Wednesday, February 16, 2011

Then what are good times for?...

I read Paul Neiffer regularly. He offers timely advice on accounting matters. But this post had me scratching my head. With considerable moral condescension, he advises us silly farmers how to manage the current wave of prosperity.
As an advisor, I would recommend that a farmer take advantage of these good times by doing almost the exact opposite of what is shown above.  In other words, when prices are very good, a farmer should:
  • Keep their lifestyle the same or even reduce their living expenses,
  • Pay the tax man with these high priced commodities, if you defer it, you will most likely get a lower price and owe no tax,
  • Not covet the neighbor's half-section, but rather wait for the price adjustment and buy it for cash when times are bad,
  • Expand their liquidity to at least 50% of annual sales,
  • Keep their machinery for another year or two [More]

Let's break this curiously Puritanical admonition down just a little shall we?
  • OK, we should LOWER our lifestyle when things are good - and they are really, really good for most grain farmers at least right now. I'm assuming he would not advise raising expenses when the economics are worse, so is there any time we can - with our accountants permission, of course - trade the wife's car for one that starts most of the time or take the family to The Mouse?
  • Now he is a market adviser predicting lower prices. How were the guys who sold out at previously "good" prices (say, $4.50) served by this advice to sell and "pay the tax man". They only missed a 50% pure-profit gain, that's all. (DAMHIKT) But then their taxes would have been higher - the horror! When a financial adviser starts predicting prices, it's time to ask what you are paying him for.
  • Yeah, I'm sure that same piece of ground will show back up in a couple of years. Of course, this strategy hasn't worked for, ummm, 25 years or so, but someday it will. Land is not a fungible investment like stocks. My rule of thumb is you get one chance every generation for nearby land. The guys I see farming today aren't the ones who waited to buy when land got cheaper because then they were even more pessimistic.
  • CPA's love liquidity and especially cash because it's easy to count and find ways to extract commissions on transactions. Can't do that with farmland. It just sits there all illiquid, appreciating, providing job security, and generating whopping returns. 
  • Timing machinery decisions by "how good things are" is nonsense. These are productivity and economic analysis. Right now, for example, investing in new technology has been shown to be one the biggest components of profitability. I will grant that trading when there is a line at the dealer is a bad idea, but I suspect Paul has never advised farmers to trade at anytime, even though getting machined up before now and being able to pause for a year or two is looking like a good strategy.
It's disheartening to see such a (unintended, I'm sure) patronizing lecture on the handling of our own wealth. While I'm sure Paul has seen examples of unneeded extravagance that led to financial problems, I think these are increasingly isolated cases in our industry.

Accountants have a strong bias toward cash as THE FORM of wealth. There is never enough cash to make them happy, in my experience. But this David Kohl-like guidance on how foolish we are to deploy our gains in ways that make us happy or secure a distant future casts serious doubt on the objectivity of any financial adviser.

After all, if you know the answer is always going to be "no", why pay to ask?


macoupin county illinois said...

john, are you sure about the author of this article, cause i'm pretty sure my dad wrote it.

Anonymous said...

No Macoupin, it could have been my dad. When we bought a really good 260 in 1970 for $500 acre, he was sure we would lose everything. But we got into the 80's and were not too far in debt, probably due to his influence and survived!

Anonymous said...

John, you wrote a similar article a few years back, telling us to be humble, not ot buy fancy trucks or cars. Surely you remember this?

John Phipps said...


Actually my articles are run together in my mind, but can see myself saying something like that.

However, there is a spectrum of conduct not two choices. Ostentation for its own sake never strikes me a s a good idea. But raising your standard of living appropriate to your new circumstances is how we reward right conduct in our lives, I think.

Doing better than the budget frees funds for many things and my Dad's old rule of "an improvement in the house for every improvement on the farm" seems like a good guideline.

Humility and an attitude of service are non incompatible with wealth, but is a mark of a life well-lived to balance the two.