Handling the financial squeeze

2009-02-13 00:00

LAST week Oprah Winfrey interviewed a United States economist on her TV show. It was extremely painful to watch how the American people have been drawn into the stranglehold of debt, created by powerful CEOs of companies who have encouraged people to borrow far more money than they could ever hope to repay. Of course, the CEOs were paid huge incentives to “sell” as much money as possible to the people.

This happens here, just as it has happened in the U.S. I have a good relationship with my bank managers, but they would be quite happy to take me into unmanageable debt if I let them. Luckily my wife and I were both raised in families where “wealthy people” were those who saved their money and “rich people” were those who spent it. We were trying-to-be-wealthy people who didn’t quite make it. At least we haven’t blown money that we did not have.

Many farmers who have finally accepted that they are in financial trouble have asked my advice regarding their situation and I have a standard answer which starts off much the same as Winfrey’s economist gave to the American people — reduce your debt to zero. Many Americans, and our farmers, have debts that exceed their assets. Once they settle their debts they are broke. This is tough and they have to start from scratch again.

However, some farmers have come to me when their assets still exceed their debts and there is then some chance of introducing a revival plan. But they still have to reduce their debt to zero. This often means selling a farm and expensive machinery. It is unbelievably painful, especially if the farm has been in the family for five generations. Some people fight against this first principle for a number of reasons, but the most common reason is that “you have to borrow money to make money”. Tell me what agricultural business gives you a return greater than the cost of your debt and I will say go for it. But very few do. The cost of money is generally more than you will make out of agriculture. So reduce your debt to zero.

The next step is to reduce your overhead costs. These are the costs that do not lead directly to production, such as any machinery in a beef operation. Cattle eat grass not metal. Cattle also do not eat fuel, they do not need vehicle repairs, general repairs, insurance, labour or miscellaneous costs such as your beach cottage. The most successful farmers keep their overhead costs down and their direct production costs up.

The next step is to spread your overhead costs. This means that you must run a bigger operation with the same overhead costs. If you have one bakkie for 300 cows then run 600 cows with the same bakkie. The cost of the bakkie is then spread over double the size of the farming operation. This is half the cost per unit managed. Alternatively, sell your bakkie and use a motorbike or a donkey.

Once you have achieved these three steps, the challenge is to maintain it. Just like Winfrey’s economist said: “Once you have moved into a smaller house, sold two of the three cars and moved the children into a government school then maintain this state and start becoming wealthy.” The days of pretending that you are rich are over.

Our farming predecessors knew about these three principles and that is why they became wealthy and could provide their family with a farm. If you have been encouraged to take on more debt by the banks or through peer pressure and living the rich life, you have to backtrack and start again. That is terribly tough but rather cut your losses and come back to fight another day.

We can become despondent with a full recession hitting the world, but with recessions come opportunities. Cut your costs now and look for the opportunities. These opportunities come in many guises. It may be terrible to say it, but one man’s loss is another’s gain. Carefully consider the three steps to starting again. They are hard to implement but they do work. I have been much more lenient than Winfrey’s economist, who says it straight: “You have allowed yourself to be conned into debt, now get yourself out of it.”

• Alastair Paterson is an agricultural consultant. He can be contacted at 033 330 4817, 082 880 9002 or e-mail agpaterson@satweb.co.za

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