September 30, 2020
Do you see your banker as friend or foe?
We all have a list of reasons we don’t like bankers. Most of them are not even our reasons; they were put in our minds by previous generations who had bad experiences with bankers.
Let’s think about this for a second. The bank does not want to repossess stuff. That would be a headache. They really want us to win when they lend money. The bank’s job is to sell debt and make some money by charging interest. Interest is compensation for the time the banks’ money is used. It’s how they make a profit.
My first mentor once told me that to build a community we needed a banker to sell debt to a young couple so they were stuck there for a while, paying it off. During that time they would have kids, which would then lead to one of the parents teaching Sunday school, then eventually work up to county commissioner.
Getting the loan
Getting my first loan was a real pain. Some loan officers would not even let me sit down when I told them the purpose of my visit was to borrow money to buy cattle. They told me they don’t do that and pointed to the door. They didn’t even look at my marketing plan. All they saw was a young man who wanted to play cowboy.
The last loan officer I spoke with sat down and looked over my plan. It was the first time he was exposed to the idea of sell-buy marketing. He was very curious and asked me a ton of questions. Most of the questions were along the lines of, “What if this happens?” I had done a few successful sell-buy trades already, and even though I had not seen it all, my answer was always to stick to what I was taught and remain disciplined, let the math guide me and keep my emotions out of it.
I now see that meeting much like a job interview. Just like a potential employer judges a person to see if he thinks they will work out, bankers do the same thing. The previous bankers judged me too. They saw a young kid who probably didn’t know much, and didn’t have anything new or original to bring to the table. Based on past experience, they made a snap decision not to waste their time on me. Sometimes the banker doesn’t believe in your plan, and sometimes they don’t believe in you.
The sell-buy advantage
This is one of those moments where sell-buy shines. It is fourth-grade math -- and math is fundamental, meaning it never changes. By letting the math guide me I could keep my emotions out of things, and respond to what the market is telling me. When we react, which is what most people do, we let outside forces act up on us. When we respond we remain in control of ourselves. All I had to do was remain disciplined to follow the math. This gave me confidence in what I was doing, and confidence sells. That is what got the banker on board.
This is where sell-buy is different than the conventional way people market cattle. There is no forecasting involved. We simply look at what the market is telling us today and respond accordingly. If we end up with a group of cattle that had some death loss, didn’t gain weight very well, the market dropped, or whatever the case, this information is factored in before making any marketing decisions.
Since sell-buy is simple and fundamental it was easy to walk the loan officer through the math. I keep records of past trades, and I showed those to him. It was easy for him to see the positive cash flow. I also outlined how my cost of gain (COG) changed as the price of feed changed. Even though my feed was all home raised, and raised at a cost below market value, I was charging market value. So not only was I showing him that I was making profit on trading cattle, I was also capturing a margin on the feed.
When my loan officer took this to committee, it was easy to see that I was generating positive cash flow, regardless of market direction, and with my COG fluctuating as well. One loan officer on the committee finally understood what I was doing. He concluded that I was not looking at the market to tell me when to sell. I was looking at the market to tell me what to buy. While they didn’t fully grasp the concept of price-value relationships, they understood enough to see that I did. When I decide to sell something and buy back, I am not hoping, I am doing so confidently. All my control is on the buy side of the transaction. If something is not good enough, I simply stop bidding.
Another thing bankers like about my business is the fact I have separated farm money from house money. In my yardage expense, I included salary and insurance. If I do end up in a tight spot where I have to do a breakeven trade, I can recapture the original money and my salary is still paid. This is important because then things at home are taken care of. When people can’t buy groceries or pay the light bill they tend to get desperate and do stupid things. When the home front is taken care of, we remain calm. Bankers like that.
Always be sure cattle loans are on a revolving line of credit. When the loan matures each year all you should have to do is pay the interest and sign some paperwork to renew it for another year. If you have one of those loans that has to be repaid in full each time before issuing a new loan, just remember that no one picks a market low like a banker. Murphy’s Law means you will be forced to sell undervalued cattle.
Also, there is no shame in starting small. This is a new concept to most bankers and they may not be willing to lend much at the start. After executing some profitable trades and reinvesting those profits back into the business to expand cattle numbers the banker will quickly see the cash flow, and the growing balance sheet. At that point he knows he’s backed a winner and that you’re going places and he will eagerly want to go along for the ride. He will be willing to lend even more money. The thing to keep in check is to be sure that you are making more money by using the banks money, than the bank is charging you for the use of that money.
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