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What do the following
things have in common: Former U.S. presidents, dead musicians, and $7 wheat? Answer: They are never appreciated until they are gone. Just think of Jimmy Carter. He is often called the best ex-president we have ever
had, but during his term, well, the grain embargo still causes some complaints from wheat farmers. Johann Sebastian Bach was known as a great organist while he was alive, but it wasn’t until 100 years after he died
that he received recognition as a great composer and now four out of the seven songs in my son’s violin book are by Bach. I didn’t even know he played organ, but that was his occupation while living, and his
compositions didn’t become well known until after he died. And $7 wheat? Well I think we all know how much we miss that. It was a great thing, although it was difficult to fully appreciate after watching your
neighbor deliver $20 wheat just a few months prior. So what do we have right now, within our grasp, that we should appreciate, but are too blind to see? What will we look back upon in one, five or ten years, and say
“Wow, what was I thinking? How could I not appreciate that?”
The first thing that comes to my mind is interest rates. I am very grateful to be able to borrow money at such low interest rates.
Short-term rates such as operating lines of credit are especially attractive, but I believe that even longer term rates are attractive. It is a good time to be a borrower, and locking in long term interest rates is
a good risk management strategy to make sure we don’t end up in the same credit crisis that struck down many homeowners. If you are looking at the long term, don’t be obsessed with hitting the low. Focus on locking
a rate that you know will allow the payments to cash flow on your farm. If you are locking in a 20-year land note, how much lower can rates go versus how much higher? What is the risk in variable rates versus the
reward in locking in today’s rate?
Along that same line is working capital, which is current assets minus current liabilities. In a nutshell, if you sold all your grain
and collected all the money owed to you, and then made paid all your bills and made your yearly loan payments, how much money would have left? Whatever is left is called your working capital. According to Minnesota
and North Dakota farm management data, crop farmers have more working capital today than they ever have in the past, but that is beginning to change. Working capital is shrinking. Perhaps a farmer paid cash for
machinery, or maybe it is because the wheat in the bin was worth $7 last spring, and now it is worth $4. Whatever the reason, farmers have less cash on hand which means less of a cushion in a bad year.
Working capital should be spent, and used to make your down payment on land, or that new combine, but look again to make sure there
is still a cushion if you have a bad year. It is always nice to have cash on hand just in case that quarter across the road comes up for sale and you need a down payment, or if you have a bad year and need to dip
into cash reserves to make your loan payments. Cash is always more appreciated when we have none.
Finally, the elephant in the room is grain prices. Can I really find anything worthwhile in these grain prices? In March 2011, will I
really look back one year and think we had it good in March 2010? I don’t think so, but that doesn’t mean I can just put my head back in the sand and not come up until we hit $7 wheat again. Although it is tempting
to run and hide, don’t. Instead, take a minute to calculate your cost of production. If today’s prices meet that cost of production, sell something. It doesn’t have to be everything, but we need to find a price that
gives us some profits. The key to profitability for past few years has been “Wait and Hope” and it paid off just fine. The grain markets were rallying, and those who waited received the highest prices. Now it
appears we’re back in familiar territory: Forward contracting is necessary, profits are measured in pennies, not dollars and there are fewer opportunities to take advantage of profits.
Some things will never be appreciated until they’re gone, but it is your job to find those hidden gems before they disappear. Whether
it’s a profitable wheat price, low interest rates, or cash on the balance sheet, enjoy them while you have them because they might not always be here.
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