Wow – I’m a Millionaire!
In a recent article I expressed that agriculture has a number of millionaires on paper who have never made a dollar. Sitting across the kitchen table from a young farm couple who had been farming for a decade added a new twist to this story.
The couple was feeling a little down in the dumps because of high input costs and low commodity prices. Both were working off the farm as their schedules allowed to bring in cash flow to meet debt commitments. They were also diversifying the business and moving toward value-added enterprises to increase profits.
During the first five years of business they worked very closely with their accountant to provide a strong set of cash flows and balance sheets that were required by their lender. However, because of their success, the lender relaxed the record requirement. Times got busy with business and family obligations, so record keeping became lax, and the accountant became a secondary priority.
After viewing their operation, I asked to see their balance sheet. It was somewhat unorganized; however, piecing it together while the other farm advisor talked with the couple brought a smile to my face. This couple’s assets were $2.5 million. Liabilities, including accounts payable, were $1.5 million, for a net worth of $1 million. Earlier in the conversation they indicated they had started with only $30,000 in cash and farm equity.
As their attention turned to me, they asked what I had found. I said, “You are millionaires!” They had increased their net worth about $100,000/year. Drilling down, we found that much of the boost was due to increased livestock and grain inventory numbers and an overall reduction in principal on the debt. Only 30% was the result of increased land values. I guess I was ‘Dr. Feel Good’ for the day. Dr. Phil, look out.
The moral of the story is that we sometimes get away from the basics and get caught up in the emotions of the time, failing to realize how much progress has been made. A periodic assessment of the financials can bring enlightenment despite trying economic times.
The Road Warrior of Agriculture
My e-mail address is: [email protected]
Editors' note: Dave Kohl, The Corn and Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups.
To see Dave Kohl's previous road warrior adventures type Dave Kohl in the Search blank at the top of the page.
This online exclusive is brought to you by http://www.cornandsoybeandigest.com