Many people know I am avid basketball player and fan, which often leads to questions regarding upcoming tournaments or players, alongside the usual economic and agricultural inquiries. Believe it or not, many times these questions serve as my inspiration, in one form or another. As they may prove valuable for you as well, below are a few questions and answers from my travels.
What do you think of lenders loaning money to producers based on their equity even though the producers are exhibiting negative margins?
This is an extremely timely, sensitive and pertinent question in today’s agricultural environment. With commodity prices down and costs slowly readjusting, negative margins are not uncommon and in some places, considered normal. If a producer seeks refinancing using equity, there must be a written plan with strategies, tactics and timelines for improvement. This plan needs to be monitored by the lender and both the lender and producer need to understand a side-by-side approach is critical. Clearly, if the producer cannot execute on the plan, requests for future readjustments will be carefully scrutinized by the lender, review team and regulators. In addition, realize that in these types of situations, there is often considerable equity burn. This can be extremely problematic if the improvement plan has not been executed because not only is there less equity, there has been no improvement in the situation.
How does the younger generation encourage the older generation to consider secession without creating problems?
Well, in short, the answer to this question is very carefully! Seriously, even with volatile markets and suppressed prices, this is one of the biggest issues facing agriculture today. Often, an outside source such as, a lender, agribusiness-sponsored seminar or an article can be a catalyst for change. Transition planning is a journey; however, this journey can be highly emotional and requires a guide. An outside facilitator can help you map out the best road and then, serve as your navigator, steering you away from ditches and detours. Like any journey, success in transition planning requires patience, open communication and common goals.
What is a realistic return on investment in the next five years?
As agriculture continues to navigate the economic reset, modesty is a good mindset regarding returns on investments. Returns just above the long-term inflation rate of 4 percent may be a new reality. This includes dividends and capital appreciation. Remember, if your returns exceed the long-term rate of inflation, your buying power is actually increasing.
What are your thoughts on land prices?
In the 1980s, agriculture was caught up in a credit bubble. Today, agriculture faces an asset bubble with more self-financing and equity. Credit bubbles correct quickly while asset bubbles resolve similarly to a slowly deflating balloon. This year, land values and cash rents are being reset which may likely continue into 2017. However, land values are generally established either locally or region depending on certain dynamics. This could include the number of buyers, enterprises, quality of land, and of course, the amount of water, minerals and assets underground.
In basketball, experienced leadership along with a good point guard often gives a team a good chance at successful tournament competition. In fact, the same is usually true in agriculture. Even with suppressed prices and volatile markets, experience mixed with a good manager can help an agricultural business successfully compete in today’s economic environment.