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Don't Let Emotions Sabbotage Decisions
My first vivid memories are rooted in the 1980s farm crisis. My dad and his brothers split up the business partnership due to disagreements, losing their economies of scale. I remember the day in 1984 when Uncle Gerald sold his entire line of equipment mid-summer just to cover his interest rate debt.
I remember his complaint that it was difficult to get out of bed, when by dawn the interest rates had accumulated more overnight 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 1970s. It was the exact opposite in the 1980s, and interest rates killed him. They found his corpse in a lake.
Supposedly the 1980s taught us to be more fiscally prudent and to work out decisions with a sharp pencil prior to spending a dime. However, I’m not sure. Crop prices have been exceptional; this has been fantastic, yet also a concern. In regions unaffected by drought, it’s caused erratic spending and skyrocketing land prices. I see succession plans 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 spent nearly $200,000 fixing up the house, while his parents built a $700,000 dream home. The home farm had a decent shop built in the 1980s, which was the base for the family’s 2,000-plus acres.
The father and son had problems. They split up their partnership, but they both shared the same shop and some equipment. The son’s wife suggested that the father build a 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 she wanted a new shop built for her husband on an adjacent farm so the home farm wouldn’t have so much traffic with the children around. Thus, one new shop for the dad and one for the son, with the old shop used to store machinery. Land prices had risen and the bank would loan the money. Why not?
You might chuckle, but this logic is happening on almost every farm at some level, and it’s got to come to a halt. Succession-related issues are causing emotional decisions that don’t make economic sense. When hard times hit, reality will hit the fan.
My dad and his brothers split up because everyone didn’t get along in the 1970s. In the 1980s, life became difficult.
I’m an economic doomsdayer because I lived through it. I respect the opinion of my clients who think interest rates will remain low and crop prices will go higher. No one has a crystal ball, but you’ve got to imagine the worst-possible-case scenario and make decisions based on these forecasts. These scenarios should be the acid test for your decisions. If it pencils out, do it; if not, think twice about it.
I’m seeing brothers split partnerships today when it doesn’t make economic sense. I’m seeing new sprayers, combines, and seed drills bought to farm the same number of acres that were farmed by two brothers with one line of equipment a decade prior.
It starts with the creation of two separate business entities with the promise of sharing equipment. Then over the years, this synergy wanes. The brothers get into a subtle competition of who can own the bigger sprayer and get the best-looking (not most profitable) crops. In the majority of cases, splitting partnerships doesn’t improve brotherly love, regardless of what you tell the neighbors.
A new client called me from Iowa. Due to his faith, they don’t carry crop insurance. They were having hard times after two years of drought. A decade ago two sons split a partnership and then bought two complete lines of equipment. I’m now helping the 83-year-old father sort out the sons’ relationships so they can sell a line of equipment and a few farms, and they can get their economic affairs in order. Fifteen years ago, he had 1,200 acres with no debt and a full line of new equipment. Now, because of his sons’ irrational decisions, the family might lose it all.
I’m not against investing in a farm’s future. I am dead set against spending money without improving profit or providing strategic value in the long run. Brothers splitting farms because they can’t get along isn’t always a smart strategic move, and it might result in a different name on the farm mailbox.
If corn hit $3.50 per bushel and interest rates jumped by 5% overnight, could you cash-flow your decisions?
Banks that gave away money in the 1970s wanted it back in the 1980s. Let’s start making decisions using rational economics instead of raw emotions.