The Other Side of Leverage

[wheatking16]

I published Part 1 of The Margin Call series, Understanding Farmland Value Sensitivity, where I explore the other side of leverage.

You might find it interesting

or

You might not.

The math surprised me, though.

[url]https://www.grainreport.klarenbach.ca/p/the-margin-call-part-1-understanding-farmland-value-sensitivity[/url]

[Templeboy]

Good Piece!

It's happening right now in real estate in Vancouver and Toronto. Corrections are just like the block buster movies, they take longer to get out into the country.
Sub prime and private credit are in deep trouble. Covenants are stricter on lower rated debt, so they fail faster. As soon as covenants are breached expect a 2 to 5% increase in credit costs, might be double the current rates.

[AlbertaFarmer5]

Thanks for posting.

I couldn't have said it better myself:

Leverage is a magic carpet when the wind is at your back, but it's an anchor when the tide turns.”

[blackpowder]

Warren Buffett also said debt was like a knife taped to your steering wheel.

I'm not a doomer nor a prognosticator, but it's been a little deja vu all over again for a little while now.
Our own SK strategy has changed lately.

Andjelic may have been right with his warnings this winter.

Monette saw an opportunity and did well with it. Good for him.
Not the first or last. Not even exclusive to agriculture.

[Taiga]

“Monette saw an opportunity and did well with it. Good for him.
Not the first or last. Not even exclusive to agriculture.”

I don’t know if we can say they did well with it or not, shake out the insolvency first and see what’s left.

[sumdumguy]

I can’t imagine trying to keep track of all the land, the equipment and hired help. I sure wouldn’t want it.

[biglentil]

Probably has a team of a dozen full time accountants, plenty of land he has never even driven past, except from 40000ft in his private jet and equipment he has never seen. When the ship starts sinking loyalty fades and employees tend to leave with souvenirs.

[blackpowder]

Make the money when it's there. Keep as much as you can.
Keep your eye on the door. Like wildcatting lol. It's not against the law.
An opportunity was capitalized on. We would have done the same.

I sometimes wonder if still feeling the effects of generational investment discouragement. ie the outside ownership ban for starters.

[AlbertaFarmer5]

According to the experts on twitter, this is who supposedly holds the 950 million loan that was called:

9-bank syndicate led by BNS, including all big-five Canadian banks + FCC + EDC + Conexus Credit Union

If this is true, then not hard to see a scenario where all the major Canadian agricultural lenders lose their appetite for a risk of any kind.

[AlbertaFarmer5]

LEP, as someone with banking experience.
When a business is growing exponentially as this one was, would a banker be able to get a clear picture of profit or loss before it's too late?

If this year I'm selling crop from 5,000 acres, but buying inputs and equipment and labor for 10,000 acres. Then next year I'm selling crop from 10,000 acres but my expenses are for 20,000 etc all the way up to 400,000
I would never show a profit due to the expansion. But like any exponential growth, once it comes to a screeching halt, it would be impossible to continue to hide operating losses in the expansion expenses.

Or am I being naive?