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Honored Advisor

RISK, or the loss of

An inherent part of farm business is the affair with risk.   Youngins can't wait to carry it and the old ones are 4 inches shorter from carrying it.

 

My favorite quote lately "any fool can farm with $7 corn"...  is not totally accurate....... it takes a special fool to pass the rewards on to the carnival called "agrabusiness".       (ever notice how the size of that carnival grows exponentially with every dollar added to the price of grain??

 

I got a good friend,,,, well truth is he is a good friend to a large community of folks,,,,, he is an implement dealer and a good one.

When he is pulling in the reigns and is out of good deals and (with me) not enjoying the day as much, I know that we are on a down turn.  He is a "leading indicator" as Palouser would say over on the marketing page,  estute and anticipating what is to come.  He knows what happens to his business when grain prices fall and wheat acres are gobbled up by yearling cattle.  

God Bless him he starts preparing early and I appreciate watching him because he may not be thinking it, but I know,  we need him in good times and bad.  He has instincts for survival.  He manages his risks.

 

Question is ...... we all enjoyed a few years when profit was nearly guaranteed if you could raise a crop,  Did you loose your taste for risk?  

Looking back we see events in the history of our individual businesses when a risk made a big difference.  Good or bad.

Sometimes we fail to evaluate the risks not taken.  Too often we would rather forget them.  But they are important to take note of.

 

Sounding too old, I think there has never been a time in agriculture history when the future has been more uncertain and at the same time held more excitement and promise.

Try to find some youthful desire for risk.

Be ready to embrace some risk these next couple of years look rough.  Isn't that is when true opportunities come?

 

 

 

 

 

 

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18 Replies
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Honored Advisor

Re: RISK, or the loss of

hey SW, I look foward to challenges, with the caveat that the 'tinfoil hat" side of my brain isn`t correct about this being "The Big One".   I`m not the worrying type, but if interest rates go up, grain prices go down and inputs stay flat, any amount of debt could turn quickly deadly. 

 

With "any idiot can raise $7 corn" ...they said that about Roundup Ready soybeans (any idiot can have weed free fields) about 15 years ago, we see how that turns out for those with a solely based Roundup spray program.

 

What a guy did when we did have $7 corn will determine if he survives <$3 corn.  Some got cute and forward sold $4 and $5 corn and never really sold $7 corn.  Some got cute and took on debt that needed $6 corn to service.

 

interest rates shouldn`t go up...but for that very reason, they probably will.  And the fed doesn`t seem to take "baby steps".

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Honored Advisor

Re: RISK, or the loss of

BA,

 

Thinking along with ya.  One of the biggest risks that never gets mentioned........ the sudden change of attitude in Washington.

 

And it is coming--- The pendulum always swings back.  It may center a little more left of prior decades and with the size and scope of regulation --- probably should --- but the swing is coming.

 

And when your headed down the mountain like we are a sudden u-turn is going to throw us off the wagon if we are leaning the wrong direction.

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Honored Advisor

Re: RISK, or the loss of

Your post hits me on a particularly pensive day.  We just put the last touches on detailing my Shadow for the last time.  Mike's big 1800 VTX is due for the treatment tomorow.  They are heading up the road, trading them in, with the 1300 at the getaway house, for that Mule...the  4WD one, not the ones that decorate the pasture.  This rite of spring was very bittersweet. 

 

We are feeling our age, I guess, and that tends to make one risk-averse, from what I recall of investment counseling, a couple of decades ago.  Risk tolerance is supposed to be based upon your feelings about two major factors:A) Can you afford to lose this money?;  and B) Does your gut tell you you still might still possess the faculties to ever earn it back, if you did? 

 

I come to this discussion after a recent viewing of a Jim Rickards video assessment of the coming 25-year global depression.  He says the real unemployment rate in the US is 23%, and that our friends at the Fed are over-leveraged by $77 in debts for every $1 they can actually lay claim to...sobering, when you think that is about three times worse than in 1977. 

 

Remember the eighties? I don't just mean big hair bands and bad Harleys. 

 

Throw in Rickards' prediction of the "death of the petrodollar".   Quite possible, given the current at-odds relationship we have with the Saudis; the paper tiger of the Chinese economy, with its ghost cities and other GDP chicanery;  China and Russia buying gold on the black market, and we have a real stew of ingerdients that put us in dicey economic circumstances.  Add on the IMF's not-do-secret desire to rob the dollar of its global currency status...this is just a gathering of extremely bad storm clouds on the horizon. 

 

The only good thing about his predictions, as I see our position if they came true, is that hard assets like land ( especially farmland) are deemed good hedges.  Owning land and having no debts is a good strategy if the world economy as we know it comes to an end? Cool!

 

Seems to me that owning land and having no debt is pretty good planning in high times, too.    Of course, we had to forgo some of the party then, just to get it all paid off; but it's done now. 

 

As much as I may have envied row cropping folks the last five years, I wouldn't want to trade places with you today. 

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Advisor

Re: RISK, or the loss of

With all this talk of risk and interest rate hikes imminent let me ask a question:

 

I know a guy Smiley Wink who currently has a variable interest loan, under 3% today, and can pay this loan off in 5 years.  Or he can lock it in for 10 years at 4.65%, or 20 years at 5.41%.  Should he just pay off the loan or lock it in and save the cash in anticipation of pulling the trigger on cheaper land sales in the next few years?

 

Hold on to your hats, this is gonna get bumpy!

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Honored Advisor

Re: RISK, or the loss of

tree,

 

Has the present variable loan got an upside limit?

I know of a few being written in the 3,7% range adjustable every 5 years with a total limit movement of 2% ---- so it has a 5.7% limit up...   That sounds ok to me.

 

The last question.    With the economy based somewhat on government supported activity, unemployment big and technology pushing it bigger.  Farm Land being one of the few best investments by those worldwide with cash to invest.  You might wait quite a while for that cheaper land......

The cost of farmland might be one of the most damaging issues farmers face for quite a while......... it all changes hands eventually and every year gets taxed as well as every time it changes hands.......

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Honored Advisor

Re: RISK, or the loss of

Here`s what concerns me and I use the word "concerns" to avoid the word "terrify".  Okay, let`s say someone has some 5yr 3.5% money borrowed and a 4% 1 yr opperating loan, that CAN go up a little in the next year, maybe as much as 2 points.

 

Let`s further say corn is a buck cheaper and beans 2 bucks cheaper come fall, the 5 yr money borrowed now has a "5.5%" rate, which could go to 7.5% in 2016.  And with the 4% 1 yr opperating note and $2 corn and $7 beans it can`t be entirely paid back.  Now to renegotiate it from a position of "weakness" they might want 8 or 9%...who knows.

 

Once the snowball starts rolling, how much equity does one want to burn?   I know a guy that after the banker took a week to decide if he would get money, he was told that his corn breakeven was over $5 and the two person family was allowed $24,000 in living expenses.   I don`t know but for that guy to get $5 for his corn only to live off $24K just to make ends meet, doesn`t look like a good situation at all.  

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Advisor

Re: RISK, or the loss of

A limit up per year but no total cap.  I think pay it off is the right answer.  Until one of BA's scenarios happens.

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Senior Advisor

Re: RISK, or the loss of

You can almost never go wrong by eliminating debt.  A dollar in our hands is worth more than that same dollar in our bankers control.

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Honored Advisor

Re: RISK, or the loss of

Just curious if the $24,000 includes health insurance costs or not? With ACA and costs for typical family coverage, that could easily eat up half of the living allowance.

It should work out okay, unless anyone wants to eat....
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