreciating equipment, to the fullest extent in an effort to facilitate further expansion. The scourge of his actions over these last few years was the incredible drain on his cash flow to service all this debt. This came to light for him when recently he needed land equity to source an operating line of credit so that he could meet his debt payments.

Direct Questions

Have most of the increases to equity on your balance sheet come from appreciation of asset values or have they come from building your retained earnings?

How has your Debt to Net Worth changed over the last few years?

Are you drawing on your operating line of credit to make loan payments?

From the Home Quarter

It amazes me how what was ingrained into our long term memory for so long was so quickly forgotten. The memories of the indescribable hardships of the 1980s and 1990s have seemingly been overtaken by the boom years of 2007-2013. The willingness to replace the history lessons of tight margins and poor cash flow with the euphoria of big profits and cash to burn has led to many farms now facing a debt and cash crisis similar to what was common in the final 20 years of the last century.

The trickle-down effect of debt stems from when debt levels increase as fast as, or faster than, the borrower’s long term cash flow and net income. While asset levels increase, sometimes very rapidly, tremendous growth in debt levels eat away at potential equity and use up available cash flow. While the land base has expanded and late model equipment efficiently farms all the acres, while the bins may be full and the employees are busy, it all trickles down to cash.

When the demands on your cash are a raging river, it is pretty hard to live on a trickle.