push pull

Push and Pull

Push and pull.

Passive aggressive.

Proactive or reactive?

Okay, passive aggressive doesn’t REALLY apply…or does it?

A recent conversation with a banker had him using terms & phrases such as:

  • they have no idea what they owe, to whom, or what their payments are;
  • they leave out information in what they send to us;
  • after a year of battling over their lack of cash management, the bank is viewing their risk profile as ‘high.’
  • the promised to put together a plan months ago, but it seems there was always ‘something more important’ to do. Now that the bank is downgrading them, they’re in a hurry to get the plan in place.

The borrowers that this banker was speaking of have consistently displayed a behavior that is reactive. They:

  • only provide info to their lender when threatened;
  • do not follow the terms set out in their borrowing agreement;
  • only got serious about making a plan when the bank indicated that their credit risk profile was being downgraded.

Situations like this are, sadly, not uncommon. All too often, financial professionals see impending challenges and offer advice that is pertinent based on their experience. Whether the advice is heeded or ignored is out of our control.

What can be done? At risk of sounding like a broken record…

  1. Preserve cash by building strong working capital;
  2. Do not acquire capital assets with working capital…borrowing is still incredibly cheap!
  3. Drive down overhead costs so you can produce at the lowest Unit Cost of Production.

The challenge, of course, is now during a period of low commodity prices, how does one go about preserving cash to build working capital. A pessimist might say “that ship has sailed” with the end of the commodity boom. Notwithstanding any significant production issues somewhere on the globe, this may be true. And to bring it back around to the open of this commentary, proactive or reactive, it seems that by and large farms are reacting to the profitability challenges and positive cash flow challenges of the day. Proactive would have acknowledged that the good times were cyclical and would not last forever…

Plan for Prosperity

PUSH yields. In commodity production you need the bushels, but focus on optimum yield for profitability, not maximum yield for coffeeshop bragging rights!

PULL efficiency. You need to do more with less in low margin environments.

PUSH costs down. The lowest Unit Cost of Production (UnitCOP) wins. Period.

PULL management effectiveness to new heights. During times of questionable profitability, it is management that will rise to the top.



It Can't Happen to Me

It Can’t Happen to Me

Have you heard?

Things aren’t all roses in agriculture lately. Sure there are some who are doing quite well, and of course the recent drought gets the credit for any 2017 results that were sub-par, but what about those who still did okay during the drought? What about those who are still sub-par when everything is firing on all cylinders?

A recent article on DTN titled Skating on Thin Ice summarizes the message of Dr. David Kohl, renowned ag economist, at the National Agricultural Bankers Conference earlier this month. Dr. Kohl has been advising ag bankers for over 40 years. He’s got some chops.

His prediction (in summary): there will be clear winners and losers, the losers being the bottom 30% of all producers.

What makes the bottom 30%? They barely make a profit, have burnt through most (or all) of their working capital, and are beginning to burn through their equity. Dr. Kohl suggests that a farm in this position consider exiting before all equity is gone.

It was back in 2016, over a year ago now, that rumblings were coming out of the US Mid-West about farm lenders tightening up on credit approval criteria. I tweeted the following:

We’ve already seen an increase in interest rates from the Bank of Canada, and we are to expect more according to messages from our federal government. But do not think that your interest rate can only be changed by the BofC. Lenders set interest rates according to how your business is risk-rated. If you’ve already burnt through your working capital and have moved on to burning equity, you are considered to be high risk and will be charged interest accordingly.

Land value appreciation has propped up many farms that have a history of poor operating profits.

Remember when we talked about how the commodity super cycle (2007-2013) allowed below-average management skills to generate above-average results? (Ref. Vol.3 /No.44 Happy Halloween) Even those producers who were not able to produce a profit from operations could still show that equity levels were increasing because their land was appreciating. This created a false sense of security, and a false sense of accomplishment.

Notwithstanding what is going on in US ag lending, the landscape in Canadian ag lending can change.  The bank’s desire to support businesses that cannot generate profit from operations is limited. Are you on the radar?

To Plan for Prosperity

Allowing your relationship with your lenders to be anchored by land value appreciation only, and not profit from operations, could make you a subject for a change to your borrowing terms. How would your business be affected if your interest rates increased by 1%, or if your credit limits were reduced by one-third? If your current lender views you as high risk, other lenders will too…


Shaking Hands

Let’s Make a Deal

Here is an incredible opportunity for you!

You can invest in a business that has grown its assets by 100% over the last 6 years. It has doubled its production and its staff compliment in that same time-frame. Revenues have increased by over 130% since 2005.

No…why not? The description is accurate of many farms, maybe even one you know.

We’ve purposefully made no mention of liabilities or retained earnings, nary a word on profitability or cash flow. Sadly, it is because ignoring those is typical when expansion is allowed to be the critical success factor.

Investing in a business that has inconsistent profitability and little (if any) controls over cash flow is beyond risky. Is it any wonder that industry lenders demand detailed and accurate information before investing in your business?

To Plan for Prosperity

Do up a Debt to Net Worth calculation. If your figure is 1 to 1, that means your creditors have equal ownership as you in your business. If your Debt to Net Worth is greater than 1 to 1, your creditors have more skin in your game than you do.

If you wouldn’t invest in a business that cannot prove reliable profitability and consistent cash flow, why would anyone else?


Fail to Plan

Fail to Plan, Plan to Fail

Fred* wants to expand his farm. He feels he’s getting left behind when he hears about each land acquisition made by some of his neighbors. It’s not like Fred hasn’t expanded his acres; he’s doubled up since 2005 when he farmed about 3,000. But he knows he can handle more. And by all accounts he needs to increase his acres to spread out his equipment costs; at least that what he hears at all the seminars and reads in all the farm publications. His banker keeps telling him that his costs are too high as well, but she wouldn’t give him a combine loan a couple years ago and the dealer’s financing program did, so what does she know…?

Drawing up plans to seed just over 6,000 acres this spring, Fred can’t let go of the notion that he needs to be at 10,000 acres. There are a couple of neighbors who’ve hinted that they might not put a crop in this spring, and if Fred could take on both, he’d be at 10,000 acres. That would feel pretty good driving through town letting everyone know he was now a 10,000 acre guy! Heck, he might even put it on the side of his truck like some companies do with their safety awards. They’re proud of their accomplishments and show them off, why not Fred?

As he goes over his crop plan, he starts wondering about where he’ll procure his inputs. If he maxes out the lines of credit at both input dealers in town, and the one at the bank, he’ll be able to get everything seeded, fertilized, and sprayed. “No problem,” Fred thinks to himself. He gets on the phone to get prices from each input supplier so he can decide what to buy from whom.

About a week into April, Fred gets the word he was hoping to hear: both neighbors who were considering retiring will not be seeding a crop this year and will be renting out their land. Fred immediately gets in the truck to pay his neighbors a visit to see if he can secure a rental agreement with each of them. To establish good-will and earn the opportunity, Fred offers each $5 per acre cash rent above what they were asking. They shake hands, and Fred excitedly heads home.

Upon sharing the news with his hired help, Fred is too excited about his “accomplishment” to recognize that his lead hand is not happy about what Fred is telling him: the seeding rig will have to run 24 hours since there isn’t time to buy another air-drill and get it field ready. Fred heads back to the house to update his crop plan and to secure more crop inputs.

Two days later, Fred’s world comes crashing down:

  • he is unable to get any more credit to acquire crop inputs for his additional rented land;
  • he has been denied a new cash advance because he was late paying back the old one;
  • he has lost his new rented land because he can’t get inputs and because the cheque he wrote to each landlord for upfront rent payment has bounced;
  • his lead hand just quit to go work for a neighbor who provides a “better work environment.”

To Plan for Prosperity

They key is in the heading title: PLAN

Fred doesn’t plan; he reacts. He is not able to expand his farm even though he thinks he is. He is not as financially strong as he thinks he is because he cannot get more credit when he needs it. He is now short on help to get seeded on his own current acres. Fred wants to be bigger, but he’s overlooked being better.

At risk of “over-flogging” this issue, Fred’s challenge has been lack of working capital. And it is that lack of working capital that has not only directly cost him an expansion opportunity, but indirectly cost him his lead hand.

It’s been said that “if you fail to plan, you’re actually planning to fail.” Fred has become the embodiment of those words. The ramifications of this story go farther than we have time to discuss.

You can avoid falling in with the likes of Fred by enacting control over your future: implement strategic growth using sufficient resources with discipline.

*Fred is a fictional character. The story portrayed above is fictional. Any similarity to a real person or situation is purely coincidental.


farmfutures farm survival

Derived from Farm Futures “Survival Plan”

This opinion piece was published on farmfutures.com on April 3, 2017. Titled What’s Your Farm’s Survival Plan, the author, Mike Wilson, describes how farm income in the US Mid-west is falling and thus challenging working capital to remain at adequate levels. As you have read here, and on my Twitter feed (if you follow me) is how borrowing  is becoming more difficult for US Mid-west farmers. I’ve posed the question several times is “Who thinks this can’t happen here” (in western Canada?)

Wilson lays out five practices that farmers can use to improve their chances of keeping a good relationship with their lender. Before discounting the suggestion by saying, “Yeah, well it’s different in Canada,” give it a read and appropriate consideration. Unless, or course, you believe it can’t happen here…

Snip Farm Futures Farm Survival The graphic is a screen capture of an excerpt of the article from the Farm Futures website. The text has been copied below, with my comments following each one:

What do lenders think when you walk through the door? If you do these five things, financing shouldn’t be much of an issue:

  1. Lenders will work with farmers who can communicate and execute a plan, whether it’s for marketing, cash flow, or both.
    *KG: we’ve discussed here many times over the years how important it is to communicate with your lenders who typically don’t like surprises. And while we’ve been preaching for years the value of planning, there is a key word in the statement above that, if ignored, makes planning the useless task so many farmers feel it is: execute.

2. Understand breakeven analysis and keep family living expenses low. Look for that extra dime in your marketing plan. Watch for opportunities to keep yields above average. A lot of that is just paying attention to details.
*KG: break-even analysis is one part of it. Utilizing Unit Cost of Production (UnitCOP) is critical not only to your break even analysis, but also your marketing strategy. It provides a built in sensitivity analysis to both prices and yields. It will clarify the importance of “that extra dime” in your marketing plan. It provides a level of detail that most farms still don’t employ in decision making…

3. Lenders need to know how you will pay them back. You can walk into their office, tell them about the 50 acres that just came up for sale next to your farm and expect to be approved — but that’s not how it works. They need to see that you’ve done your homework. They need to see your accurate balance sheet, income statement, accrual income adjustments, and other key financials. They need to see the numbers before they can pull the trigger.
*KG: Bankers make informed decisions; “they need to see the numbers before they can pull the trigger.” If the numbers are absent, it’s a hard stop. If the numbers are questionable, meaning that the credibility of the figures come into question, it’ll also be a hard stop. Several years ago, I witnessed a would-be borrowing get slammed by several quality bankers because the borrower provided sloppy info that was unverifiable. Lenders won’t make a decision to proceed without quality information; neither should you.

4. Be conservative with your money. “This will be a learning experience,” says Dan Gieseke, Missouri Farm Service Agency farm loan chief. “Many have not been through a tough time. They need to be conservative now, so they can be ready to take advantage of opportunities when they come along.”
*KG: The best time to be conservative with your money was 5 years ago. The next best time is right now. My old pal Moe Russell says, “If you are greedy in the good times, you’ll be on your knees in the bad times.” While shiny paint often feels better than a big bank balance, it is that bank balance (the life-blood of your business: working capital) that will not just help you survive the bad times, it will propel you through them; it’ll maybe even help you thrive during those bad times when your competitors are on their knees…

5. Use records to do analyses. “My fear is that farmers don’t use them,” says Purdue economist Freddie Barnard. “In the ’80s, we got beat up. But the tools to do the analyses then were not out there. There are tools now. Just use them, and try to make informed decisions.”
*KG: there are so many tools available, so much information available, that I would have a hard time arguing against someone who is admitting that “it’s overwhelming.” It is. While I would empathize, I wouldn’t accept that as an excuse. There are many qualified people in this industry who are ready, willing, and able to help you sort through the overwhelm, and establish a strategy to develop and implement a process to get you to a working level of comfort with data management, analysis, and decision making.

To Plan for Prosperity

“Do what you do best, and get help for the rest” is a cornerstone of my advisory work. If none of the five points above strike a chord with you because you don’t know how to do them, or don’t like doing what they suggest, then take a moment to ask yourself if the five points above are actually important to you.
If they are, but you’re not sure where to start, then start by picking up the phone and calling someone for help.
If they’re not, then good luck to you. You’re going to need it.

Your business, your family, and your legacy are too important to be left to chance.

inadequate working capital

Critical State – Maintaining Inadequate Working Captial

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.


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.


Borrowing Binge: At The Farm and Beyond

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.

Crop Failure

Critical State – Crop Failure

Do you have the financial strength to survive a crop failure?

Considering that most farmers are still primarily production focused, there is likely no greater catastrophe in their mind than a crop failure. With Mother Nature offering challenging conditions every year (even 2013 which had a strong majority of farmers enjoying “the perfect growing season,” there were still many areas that faced insurmountable weather challenges) one would think that prudent risk management would involve many of the following strategies, each with a prescribed weight based on each farm’s specific need.

Provincial crop insurances, Agri-Stability, private revenue insurance, hail insurance, etc. are the most popular risk management tools used by farmers today. Most farms use one of those, or a combination of several. Each farm’s weighting of the various programs will be as unique as each farm. However, many farms use none of these risk management tools. They will each have their own rationale for why. Some are so well capitalized that they can self-insure, take the financial hit from poor production and keep on rolling. Others do not understand how the programs work, and because of their ignorance, they choose not to take part. In the middle is the majority, broken into two parts: one that clearly understands the nuances of each program, and utilizes it to the fullest, most prudent extent (which might mean not using them at all); the second does not bother to gain such understanding and simply does what’s always been done year after year.

There are four distinct factions described above in how many farmers approach risk management. Which one do you fit into?

  1. Well Capitalized, avoids using the programs: you have abundant savings and working capital to withstand more than one year of zero, or near zero, gross revenues and choose to eliminate the premium costs for risk management programs.
  2. Lacking full comprehension of programs, avoids using the programs: you feel that they are too complicated, too expensive, and never pay you.
  3. Intimate understanding of the programs, uses (or does not use) the programs to the best net benefit to your farm: you know the ins and outs of the program(s) better than anyone who answers phones at the respective help desks. You carefully weigh premiums, coverages, and benefits with precision so that all match beautifully with your production practices. This may include not using the programs because the cost-benefit is not sufficient.
  4. Not bothered to learn about program nuances, uses (or does not use) the programs because “that’s what we’ve always done”: you don’t have time to read through the acres of lingo and jargon that are provided to you, so you just blindly take the same coverage you’ve always taken, or not taken any coverage at all. “Just go with what we did last year!”

Of course, these groupings ignore the geographic issues in that, for example, some farms span so many miles that a hail storm is incredibly unlikely to affect the entire farm, some farms are so large that program premiums can represent a small fortune, and some farms (large acres or not) are in such tight proximity that weather risk cannot be “spread out.”

Direct Questions

Which category above do you fall into? If it is #2 or #4, what is your risk management approach?

Do you prefer reliance on risk management programs over building strong working capital? Why?

Production is critically important. How do you manage the risk of crop failure?

From the Home Quarter

Farming is risky business, and the risk of losing a crop can bring a farm to the point of Critical State. How we manage the risks, and in this discussion, the risks pertaining to crop failure deserve attention that is paramount. What certainly gets most of the attention when it comes to managing the risk of a crop failure is inputs. And while there is no arguing the importance of doing all you can to produce the highest yield and best quality crops, there is more to the equation. Much of what will bring success or failure to your efforts in production is out of your hands.

The only way to get off the train of risk management programs (and cash advances, and trade credit, and operating credit) is to build abundant working capital.

You cannot shrink your way to greatness and you cannot spend your way to prosperity.

canola field

Critical State – Debts Get Called

Imagine, if you will, that it is a nice harvest day in late August. The combines are serviced and running, warming up to head to the field. You’re in the house grabbing a quick bite and filling your water jug before embarking on what looks like a long afternoon of harvesting. The phone rings, it’s the bank. They tell you they’ve made the decision to reduce their market exposure in ag lending in your area, and that you’ve got 30 days to “find a new lender.”

While I hope this is an imaginary situation for most of you, it is a true story for a client of mine from my banking days. It wasn’t my bank that “de-marketed” them; that happened years earlier, but it left a sour taste in their mouth. They had cash flow challenges like almost all grain farms did coming out of the 90’s, but their file was not at risk of going south. There was no indication in the previous weeks or months that their loans may get called, so you could only imagine the shock, the disappointment, and the anger at getting that type of phone call at the beginning of harvest. How could they find the time to seek a new lender when the combines had to roll?

Here are some terms that borrowers need to understand:

  1. Demand Loan: this is a loan that provides the lender with the right and opportunity to demand full repayment of the loan at anytime. While there still may be time remaining on the loan term, notice of demand to repay the full balance is an option the lender can exercise.
    Structuring your borrowing to include no demand loans does not guarantee that you wouldn’t face a situation as described above. Demand loans are typically listed as a current liability in your financial statements which makes your working capital look offside.
  2. Effective Annual Interest Rate: interest payment terms, specifically interest compounding periods, affect the actual dollar amount of interest you pay on a loan. Interest that is compounded more frequently will cost more than less frequently (this also applies to your interest bearing investments: more frequent compounding pays you more interest and vice versa.) Lenders are required to calculate and disclose the annual effective rate so that borrowers can have a standardized figure to compare.
    Consider 5% interest compounded semi-annually; the effective annual rate is 5.0625%. Consider 5% compounded quarterly, and the annual effective rate becomes 5.09453%. The difference between the posted 5% and the annual effective rate in these two examples is the compounding interest.
  3. Covenants: as the term implies, covenants form part of the binding agreement between you and your lender. Breaching a covenant could put your total borrowing at risk of being demanded by your lender. Covenants can be for anything from minimal financial metrics to submitting financial reporting. Sluffing these off will hurt your lending relationship.

Direct Questions

What information do you require from your lender to give you more knowledge and comfort?

How are you being proactive in managing your relationships with your lenders?

From the Home Quarter

Receiving notice that your debts have been called instantly puts your business at critical state. While having an excellent relationship with your lender does not guarantee that you won’t be the victim of a corporate de-marketing decision (like my former clients above,) it will put you at the top of the list of clients to keep if there is ever a culling program initiated by bank HQ.

inadequate working capital

Eat to Live, or Live to Eat

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…