Recently, I had a meeting with a Client and his banker, designed to update the bank on our progress to date and our plans for the next 12 months. Usually, I find these sessions very beneficial for both the Client and his bankers. This one was somewhat tense, as I had expected it would be, given that I had rejected all of the bank’s “recommendations” for this operation…
Let’s look at three of them:
First, they felt the Client should sell his heifers to raise capital and pay down debt. Really, I thought, and what will they use for replacements? Perhaps they could buy them, but based upon what we’ve seen on the prices of springers & fresh two-year olds these past several months, that would have been costly.
Next, they suggested that he sell his entire herd and just plant trees. This has merit over the long term, but if the client sold his entire dairy herd and planted trees on all of his farmable acres, what would his revenue source be during the next 4-5 years while these trees were coming into full production. This also would require a major capital expenditure and addition of debt. How could they service the interest on this new debt?
Finally, the bank suggested that we sell part of the Client’s land to reduce debt. Their Loan-to-Value on the real estate was 40%. Wow! In hindsight, we would have missed the upturn in land values for properties like this that have multiple sources of water.
Upon rejecting these shortsighted suggestions, we were immediately reminded about how lucky we were to have their financing… He suggested that the dairy industry was such a train wreck waiting to happen, so we should get out while we can. I wonder if I should forward him a copy of the Daily Dairy Report, showing $24-25/cwt milk prices? Yes, feed is high, but margins should still be solid.
At this point, I borrowed a line from former Vice President Mike Pence in the 2020 VP Debates and stated, “You’re entitled to your own opinion, but you are not entitled to your facts.” So, what was he implying?
- That this was a short-term game? Perhaps it was for the bank, but not for my Client. They were in it for the long haul.
- We didn’t know what we were doing? Since this discussion, heifer prices are up, and I’m glad we are not having to buy any. Trees are great, but I’d hate to be buying feed on the open market today with its high prices.
- Land values are up, and, as result of this and the solid herd management that has been put in place, several other banks are now interested in this credit relationship.
- Why decrease debt levels if your Loan-to-Value percentages are in line with positive industry standards and your performance is steadily improving? I don’t know.
This Client’s performance is trending upward and is on track to exceed our projections for this year.
Please allow me to leave you with this: Are you receiving the most optimal financial advice? If I can assist you on this, please feel free to contact me.
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