One thing that we all know for sure is that we are now officially one day closer to the next big “opportunity”. Some call it a “big rally" and some call it a “headache”!
We know that while a dramatic move upward in prices does come with its challenges, it also brings a wealth of opportunity for the grain elevator that is prepared.
To get prepared, there are some things that every C.E.O., C.F.O. and grain department head should be aware of and thinking about, prior to the event. These are items that can’t be left until you know that the time is here or on the way. They MUST be done prior to any inkling of the event.
#1 - Detailed and Up-to-Date Cash Flow Plan
Make sure that you have a detailed cash flow plan that is up to date and that allows your organization the opportunity to stress test the financials and credit line under rally conditions. Understanding your plan from both a bushel flow AND cash flow perspective will be very important.
Likely there will be inventory, forward contracts, and HTA’s, that will all require futures and incurring margin calls. Remember, the purchases during a dramatic rise in futures levels also result in opportunities to buy some really good basis numbers, if you can afford to carry the positions.
For the unprepared, they will be forced to sell off positions at a loss if they are not able to sustain the margin calls. Knowing and understanding the magnitude of this opportunity will be the number one reason that most people take action and have a good plan in place.
#2 - Preservation & Access to Capital
Preservation and access to working capital will be critical. To capture the looming opportunity, your ability to finance your positions will be the limiting factor to your success. Banks will typically lend 4-6 times your working capital. Under the circumstances of a major upward price move, your ability to generate additional working capital will be crucial.
This is typically done through earnings or refinancing long term assets that have been partially or completely paid off. Let’s assume that you have a bin that is paid for and has been appraised to have a value of $2,000,000.
A lender might be willing to offer a $1,000,000 loan for a 10-year period. In return for the face amount in cash, you would then have a current portion of the long-term debt of $100,000 and a long-term portion of $900,000.
This would result in an increase in working capital of the $900,000, which would result in another $3.6 million – $5.4 million in your credit line, depending on the lender. This is a very simple explanation, but you get the idea. Increasing working capital can lead to increased credit line capacity.
#3 - Knowledgeable Lender
Make sure that your lender and her team is knowledgeable to ensure that there are not any unnecessary obstacles between you and the opportunity that awaits.
Your loan officer/relationship manager is your advocate with the credit department at the lender. He needs to understand what will be expected of him, his team, and the lender in this time of quickly changing events.
By having conversations with the lender well before the time that opportunity manifests itself, you will be able to help them understand the right action to take in the moment.
Additionally, helping the relationship manager to understand what documentation can be provided on a regular basis now will enable you and your team to guide them through the process of understanding what the documents show and what they mean. It will also help them to verify what you are communicating to them by way of supporting documentation.
This will allow them to share that information and understanding with the credit team, analysts and compliance people that many people never see. We must remember that many of that back-room team have not been through a major price move, we need to understand that and help them get ready too.
#4 - Routines & Processes
Lastly, we need to make sure that we have in place the routines and processes that will ensure our success and maximize our ability to capture opportunity. From the normal daily routines and processes that we are balancing in a timely fashion, to monthly functions that are so important to accurate financials, to those times when we just get our team together and talk about those “crazy” happenings that nobody can predict but happen all too often.
When was the last time your team talked about the opportunity to acquire a neighboring facility that you’ve always had your eye on? Under what circumstances would you begin to get serious about it? Is there a price level that it becomes a “no-brainer”? It’s something that should be talked about using a process that has been used and proven to be effective, for you and your company.
One thing that we know for sure is that the best opportunities come when we least expect it. They also come when those that were not prepared are in a stressed or distressed position and are looking to get out.
We don’t want to be in that unfortunate situation, but we do want to be able to take advantage of opportunities that just don’t come around very often.