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Everybody needs credit to start a business, to do an act of development or to get out of hardship, but it feels like some people have been using this bank forev

Everybody needs credit to start a business, to do an act of development or to get out of hardship, but it feels like some people have been using this bank forever. Can't they extract a margin, accumulate the money, and run the business out of their margin instead of constant borrowing?

talideon 12y ago
Constant borrowing like this isn't uncommon for farmers and other agricultural producers. You need to pay for things like feed, seeds, livestock, fertilizer, electricity, machinery, &c., every year, and that's a large capital outlay, and they have to wait a long time to be able to deliver on that, be it harvest, lambing season, whatever. It's things like this that lead to the creation of futures, and effectively, that's what these farmers and Credem are engaging in.
- masklinn 12y ago
  > Constant borrowing like this isn't uncommon for farmers and other agricultural producers. Or companies, for that matter.
  - talideon 12y ago
    True, and that's one of the reasons futures contracts spread beyond the agricultural sector, where they originated. The key difference with agriculture is that it's really easy to see how futures work--it's the model sector for futures--whereas in other sectors, they can be somewhat more nebulous.
saalweachter 12y ago
I can think of two reasons. The first reason is that your expenses and income are going to vary considerably year to year. Maybe your livestock die and you need to purchase new ones / wait for young ones to mature. Maybe the price of cheese declines. Maybe the price of feed goes up. The routine use of loans smooths your expenses over time. Otherwise, you might have the cash on hand for a good year, but in a 'bad' year (which might be an every-three-or-five-year thing) you might not. The second is leverage. Having a money-pile lying around on the off chance 3/4ths of your livestock die is horribly inefficient. Even just having a money-pile lying around for guaranteed expenses 10 months from now is inefficient. So you invest it. As a small businessman, the smartest way to invest it is in your own business, by growing it. So if you have extra money around, you use it to buy an extra cow or an extra pasture or an extra cheese tank. These investments are unfortunately illiquid, so you borrow cash against them to pay operating expenses.
bryanlarsen 12y ago
Where I grew up (Saskatchewan), a small farm is worth about $2 million in land, buildings and equipment. (For example, a new combine harvester is worth ~$750,000, a decent used one is a quarter million). So you borrow $2 million in a capital loan to buy the farm from your Dad, and another half million as an operating loan for your first year's expenses. You then spend 40 years paying off these loans. Once you've got them paid off, you sell the farm to your son/daughter and retire on the sale proceeds. Also, the margin for agricultural products is quite low once you average out yield fluctuations. They are commodities, so by definition the price is equal to the cost of the highest cost producers. So the only margin you have is how much you can keep expenses lower than other producers around the world.
- tonyarkles 12y ago
  I'm always amazed to see other Sask folks here! There's also the year-to-year smaller operating loans. Things like $90,000 worth of chemicals, etc. I know that some folks even go so far as to put those expenses on a MasterCard, in order to collect the airmiles.

talideon 12y ago

Constant borrowing like this isn't uncommon for farmers and other agricultural producers. You need to pay for things like feed, seeds, livestock, fertilizer, electricity, machinery, &c., every year, and that's a large capital outlay, and they have to wait a long time to be able to deliver on that, be it harvest, lambing season, whatever. It's things like this that lead to the creation of futures, and effectively, that's what these farmers and Credem are engaging in.

masklinn 12y ago
> Constant borrowing like this isn't uncommon for farmers and other agricultural producers. Or companies, for that matter.
- talideon 12y ago
  True, and that's one of the reasons futures contracts spread beyond the agricultural sector, where they originated. The key difference with agriculture is that it's really easy to see how futures work--it's the model sector for futures--whereas in other sectors, they can be somewhat more nebulous.

saalweachter 12y ago

I can think of two reasons. The first reason is that your expenses and income are going to vary considerably year to year. Maybe your livestock die and you need to purchase new ones / wait for young ones to mature. Maybe the price of cheese declines. Maybe the price of feed goes up. The routine use of loans smooths your expenses over time. Otherwise, you might have the cash on hand for a good year, but in a 'bad' year (which might be an every-three-or-five-year thing) you might not. The second is leverage. Having a money-pile lying around on the off chance 3/4ths of your livestock die is horribly inefficient. Even just having a money-pile lying around for guaranteed expenses 10 months from now is inefficient. So you invest it. As a small businessman, the smartest way to invest it is in your own business, by growing it. So if you have extra money around, you use it to buy an extra cow or an extra pasture or an extra cheese tank. These investments are unfortunately illiquid, so you borrow cash against them to pay operating expenses.

bryanlarsen 12y ago

Where I grew up (Saskatchewan), a small farm is worth about $2 million in land, buildings and equipment. (For example, a new combine harvester is worth ~$750,000, a decent used one is a quarter million). So you borrow $2 million in a capital loan to buy the farm from your Dad, and another half million as an operating loan for your first year's expenses. You then spend 40 years paying off these loans. Once you've got them paid off, you sell the farm to your son/daughter and retire on the sale proceeds. Also, the margin for agricultural products is quite low once you average out yield fluctuations. They are commodities, so by definition the price is equal to the cost of the highest cost producers. So the only margin you have is how much you can keep expenses lower than other producers around the world.

tonyarkles 12y ago
I'm always amazed to see other Sask folks here! There's also the year-to-year smaller operating loans. Things like $90,000 worth of chemicals, etc. I know that some folks even go so far as to put those expenses on a MasterCard, in order to collect the airmiles.