Stupid Emotions

My first vivid memories that I can recall were related to the 80’s farm crisis.  My Dad and his brothers split up the business partnership in the 71 due to disagreements, loosing their economies of scale.  I remember the day in 1984 my Uncle Gerald had to sell his entire line of equipment mid-summer just to cover his interest rate debt.  I remember him complaining that it was difficult to get out of bed in the morning, when by dawn the interest rates had already accumulated overnight more than he could make farming that day.  Gerald was known as a near genius cattleman, a hard worker and everything he touched turned to gold in the 70’s.  It was the exact opposite in the 80’s and interest rates killed him.  They found his corpse in a lake…

What did we learn from the 80’s?  Supposedly we learned to be more fiscally prudent and work out our decisions with a “sharp” pencil prior to spending a dime.  However, I am very, very concerned that we have forgotten the lessons learned. 

  In regions not affected by the drought, it’s caused erratic spending and land prices to skyrocket.  In succession planning, I am seeing plans being made based on emotion; not by pro forma cash flow statements.  Things are getting silly…

For instance, a son had moved onto the “home farm” and had spent nearly $200,000 fixing up the house while the parent’s built a $700,000 dream home down the concession.   The home farm had a decent shop built in the 80’s which was the base that the family ran 2,000+ acres across Lambton County. 

The father and the son had problems.  They had split up their farming partnership but both shared the same shop and some equipment.  The son’s wife suggested that the father in law build his own shop at his new house, so that the two weren’t always “on-top of each other”, fighting all the time.  Then I got an email, stating that she wanted a new shop built for her husband on an adjacent farm so that the home farm wouldn’t have so much traffic with little children around.  Thus one new shop for dad and one shop for the son, use the old one for machinery storage.  Land prices had risen and the banks would give them the money, so why not? 

You might chuckle, but this stupid logic is happening on almost every farm at some level and it’s got to come to a halt.  Succession related issues are causing stupid emotional decisions to be made, which just simply don’t make economic sense.  It’s easy to do in good times when banks are foolishly giving away money but when hard times hit, reality will hit the fan.

Remember, my Dad and his brother’s split up their partnership because of “everyone not getting along” in the 70’s.  In the 80’s, life became difficult.  I am certain that many readers recall the same plight. 

I am an economic “dooms dayer” because I lived through it.   I don’t think that high corn prices and low interest rates will always be around.  I think this is cyclical.  That said, I respect the opinion of many of my farm clients whom think interest rates will remain low and crop prices will go even higher.  No one has a crystal ball.  But I do think you’ve got to imagine the worst possible case scenario and make decisions based on these forecasts.  These scenarios should act as the acid test for your decisions.  If it pencils out do it and if not, think twice about it. 

I am seeing a lot of brothers split farming partnerships today when it simply doesn’t make sense economically.  Too often I am seeing brand new sprayers, combines and seed drills being bought to farm the same volume of acres farmed by two brothers and one line of equipment a decade prior.  It starts off with the creation of two separate business entities with the promise of sharing equipment.  Then over the years, this synergy wanes. The brothers quickly get into a subtle competition of who can own the bigger sprayer and spend money get the best-looking (not most profitable) crops.  In the majority of the time, splitting partnerships does not improve brotherly love, regardless of what you tell the neighbors…

I just had a new client call me from Iowa and due to their faith they don’t carry crop insurance.  They were having hard times after two years of drought.  A decade ago two brothers split a partnership and since then had bought two complete lines of equipment.  Stupid decisions were made based on emotions, not economics. I am now helping the 83 year old father sort out the boy’s relationships so that they can sell a line of equipment, sell a few farms and get their economic affairs in order.  15 years ago, the old man had 1,200 acres with no debt and a full line of new equipment.  Now, because of decisions made by the brothers based on emotions not rationality, the family might loose it all!

I want to emphasize that I am not against investing in a farm’s future.  However, I am dead set against wasting money, which is not going to improve farm profit or provide any strategic value in the long run.  Brothers splitting farms because “they can’t get along” isn’t always the smartest strategic move and might result in the family name not being on the farm’s mailbox in 30 years time.

If Corn hits $3.50/bu and interest rates jumped by 5% overnight, can you cash flow your decisions?  This should be the acid test for all decisions made during a family fight. 

Remember, the banks were “giving away money” in the 70’s and then wanted it back in the 1980’s.  Today they may be lending “on Prozac”, but watch out…    

Money doesn’t grow on trees.  It’s time to end the madness…

Let’s start making decisions using a sharp pencil instead of raw emotions!