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Banking career in conservative times

Howard began his career in a non-traditional bank in Laramie, Wyoming. Despite having a degree in animal science and limited business background, he was hired due to his knowledge of agriculture. The bank's conservative approach meant they focused on lending only 70% of the value of livestock and feed, and they were hesitant to accept machinery as collateral.


The early 80s

During the late seventies and early eighties, the farming industry faced numerous challenges. The grain embargo imposed by Russia, rising commodity prices, and inflated real estate values created a volatile environment. The government's involvement through loan programs further complicated the situation. As a result, many banks in the center section of the nation, primarily serving corn, beans, and grain crop farmers, declared bankruptcy.

Howard's bank, being in a relatively insulated area, managed to weather the storm. However, they did take on clients who faced difficulties with the Production Credit Association (PCA), a government agency providing agricultural financing. The bank's conservative approach helped them navigate these turbulent times and protect their interests.

The term "conservative" in the banking context refers to a cautious lending approach. Howard explains this by using the example of valuing cows. While the market price for a good cow might be $2,000, the bank would consider it worth $1,200. This conservative valuation ensures that collateral can cover the loan in case of financial trouble. It also emphasizes the importance of equity and a realistic assessment of asset values.

The conservative nature of banking during this period had significant implications for both banks and borrowers. Banks aimed to maintain a strong equity position to safeguard against potential losses. Borrowers had to understand and accept the conservative valuations to ensure they could meet their loan obligations. This conservative mindset was crucial in the face of market crashes and economic downturns.

Comparing the banking industry's experience in the eighties to more recent times, Howard notes that the market crashes of the past did not have the same catastrophic impact as the eighties. This observation raises questions about the reasons behind the difference in outcomes. It could be attributed to various factors such as improved risk management, regulatory measures, or a more diversified agricultural sector.


Cash flow is king in agriculture

Howard White, a banker with experience in the industry, emphasizes that cash flow is king. He explains that cash flow is the ability to service debt, regardless of changes in underlying asset values. This distinction between profitability and cash flow is crucial for farmers and ranchers to understand in order to maintain financial stability.

White highlights the importance of equity in the operation. Having equity allows farmers to withstand losses and still have access to loans. This is in contrast to operating solely on borrowed funds, which can be risky during downturns. White also emphasizes the importance of cash flow in determining the ability to repay debt. He encourages farmers to stress test their operations at higher interest rates to assess their ability to withstand financial shocks.

The current landscape of high real estate values in agriculture is also known. Land prices have significantly increased, with some farm ground selling for as much as $10,000 to $13,000 per acre. However, White raises concerns about the sustainability of these high prices and their impact on cash flow. He questions whether operations can support the debt associated with such expensive land.

White's insights highlight the need for farmers and ranchers to carefully evaluate their operations and assess their ability to weather potential market downturns. The focus on cash flow is crucial in determining the sustainability of debt and ensuring financial stability. While high asset values may seem attractive, they must be supported by strong cash flow to avoid potential financial hardships.



Cash flow is crucial

One of the main points highlighted is the difference between profitability and cash flow. While profitability can fluctuate, it is cash flow that keeps the lights on and allows the business to keep moving forward. White emphasizes the importance of staying on the battlefield today in order to be there tomorrow, and cash is what keeps a business in operation.

He also stresses the need to focus on cash flow in order to weather changes and ensure financial stability. White suggests that farmers and ranchers should pay attention to their overhead costs and evaluate the efficiency of their operations. This includes considering whether there is too much machinery or if there are ways to reduce overhead expenses. By optimizing cash flow, farmers can put more money in their pockets, pay their bills, and potentially improve their facilities to become more profitable.

He also touches on the importance of cash reserves and their relationship to debt service. White notes that cash reserves are individualized and depend on factors such as health issues, age, and personal preferences. However, he suggests that a minimum debt coverage ratio of 1.25 is ideal. This means that for every dollar of debt, there should be $1.25 worth of income. This ratio provides a cushion for unexpected events, such as a downturn in the livestock market, that can impact cash flow.

In addition to debt coverage ratio, White mentions the importance of a working capital or current ratio. He suggests aiming for a ratio of 0.7 or better, indicating a healthy level of working capital. This ratio is calculated by dividing current assets (such as current calf crop and feed) by current liabilities. It provides a measure of financial health and liquidity.


Importance of accountability in business

One key aspect is the importance of accountability in business. We discuss how having a group of people who are willing to provide honest feedback and challenge their ideas is crucial for success. We emphasize the need for individuals to surround themselves with a team of peers or advisors who will not hesitate to call them out when they make mistakes or stretch themselves too thin.

Being self-employed or owning a small business can sometimes lead to a lack of direct accountability. Unlike those with jobs who have bosses or committees to report to, small business owners often operate in their own world and may lose sight of the need for external accountability. This is where building a team of peers or advisors becomes essential.

He mentions that having a spouse or partner who is on board with financial decisions is also crucial. We discuss a story where an individual made a sizable investment against his wife's wishes. Recognizing the importance of his wife's opinion, he sought the advice of others to help convince her. This highlights the significance of having a spouse who is financially aware and willing to discuss and make decisions together.

He also touches on the idea of preparing for potential financial disasters. While it is impossible to predict the future, he stresses the importance of being prepared for unforeseen events. We discuss the probability of a financial disaster occurring and the consequence it would have on a business. By considering these factors, individuals can determine the level of preparation they need.

They mention different approaches to preparation, such as owning gold and ammunition or taking a more moderate approach. They highlight that the level of preparation is subjective and depends on individual preferences and circumstances. They mention a futurist who advocates for owning gold and guns, while others argue against it. Ultimately, the level of preparation is a personal decision.


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