Editor’s note: This is the final column in a 7-part series about lessons learned from the 2008 financial crisis.
They say never let a crisis go to waste, and I hope farmers used the 2008-09 financial crisis to boost their understanding of the various types of risk they face.
That’s why I started this series, which I’m concluding this week.
The financial crisis began 10 years ago and some of its impacts are being forgotten. For those who survived it, which includes most farmers running farms today, it taught a lot of lessons that should be remembered.
For those just getting into farming in the past few years, thinking about what happened in the few years after 2008 is a great way of understanding the types of risks and the size of risks farmers can face. A global financial crisis like 2008-09 might not hit farmers again, but the harsh light of that extreme period highlights the risks farmers face without always realizing it.
Other stories in this series:
- Remembering the lessons from the 2008 financial crisis
- Hedging makes sense, but manage them
- Knowing your lender when times get rough pays dividends
- Manage farms like low-margin, high-volume businesses
- 2008 crisis showed importance of interest rates
- Financial crisis of 2008 helped test market theories
Here’s what I concluded from the Lessons Learned series:
Smart farmers have a risk management plan. But it’s not good enough to have a plan and then put it on autopilot, even if harvest is in full swing and it’s hard to pay attention to anything except the crop in the field.
The Sept. 20 column on the experiences and observations of brokers David Derwin and Ken Ball highlighted this reality, with the crisis requiring careful management for normally routine risk management strategies.
The Sept. 27 column with Angie Setzer focused on the critical importance of having a good relationship with your lender. When bad times hit, credit can be wrung out of the system, and you don’t want to be the one squeezed dry. Having bins full of crop or barns full of pigs doesn’t do much when buyers disappear, bills come due and the operating line of credit has been yanked. Having a friendly banker can be all the difference between solvency and insolvency.
It’s great to earn big fat margins. Lots of farmers experienced that during the commodity boom that occurred simultaneously with the subprime mortgage bubble and the ensuing crash.
That helped farmers sail through the crisis almost untouched, if they survived the depths of the 2008-09 panic when the system seized up.
But banking on the assumption of continual wide margins is never a safe bet in farming, Scott Irwin noted in the Oct. 4 piece. Farming is a “high-volume, low-margin” business. That’s got to be the operating assumption when a farmer looks at the basic structure and risk profile of how he operates his farm. It’s nice to get the great years, but history shows they are rare and not a reasonable expectation.
Philip Shaw recalled for us the devastation wrought on farmers by the 1980s spike in interest rates in the Oct. 18 piece.
But the ultra-low interest rates of 2009-17 have also had an outsized impact, he thinks. Land prices escalated because buyers could almost get money for nothing, and for young farmers, debt has piled up. But since 2014, crop prices have been much lower than in the 2006-13 period, so the debt math isn’t looking so good these days.
If interest rates continue to move higher, farm debt could become a much bigger risk issue than it has been for more than a decade.
Last week, I talked about using the crisis to test out your own pet theories, as extreme pressure put lots of assumptions to the test.
For me, that was looking to see whether the theories of alternating commodity and equity bull markets held up.
For you, it might mean examining entirely different assumptions. But if you have done that, you’ve probably learned a few things.
So that’s where I’ll leave this series, with the hope that while the financial crisis has faded from our present reality, the wisdom it offered has remained.
It has been a once-in-a-lifetime opportunity to reconsider all the risks that farms face.