FGP Cattle

 

Quality Hereford Cattle  for Quality Cattlemen

FGP Cattle - On the Farm

Interesting Webinar Part II

Posted on November 24, 2008 at 5:34 PM

In continuation of yesterday's musings...

Land values have been on the rise in North America over the last few years.  Why is this?  Well, one reason, and the current major influence in prices, is that any time there is a war, you will see a spike in land values.  War puts a premium on food, fibre, and now fuel.  In time of war, people want to invest in land to ensure that they can grow food to survive if the need arises.  People will invest in land because it is a hard assest, not a paper asset as stock markets are.  When you see a spike in values, you will see a slowdown in appreciation.

However, there can be some problems with owning land, especially in times of high prices.  If you have land, you need to have financial liquidity to get through the downturns.  Buying land creates a liquidity lock.  Your cash is now tied up in a physical entity.  The concern with this is, that when markets turn and inputs are greaters than returns, you have to dip into your cash reserves or sell the land at a potential loss to generate cash.  So, before you go out and buy that next prime piece of real estate, make sure that you can afford to float through the tough times without over-extending yourself. 

Mr. Kohl talked a bit about securing credit in the coming year.  He says that it will still be available but warns that it will be harder to secure.  You will have to jump through more hoops this year to prove that you are a sound risk.  Be prepared to provide a business plan and have a good risk management plan in place.  Sharpen those pencils good!  If you are a bit marginal, it may be tough to find credit.

Cost of credit could also go up.  Fixed rates may be more expensive as lenders may prefer to write loans or lines of credit with a variable rate to cover fluctuations in interest rates over the long term.  Interest rates are showing volatility in the long term because of the credit crisis in the US and the growing US federal debt.  Could we see double digit interest rates in the long term?  Anything is possible nowadays.  If the US federal reserves feel the need to print more money, it could bring back an increase in inflation.  Wouldn't it be nice to have one of those printing machines out back??...

You may hear more financial terms coming from the mouths of lenders over the next little bit.  Some of the more common ones you may hear include: credit scores, working captial to revenue, debt to equity ratio, (always an important one), coverage ratio (amount of capacity to amount of payments), and operating expense revenue (how much margin do you have?).  Coverage ratio is a new one for me but Mr. Kohl provided the equation for how to calculate it: (net income + interest and depreciation - farm living withdrawl) divide by payments = coverage ratio. 

Mr. Kohl made some suggestions of how to prepare your farm for the growing financial crisis: build CASH, maintain due diligence of agribusiness firms you are associated with, tax plan beyond 2009, maintain equity above 50%, be vigilent about your credit score (and your partner's), don't assume that operating lines will be renewed, anaylize your budgets carefully (actual versus projected), make sure you have a good insurance, marketing, and risk management plan in place, and prepare a business plan.  He ended with one final thought:

"Planning is not an option - it is a requirement!"

Off to plan I guess...

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