Table of Contents
The Ag Industry made the Wall Street Journal this week (the third week of July 2017) and it happens to be in the middle of a farm finance squeeze. I shared it on my Farming Without The Bank Facebook with a few of my own opinions and it sparked a great conversation.
It was so popular, I made a second post after I did a little research. Read Post Number One – My initial thoughts about the Wall Street Journal article.
Read Post Number Two – About the ZEROHEDGE Article with all of the financial data.
Haven’t read the article yet? Take a peek at it here:
Do You See What I See?
The Wall Street Journal is making JD out to be the hero, coming in and rescuing farmers by lending them money when banks are backing off. Farmers are saying how awesome it is since they need the funds with commodity prices so low. JD is looking like the hero to those farmers and creating a long lasting relationship.
However, knowing the banking system I take a step back and look at this from another view point. This goes far deeper than just lending money to save our ag industry, we need to look at how JD is doing this financially and what their long term outlook may look like.
The Zero Hedge article is right on point and covered a lot of this for me, but let me explain a few things they don’t cover.
First, Deere Financial is not a bank. They are a ‘captive finance company’ which by definition from the investopedia.com is a captive finance company is usually wholly owned by the parent organization. The best-known examples of such companies are the giant subsidiaries of the “Big Three” automakers, and the store card operations of large retailers such as Wal-Mart, Target and Sears.
Due to the size and scale of their operations, the captive finance companies of theBig Threecar manufacturers: General Motors Acceptance Corporation (GMAC), Chrysler Financial and Ford Motor Credit Company – are arguably almost as well-known as their parent companies. Note that subsequent to thebankruptcyof General Motors in 2009, GMAC underwent a name change to Ally Bank and rebranded as Ally Financial in 2010.
As Barry Dyke, the author of The Pirates of Manhattan says, “Captive finance companies are just like banks, but because they have hard assets (e.g. farm equipment, factories, etc.) they actually leverage their balance sheets even more than banks, in GE’s case it leveraged its balance sheet 33 to 1.”
Let’s Be Transparent Here
What does 33 to 1 mean? That can be confusing if you are not familiar with the fractional reserve banking system we use here in the states so here’s a short video.
A typical bank will leverage its balance sheet 10 to 1, meaning they only have to reserve $1 and they can lend out the other $9, creating $19.00. Now imagine someone like Deere Financial leveraging their balance sheet 33 to 1! What happens when they get in trouble because they are over extended like GE, GMAC, or Chrysler? The government comes in and bails them out with YOUR tax dollars.
Deere financial is coming in and looking like the hero who cares about our ag industry when in fact that are just a “bank” trying to make money and doing what the banking system does…..creating money out of thin air causing the inflation of our dollar. The price of your tractors, seed, chemical and oreos go up because of inflation, not solely because the seller is greedy. They too are feeling the affects of the inflated dollars. (Go back and watch the whole video to get more information on this topic.) They may look like they are helping when in fact they are inflating the dollar causing your equipment to cost more!
At least John Deere is transparent in their statements that they are truly leasing to benefit John Deere. I have read several comments of farmers praising John Deere for making it easier, to which I say, “Yes they are throwing ‘affordable payments’ in your face along with the shiny new paint but that is about it.”
Like I talked about in my recent blog, Whose responsibility is it to make farm financial decisions?, it’s truly up to you the farmer to pay close attention to your cash flow and take responsibility for your decisions. Pencil it out, does it make sense to lease new equipment when you could have old equipment that has value on your balance sheet?
Ask Hard Questions
Start asking some hard questions and looking for avenues that will help you get out of the borrowing/leasing cycle. JD has a great hold on the farmers right now and in my opinion they are over extending themselves…how can a company like this grow in a time when commodity prices are low? By creating numbers to look good?
Who is going to subsidize JD when they go under? You and your tax dollars – possibly the family farm because they’ll be calling on the lease or loan to be repaid. The Zero Hedge article hit the nail on the head, when they said the bailout is coming it’s just a matter of when John Deere will be the next big bail out. They are too big to fail now.
JD is not stupid, customer loyalty is the first key to getting people on your side. I’m sure a few people sat in a room and came up with the 2017 and beyond marketing theme – Be there for the farmer when times are tough, they will remember that. When it’s time to bail them out your heart will go out out to them and you’ll be happy to help. After all it’s John Deere. Remember those GM die hards? They felt the same way and wrote check after check to get GM out of their hole.
Need more? This article written by Barrons.com showing us John Deere vs Caterpillar that gives us a deeper look. “Caterpillar appears to manage its Finco more conservatively than Deere,” Duignan and Simonitsch write. “That difference also means that the companies face different risks, with Caterpillar needing to “better manage its forecasting and inventory turns,” while Deere’s “Finco bears significant residual value risk if the US agriculture down-cycle is extended.”
JD has been around forever and many have grown to love the green machines but they have gone far beyond green machines when they started Deere Financial in 2000. Taking a bite of the pie is one thing, being a pig is another.
The moral of the story here is farmers need to manage cash flow and pay attention to their numbers without letting shiny objects get in their way. Don’t let the banker, accountant or Deere Financial make those decisions for you. Make them yourself based on your long term numbers and historical commodity prices.
Just One More Thing
I’m NOT against John Deere Financial offering this service to the same farm families that I work with on a daily basis; but I am a historian when it comes to financial oversight by companies like John Deere Financial. I don’t like to see people lose when they don’t have to. We just have to STOP and think about our financial well being as well as the country’s. The “printing” of money causing inflation hurts everyone and farmers feel it worse than most.
Can the Farming Without the Bank system work? Yes it sure can and in this case it will STOP the banks and Deere Financial from turning money 10 to 33 times! When you borrow against your life insurance policy the life insurance company doesn’t turn money. In a long term look at this, if enough people did it, it could help stabilize the dollar and keep the price of your ag equipment down. We need to think like the bank and the book goes over that to help you understand. Mr. R. Nelson Nash figured this out 30 plus years ago and saw the collapse of the dollar coming. It all began in 1931 with the Federal Reserve, now others are jumping on the band wagon making it worse. Things can be changed over a period of decades but it has to start somewhere with someone, is that someone you?
Thanks for reading this article. It’s not a subject I normally go over, but these “finance companies” need to be in the spotlight for how they are leveraging money and what is ACTUALLY happening. The American banking system is no different as you saw in the video.
If you have not picked up the book please do so. We can’t change anything if we don’t change what we are doing and thinking.
Very accurate assessment. I worked at John Deere when I went back to obtain my MBA, and did some in depth looking at the Deere and Company prescription for success. At one time, the Financial division was established to only assist the employees, in the purchase of homes, boats, cars, motorcycles, etc. Suddenly, there was a shift in departments and direction, which actually strengthen the John Deere brand, and improved its bottom, by utilizing its financial fortune to support the customers by financing the company’s own product. If you finance your product, you will be able to manufacture more product, and thus sell more product, which positively affects the bottom line of the manufacturer. This began by inventing the sell down of product, mainly harvesters, by doing leases based upon the number of years of age of the machine. You could trade in your old machine, and get in line to either lease a new machine, or a one year old machine, or a two year old machine, or a three year old machine that had been used in prior years by another operator who chose the year of age to lease, and then annually upgrade to another machine. This was quite successful when we had the earlier farm crisis, and many operators used this to keep a machine that was closer to new in their fields. When I did an analysis and a large presentation on their financial change and the restructuring to the Financial division being an equal with the Ag division, and the Forest and Construction division, it became very evident that Deere and Company was going to be able to leverage all divisions to sustain the company, without the serious concern for the client, and to strengthen their positioning against their competitors, such as Caterpillar and Tenneco. When stock hit a trading number of 90, many employees sold their stock and purchased Caterpillar stock, which had become depressed due to the competition and employment difficulties. Deere actually hired many Caterpillar employees, who had been laid off or terminated, to set up the Deere IT systems for global downloads to upgrade engine systems, and then terminated the former Caterpillar employees. I have a buddy who writes a daily stock exchange analysis, 24/7 Wall Street, that researched the oldest manufacturing name in the United States, and at the top of his list of 20 companies was John Deere.
This is an interesting take. But I can tell you as a farm product seller online, every farmer finances almost every large purchase. Most are not through banks they are vendor credit and net 30 terms from Co-Ops and feed mills that in turn get big operation loans from Banks. I call this the grey capital market, farmers will run up a big bill with one feed mill then when they cut them off they go to the next coop, then they go bankrupt. These coops and feed mills charge 0% interest they claim if you pay in terms and 18% APR if you are out of turns but what they really do is margin the products higher and claim to not charge interest but farmers pay an enormous amount for this free financing. My point being that farmers would be better off going to Farm Credit getting a secured operation loan at prime plus 1% and getting a 7% discount of the high margin-ed products.
I find that the farmers that try to farm without a bank end up using the credit card that is vendor credit terms and pay 3 times what they would if they just got a dam secured ops loan!
For ag retailers that offer credit terms its an expensive nightmare trying to collect the receivables and is very risky since its unsecured and the products like animal feed are expensive consumables unlike say John Deere tractors.