The "Owner Approach" Will Help You Weather the Credit Crisis and Downturn
The “Owner Approach” Will Help You Weather the Credit Crisis and Downturn
Final in a three-part series on the current economic situation.
By Gary Dyer, President & CEO of Farm Credit Services Southwest
What a difference a year makes! If I wrote this article last year and predicted that in the spring of 2009 you would see:
- The collapse of our banking system as we have known it
- $2.6 trillion in bailouts and a $825 billion economic stimulus package
- $40 oil and $10 milk with a 50% drop in most commodity prices
- 75% drop in urban land values and a 25% drop in rural land values
- Dow Jones stock average at 6,500, a 30 to 40% drop in house values, 8 to 10% unemployment, and a severe worldwide recession
You might have thought I was a little pessimistic. But a year later here we are.
How does all this affect Arizona farmers and ranchers credit availability? Most of our members are coming off of some very good years and are well positioned with strong liquidity and equity positions to weather a year or two of tough times. The big question is how long will the tough times last? Most of the economists we subscribe to are predicting a bottom in late 2009 with stabilization in 2010 and improving conditions thereafter. The Food & Agricultural Policy Research Institute (FAPRI) recently issued a study forecasting lower prices for agriculture commodities in 2009 followed by a recovery in 2010 with prices returning to historically high levels over the rest of the decade.
Assuming they are correct, the large majority of our farmers and ranchers will be able to weather this economic storm. However, those who are highly leveraged or less efficient will have a challenging time getting financing due to issues related to declining real estate values/equity and difficulty in demonstrating adequate repayment capacity. Those who have problems will also have fewer options available to correct the situation since it will be difficult to sell real estate or other assets in a soft market. Because of the banking crisis, even the stronger borrowers may see less appetite for new loans from lenders and higher spreads or rates with less flexibility on loan terms and conditions. Most lenders are more focused on strong credit quality and building capital versus loan growth in today’s banking environment.
The key to weathering the difficult economic environment is to take a proactive “owner” approach versus a head in the sand “victim” approach. Owners spend their time and energy taking action while victims spend their time and energy blaming others and wallowing in their troubles.
Following is a list of questions to see if you are taking an owner approach and doing everything within your control to not only survive, but to come out stronger once the down cycle is completed (also see “Maintaining a Strong Business in a Weak Economy in the March 2009 issue of Arizona Agriculture obtainable online at www.azfb.org).
- Do you have a positive relationship with a lender who specializes in agriculture, understands agriculture cycles, and is committed to a long term relationship? Do you have excellent financial information and budgets for your management and to provide your lender with no surprises or secrets? Do you under promise and over deliver regarding you financial performance?
- Have you assessed all of your staff including family members? Do you have the right people in the right spot to excel? Have you eliminated weak performers and unnecessary functions? Are you fully leveraging the talent you have? For larger operations, do you have appropriate incentive programs in place for key employees?
- Have you analyzed all business segments or commodities in your operation and expanded the more profitable and gotten out of the less profitable?
- Are you as efficient as you can be and have done everything possible to be the low cost producer in your industry?
- Are there opportunities that can be captured during the tough times? Are there some negatives that you can convert into positives for your operation? Have you maximized your throughput and production/yields? Are you fully utilizing all productive assets?
- Are there non-earning assets that can be liquidated (boats, planes, horses, cabins, etc.)
- Can you renegotiate rents and leases and get out of those that are less productive?
- Have you minimized withdrawals for family living expenses from the operation?
- Are all appropriate risk management tools being used such as crop and life insurance, hedging/forward contracting, and fixed interest rates?
- Even though times are tough and it is a buyer’s market, are there assets that you need to sell in order to provide liquidity to survive until times get better?
I realize that many of the above actions are not easy or pleasant to accomplish. The successful operators will do whatever it takes and will do it sooner rather than later.
In conclusion, many of us have been through the tough times before and we will get through this tough cycle as well. Times will get better and there will be great opportunities for those that can capture them.
The Dec. 19th, 2008 Kiplinger Letter says, “High productivity pays off in U.S. agriculture as well. The efficiency of American crop and livestock growers… supported by a well-established research network… is one reason the country ranks first in output of corn, soybeans, beef, poultry, dairy products and more. Of course, abundant arable land doesn’t hurt, either. America’s farmers are at little risk of losing their edge in coming years, despite rising production costs. Increased world population, better diets worldwide and a growing biofuels market should have agriculture chalking up big positives for the country for years.”
