|
n. Illinois | The pain was created in the time period from 1981 through 1984-1985. The bottom was 1986. Interest cost as a % of the gross back then was like 12-14% up from 5% in the 1970's before interest rates took off. Today interest cost is roughly 4% of the gross. So not only did you have declining net margins (please understand Farming is nothing but a margin control business) if your doing a good job your keeping at best 25 cents out of every dollar you make. so to have something that used to take 5 cents jump up to 12-14 cents and your making less on a per acre basis than what you had before it was a horrible combination of events and it was devastating to those caught on the wrong side. When the land market made its correction to reflect both lower cash returns per acre and higher costs of capital (it will always do this, and this is the risk we are facing currently) This stop the farmer's ability to refinance his operating losses against his land equity because many found that they had none. The fundamentals laws of finance have not changed its not going to be different this time. cash returns going down along with cost of capital going up will lead to lower land values. Lower cash returns will lead to operating losses for some. What we can't know is will we see the same horrible combination that happened in the 1980's? Will the Fed defeat inflation early? or will it fail? I have no idea nor does anyone else. The key is not getting into the situation of needing to restructure operating loans into long term loans because you find yourself without adequate working capital. If your banker isn't talking to you about your working capital you need a new one. forget about the interest rate they will allow you to get into the exact problem described above because they don't understand the importance of working capital either.
Most of Farm credit is structured with sales people who no longer do credit and many don't actually understand it, they are there because they are smooth talkers and good BS artists. Someone else is doing the underwriting and your not talking to them. Large and mid size banks have the exact same problem. Front folks are nothing but sales people and many have no real credit skills any more. Yes they are all nice folks but in the end they have no say in what happens if something goes wrong in your operation financially.
Edited by Reality speaks 1/21/2024 23:04
| |
|
1986?
