Trust is no longer enough. When the credit meltdown claims new victims every day, it makes even more sense to use these strategies to ensure the companies you deal with are still financially sound

Reading Time: 6 minutes

Published: March 30, 2009

There isn’t much question that economic times have changed. Following a bull run that could be measured in decades, times have gotten tough much faster than many companies can adjust to them.

Overall, agriculture is an economic bright spot, but no one is totally immune in an era where ownerships are so inter-connected and when so many businesses are hanging on by their teeth.

The subprime mortgage crisis in the U. S. has metastized into an outright global banking and financial crisis, threatening the underpinnings of the global economy. Suddenly the future is uncertain, and institutions that seemed stable and trustworthy are suddenly questionable.

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Consider the front page of the Globe and Mail newspaper the morning this story was being written. The tales of woe were almost unending, starting with a 3.4 per cent contraction of Canadian gross domestic product. Then, U. S. insurance giants AIG reported a $61 billion quarterly loss, the largest in U. S. corporate history, and Chinese-British banking giant HSBC had the trade in its shares on the Hong Kong stock exchange suspended while the company scrambled to restructure.

Just for good measure, after only a couple of hours of trading the TSX index had already fallen more than 400 points.

Why should you care? After all, you’re an independent business owner, with a strong equity base.

Most alarming, observers say, is the fact that many of the companies that are in trouble today seemed just a few months ago to be blue chip firms that could never be in any serious danger. It makes a person wonder just who they can trust when they’re doing business.

In bizspeak, the theorists now say we’ve moved from a high-trust environment to a low-trust environment, where more than ever, it’s essential to protect yourself in all business dealings. Such a strategy is the only way to guard against taking a hit because of someone else’s misfortune — what’s known as “counter-party risk.”

As a defense, it’s a management approach that esentially every other sector of the economy has already integrated into their operating processes. Only agriculture seems to lag behind.

Which is bad news, says Terry Betker, when there’s no shortage of evidence that agribusiness is struggling as much as any other sector with the fallout from the credit crisis.

“I was at a meeting in the U. S. recently — an open meeting with more than 100 farms attending — where one of the major U. S. grain companies brought in their senior executives,” says Betker, a partner at Myers, Norris Penny, a Manitoba-based management consultancy and accounting firm that is noted for its work with agriculture clients. “They were very open and up front about it and said ‘We’ve got to manage our liquidity in a very different way than in the past.’”

To make it even more complicated, Betker says this can mean a company could pursue anything from cutting costs to selling assets, and everything in between. Strategies will vary according to the individual company’s unique situation, which makes knowing who you’re doing business with more important than ever before. Farmers need to be asking their suppliers, buyers and others the tough questions — even the questions they may not be 100 per cent comfortable asking.

“Do your due diligence,” Betker says. “It’s one of the essentials of doing business. Sometimes I think farmers are a bit too nice about these things, a bit too trusting.”

“Create a bit of a due diligence checklist, with the four points you need to tick off for any business deal over $10,000, for example.”

— Terry Betker

Due diligence starts with knowing who you’re doing business with and a bit about their reliability and financial status. For example you could ask to see a copy of the business’s financial statements, says Rémi Lemoine, Farm Credit Canada’s senior vice-president for credit risk.

“Frequently you may find that they’ll give you a look see, but won’t want you to take them away, or they may share high-level information,” Lemoine says. “If you’re not comfortable with this, you might consider getting your accountant to contact them.”

Lemoine says using a credit bureau like Equifax or Transunion to run a credit check is also a possibility, though he notes that you must have the written permission of the company or individual in question and you’re not permitted to share the information with others. Credit reports can be a bit tough to decipher for a layperson, and may require using a financial professional such as your accountant to translate.

“Everything is coded,” Lemoine explains. “But this information is accessible and not that expensive.”

Outside of these strategies, Lemoine says a farmer can employ some very basic, but sound, business strategies to assess the companies they’re dealing with.

“Get references,” Lemoine says. “Especially for smaller companies that haven’t been around that long.”

Betker says this is a sound approach that no reputable company should object to — and he says he’s even had prospective customers ask him for references.

“I love to send them out to talk to some of the best farmers in their neighbourhood,” Betker says with a laugh.

Likewise, farmers can also take steps to protect themselves by diversifying their risks, Lemoine says. That means don’t buy (and prepay for) all your inputs at one business, or sell all your products at another.

“It’s not having all your eggs in one basket,” Lemoine says. “Of course it also depends on how far you want to ship.”

Betker says growers should also be wary of any changes in behaviour with the companies they’ve been doing business with already. In a changing environment, even the best-managed companies can find themselves facing challenges.

For example, he says you might have been making regular deliveries to a company that always paid within 30 days, but suddenly payments are taking longer to come through. This may cause you to rethink further deliveries and at the very least you should sit down and talk with the company’s management.

“They may have a very good reason — but you need to know what it is,” Betker says. “If it’s a good reason, okay. But if it seems a bit sketchy, you shouldn’t deliver any more or extend any more credit.”

Another key strategy is to avoid deals that seem too good to be true. For example, if a contract price is markedly higher than you can get elsewhere, you might have a problem. Betker recalls that a lot of hog producers had great looking contracts with incredible values in the 1990s, but they were also some of the first contracts to disappear when the market turned.

“It it sounds too good to be true, perhaps it is,” Betker says. “Or, as someone put it to me recently, ‘If it looks like a duck and sounds like a duck, it’s a duck — and you better duck.’”

Meanwhile, it helps if you get to know your own business a lot better, Betker says. For example he says producers need to clearly understand and evaluate their working capital and just how much of it they can put at risk in a given business deal.

“Let’s say for the sake of argument, you’ve got $250,000 [in working capital],” Betker says. “Then you’re in a deal that’s worth $80,000 — that could potentially be a huge hit to your working capital. But say you’re looking at $8,000. Now, nobody wants to lose $8,000, but for that operation, it won’t be the end of the world.”

Farmers could also employ a strategy that’s long been recommended for buying big-ticket items like farm equipment — going home and sleeping on it.

“Try the sober second thought method,” Betker says. “Give yourself another day to think about it.”

A further refinement of this method might be to systematize the decision-making process for business deals.

“Create a bit of a due diligence checklist, with the four points you need to tick off for any business deal over $10,000, for example,” Betker says. “I’m not an accountant myself, but I work with a lot of them and they do this sort of thing all the time and it works.”

Exactly what’s on that checklist depends on the individual farm and farmer, their financial situation, their appetite for risk and a whole host of other variables. But having one prepared ahead of time will let a producer know the operation better and have a better framework to make decisions when the time comes, Betker says.

Then, when an opportunity does come along you can quickly check it out with your due diligence checklist and see how it stacks up. Betker says it won’t be uncommon to find that many potential deals won’t measure up at first glance.

“Say you have a checklist with four items and you only tick off three — that’s not saying that you don’t do the deal,” Betker says. “But you do need to look into it more and find out what it means.” CG

About The Author

Gord Gilmour

Gord Gilmour

Publisher, Manitoba Co-operator, and Senior Editor, News and National Affairs, Glacier FarmMedia

Gord Gilmour has been writing about agriculture in Canada for more than 30 years. He's an award winning journalist and columnist who's currently the publisher of the Manitoba Co-operator and senior editor, news and national affairs for Glacier FarmMedia. He grew up on a grain and oilseed operation in east-central Saskatchewan that his brother still owns and operates, and occasionally lets Gord work on, if Gord promises to take it easy on the equipment.

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