How Ford survived the Great Recession avoiding bankruptcy and the government bailout needed by Chrysler and General Motors was that it saw it coming and borrowed a huge sum – $23.6 billion, mortgaging the company in 2006, while it could still get bankers to lend them money.
Once they got deep into the recession, bankers got scared and the ability to create credit lines vanished. They used this stash of cash for working capital and needed all of it. Frankly, Chrysler and GM were not in good enough financial condition ahead of the Great Recession to do what Ford did. They had to invest huge sums to catch up in technology with Japanese competitors and legacy issues such as health care and pension obligations for workers had sapped their margins.
They closed inefficient plants and used bankruptcy to clean themselves up.
Some of the Ford strategy is applicable to what farm operations now face as low grain prices and stubbornly high input costs sap net revenues. Working capital has become an issue for many farmers.
Storing devaluing grain makes no sense to me when the point should be to free up working capital. Ford raised money that it didn’t need at the time because it feared it couldn’t raise it when needed.
I read grain marketing advisors who claim to be pros who have given some really poor strategic and tactical marketing advice this year. We don’t know how long this economic trough is going to last, but it will take equity and working capital to get through it. By shifting to a lower input crop and aggressively marketing, I don’t think that I will draw down either equity or working capital this year, which I believe puts us out way ahead of the pack. I intend to make money.
Some farmers have refinanced, swapping short term debt for long term debt, reducing payments therein increasing working capital. Some would like to sell an 80 in a lease back, but are finding they waited a little too long and few will get it done the way they want to. There are farmers wanting to buy a farm soon that are not quite ready to do so, thinking the farm economy will get tougher and farmland softer yet.
Ford refinanced before the Great Recession. Like Ford you have to stay out ahead of the bear. At the time Ford refinanced it was viewed as a sign of weakness, but it saved them. There are farmers who are wisely giving up leases of farms that don’t work. They have farmed them and know them. Sure … someone else will unwisely pay the rent, but they will likely just find out why the previous farmer gave up the lease having acquired a liability. There was nothing gained and likely something lost by picking up the lease.
Landowners with poor farms may want high cash rent, but that doesn’t mean that they should get it. Landowners typically tend to think that their farms are better than they are and some farm managers inflate the illusion. There have been an unusual number of lease terms violated this spring which has caused landlords to become alarmed. Farmers who can pay all the rent March 1, have some leverage or at least don’t lose any. We don’t know how long this trough of a revenue drought will las, but if USDA models are to be believed it could take more time for low prices to cure low prices than some high debt, high cost farms can survive. I was surprised at the level of distress that has already surfaced over inputs and cash rents as quite frankly it hasn’t even gotten bad yet. Input costs lag revenues but they will follow them down. If we have $3 corn and $7.50 cash soybeans this harvest and some farmers have held onto old crop allowing that to devalue to those levels too, it will be a rough winter next year.
Our marketing strategy was part of our overall financial planning intended to keep us above the fray. That will get tougher to accomplish in 2016 if carryovers grow still larger as we expect. Large amounts of equity can also help farms survive tough times, but why let poor marketing pee that equity away. Just because you didn’t need the money doesn’t mean that you should hold grain. That is your asset and as it devalues, so does your net worth. It was an unnecessary loss. We had clients who during the session break in our winter seminars, got on their cell phones and sold the balance of their old crop grain and are glad they did. What that meant however, is that they had not heeded our earlier advice.
The financial distress will create opportunities and working capital and reserves are needed to be able to take advantage of them. I read one farmer who was financially strong vow that he “would own the winter.” That may have been too much bravado, but I would bet that he has his production priced.
Ford needed every bit of the working capital that it had acquired ahead of the 2008-09 financial crisis to survive it. I see what Ford did in 2006 as one of the more impressive forward looking strategic business moves that I have ever seen a company employ. How are farmers planning to get through 2015-16? What forward looking strategic plan are farmers employing? We are not Ford but we do have to take care of business. It may be an illusion that ARC payments will be enough of a bailout.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
Please Enter Your Facebook App ID. Required for FB Comments. Click here for FB Comments Settings page