The Character of Mankind

SW Financial Literacy

The Character of Mankind

I’m going to share the story of two farmers who were in a terrible spot financially. Their scenarios are strangely similar, at least in the beginning. Even though their journeys begin at the same place, the ending couldn’t be any more different.

I take this to be an incredible case study in emotional intelligence and how mindset can separate the ‘haves’ and the ‘have nots’.

Where They Began

Both farmers (Fred and George) are in the same position financially. They own several tracts of ground. One tract is mostly paid off while other owned farms have some percentage of debt against them.

• Both are bad marketers. They pay someone to help them with their grain marketing, but are always chasing home runs and never execute on their grain marketing plan if they even get one put in place.

• Both have expenses that run haywire, paying too much for their: fertilizer, labor, agronomy, seed, labor, equipment, labor, household living expenses, etc. (Note: they aren’t big enough to be able to afford any labor, let alone several hired employees.)

  
  

• Due to everything stated above, they are in severe financial distress. There have been massive losses in each of their operations for the past 3 years. Working capital is negative <$600,000> and they will not be renewed by their bank for operating funds next year without selling assets.

In Summary: Bad managers, spending problems, out of money.

The Stories Diverge

Here these two farmers head in different directions.

Fred decides to sell his mostly paid off ground to put working capital back into the operation and make sure he can get his operating note renewed at the bank for next year. Fred contacts his neighbor to see if he would be willing to buy the ground and rent it back to Fred. Fred would prefer it if no one knew he was struggling financially and wanted to make sure everyone in town sees him still running his tractor over the farm.

To make the deal work for both parties, Fred must sell the ground for cheaper than what he bought it for. At this price, the neighbor will allow Fred to rent it back on favorable terms. Fred takes the deal and walks out of the transaction with $800,000 cash. Working capital is positive $200,000 going into planting.

George decides to sell his mostly paid off ground to put working capital back into the operation and make sure he can get his operating note renewed at the bank for next year. He is beginning to see the peril his operation is in and lists the ground through a local auction company to maximize the sale value. After all payments are made following the sale, George walks out of the transaction with $1,000,000 cash. Working capital is positive $400,000 going into planting.

In Summary: Fred sells at a discount.

George sells at a premium.

Next Steps

Fred has a new lease on life. He didn’t lose ground (since he is renting it) and is flush with cash again. The family decides to do the home addition they have been planning on for years. They also buy a large 5^th wheel toy hauler and must upgrade his pickup to the latest model to pull it. Full steam ahead. No change to their practices.

Meanwhile, George is looking hard at his operation. He begins to see that he was paying way too much on labor, and now he has even less ground to pay those wages. He builds next year’s cash flow projection with his typical expenses in place and is horrified.

He is projecting to lose $400,000 over the next growing season. That is ALL the cash he just built back up for selling ground.

All his other dirt has debt against it. Another 1-2 years of these losses and he sees that he will be out of business.

George will not let this happen.

After a few more weeks of looking closely at the numbers and having serious family discussions, they make an incredible sequence of decisions.

Here is what they did:

1. He gives up his rented ground. It was all projected to lose money.

2. He will rent out owned ground to his cousin. He can get enough return to cover all loan payments + taxes + a little on top.

3. He hires himself out to his cousin for a wage. It is a strong wage since he still has an equipment line that can be used to help his cousin cover the added acres on the new ground that is being rented.

In Summary: Fred continues as if nothing happened.

George confronts reality and his ego.

1 Year Later

George is living on a very tight budget. Expenses are monitored daily and the family will not use a credit card for any expense. If they can’t pay cash for something that comes up, they will negotiate, delay payments, or sell assets to cover the expense.

The family knows it will be an uphill climb to get out of all the debt they have built up over the years, but thankfully they decided to toss the shovel aside and stop digging. Once the tide turns, with more controlled debt levels and spending habits, the operation can pick back up and farm their owned acres with their retained equipment if they desire.

Fred bounces his final rent check to his neighbor/landlord when he is overdrawn on the account. He voids his rental contract and loses the ground (just 1 year later). Fred does not get renewed for his operating note and must find another bank. He will probably find a way to farm for the next 20 years by bouncing around banks and juggling debt. Probably.

In Summary: George has direction and future potential.

Fred has bankruptcy writing on the wall.

Takeaway

These 2 farmers were very similar at the start, but it didn’t end that way. One took a hard left, the other took a hard right. George had a long look in mirror, decided there were shortcomings in his management ability, swallowed his pride, and did the best thing for his family. George has shown his strong character and grit, which I’m sure will be passed down to his kids.

Fred was only concerned by material possessions and appearance. What will be passed down to his kids? Nothing of value. The land will be gone. The toys will be gone. The money is already gone. Hopefully the next financial crisis catches his attention so they can turn it around.

What is interesting (and sad) here, is that from the outside every single person in the community will consider George the failure and not think twice that Fred isn’t thriving. Let’s focus more on celebrating the character of mankind and less on outward appearance, which can tell a false story.

Make it a great day.

Grant