Today’s financial and economic reset continues to expose some of the deadly sins of management committed during the great commodity super-cycle years. At the time, some of these management decisions made sense. Nevertheless, many producers face significant issues today as a result.

Number one on the list of deadly practices is the purchase of machinery and equipment solely to offset taxes. In a recent banking school, Section 179 was cited as one of today’s biggest challenges. This tax code allowance was designed to accelerate the depreciation of machinery, equipment and investments. Due to lowered incomes, tax deductions are not quite as useful. A significant portion of this equipment is now repossessed, and most likely sitting idle at a decreased value. In fact, the value of farm machinery is down as much as 40 percent in some regions. 

Another deadly sin is the use of operating lines of credit to purchase assets without informing the lender. During times of high commodity prices, using working capital or cash flow to purchase land may have made sense. However, there is a tendency to believe profitable times will never end, which can lead to poor planning. With today’s tight margins and cash flows, this type of reduction in liquidity can present a significant challenge.

During this commodity super cycle, some producers “won the cash-rent lottery,” which is now a difficult dilemma. In addition, high-priced land often comes with a three- to five-year lease, which inflates fixed business costs. A good tool to interject reason into emotional decisions, such as for land purchases, is the “but, what if” scenario analysis. With the benefit of this analysis, many producers may have avoided the land-rent dilemma they face today.

Yet another deadly deed in finance is improper amortization of land and other assets when borrowing money. Accelerated loan payments were quite easy in the super-cycle era. However, this year many producers requested refinancing to longer-term debt as profit margins are squeezed and debt service obligations cannot be maintained.

Complacency in management, whatever the economic cycle, is deadly. The profitable times of the recent super cycle eased attentiveness and allowed producers to stray from the business basics of marketing plans, and financial analysis and monitoring. Six- and seven-figure profits led to erratic spending and nonproductive investment patterns, all of which drags on today’s profitability.

I often hear people say that tough economic times teach us better management skills. Well, while that may be true, it is also extremely important to examine the practices of the good times to avoid repeated mistakes when the next positive cycle swings around. Remember that tomorrow will be much improved if you plan for it today.