F&G: What is your message to those on the fence about expanding or investing in business growth?
Ferree: I would want them to understand their position very well. For any kind of expansion, make sure you’re putting a good business plan behind that decision. Anytime you make long-term capital purchases, it is just that — a long-term investment — and you want to make sure you are willing to take on the risks associated with that investment before depleting your liquid position.
Every operator situation is a little bit different and you’ve got to have a good handle on what those expansions are going to do for the operation over time. Expansion just for the sake of expansion doesn’t do anybody any good; there’s got to be a business case around it to help them make plans for a future generation or an income opportunity.
Herr: First, be diligent about doing a cost-benefit analysis of the opportunity to look at the financial risks, as well as the operating risks that may be associated with any type of growth or expansion. Then, bring your lender in at an early stage to get financial feedback on these opportunities and to benefit from the experience they’ve had in similar situations with other clients. Rely on lenders or other professionals as value-added resources to make sure whatever business risk you’re taking with a new line or an expansion is well thought out and has a high probability of success.
Hund: Many companies are hesitant over the uncertainty of future tax rates, The Affordable Care Act and the potential of a global slowdown, but you’re never going to get cheaper money than right now. If you’re considering a long-term investment — three to 10 years —the interest rates can’t go down much further, so I’d say, “Do it.”
There are many reasons to be conservative, but the fact is, the time is right if you look at this from global perspective .
F&G: What advice do you have for those who are not in the best financial position but are eager to borrow?
Ferree: My advice to the grain elevators is to let their banker know exactly what the situation is and the cause of the need for additional capital. If it is because of a poor decision in the past, then have a plan in terms of how you’re going avoid that situation going forward.
One good thing from an elevator’s perspective is the markets have stabilized somewhat, so there’s not quite as much dramatic switch up and down, which can put an elevator in a precarious position. If Mother Nature works right in terms of having a good crop, I’d say we could see a downside in this market, which would alleviate some capital needs. But, the key to any banker-borrower relationship is good communication. Banks want to understand what’s driving the issues you may have and the need for capital, and what you’re going to do to help offset risk.
Hund: We advise grain companies to be very liquid and have enough money to meet a market call anytime the market moves, which is daily.
Commodity companies should not be highly leveraged and they shouldn’t have a lot of long-term debt on their balance sheet.
We like to say: “You can’t control the weather, but you can manage your balance sheet.” If you have long-term debt on your balance sheet that you need to service, the interest rates aren’t going to get any cheaper, so do what you can to refinance the debt. If the pre-payment is too high, it may not make financial sense, but if you can refinance, this is a great time.