At educational events, I frequently encounter individuals who have previously attended my sessions. Some will humorously point out my predictions that were wrong, while others are complementary of the predictions and the financial management principles I taught. Recently, one participant presented me with a thank you letter, and enclosed was a summary of comments I gave in Chicago at the end of the last century. From the late 1990s, let’s review some of the points to see if any have stood the test of time.
All those years ago, I recommended that producers should maintain enough working capital to cover 20 percent of all expenses. I noted that this was particularly true for businesses in expansion mode. While challenging, this is still ideal even in today’s economic environment.
At the time, I predicted that the period of 1998 to 2003 would be the start of roller coaster economics where extremes in volatility would start to increase. Of course, this played out and accelerated during the great commodity supercycle 10 years later.
Next, I recommended that producers develop three levels of financial defense: cash flow, liquidity, and equity. One gentleman shared with me that during the 1980s farm crisis, he almost lost his farm. When he heard this recommendation, he heeded the advice and during the recent supercycle, he dedicated much of his profits to working capital and paid income taxes. He also remained committed to self-established levels of debt and equity. Both his experience and my recommendation drove him to make different management decisions that are now allowing him to weather today’s economic storm. As a side note, this producer is also exposing his son to some excellent financial habits and good education. He and his son attend conferences together and conduct joint meetings with their lender in order to ensure a better generational and management transition for all involved.
Another recommendation this producer noted was when the debt to asset ratio exceeds 50 percent, lenders will examine critical areas. Specifically, they will assess if one can maintain production levels and still be in the top one-third of cost control. I also recommended that family living costs be under 10 percent of total income. Today, I would revise that recommendation to state net income instead of total. I advised producers to execute a good marketing program. And I warned that one bad year economically could take five to ten years to correct. According to his notes, I also stressed the importance of two to six hours of education per week, and experience off the farm.
At the time, the U.S. economy was in the 94th month of expansion, and I predicted the Federal Reserve Chairman, Alan Greenspan, was beginning to shift. I also stated that the stock market was too hot. Within 15 to 18 months, a recession began, the stock market corrected, and Chairman Greenspan shifted in policy. Does this sound eerily familiar? Will history repeat itself? Only time will tell.
I enjoyed reading through this gentleman’s notes and appreciated the opportunity to review my comments from 20 years ago. It is interesting that as much as technology advances and global communications increase, some principles seem to remain unchanged offering timeless value.