Highlight Reel: Oklahoma City - By Dr. David Kohl
Highlight Reel: Oklahoma City - By Dr. David Kohl
A highlight reel from Oklahoma City might conjure up thoughts of a sporting event or clips from a rodeo. However, this is not what you are thinking! I am referring to the American Bankers Association’s 71st Agricultural Bankers Conference, which was held in Oklahoma City for the first time ever. A review of the conference and Oklahoma City by over 500 attendees showed both exceeded expectations.
A quick visit to the nearby stockyards where over 100 million head of cattle have been marketed, a trip to the Cowboy Hall of Fame, and the fine dining in between makes Oklahoma City a must go destination for either business or vacation. A three-hour visit to the National Memorial and Museum was somber as no one talks and cell phone usage is minimal. This year, an NBA basketball arena right across the street from the hotel allowed participants to take in any of three professional games. All of the teams shared the hotel with us and one of my close banker friends inadvertently attempted to kick Steve Kerr, Head Coach of the Golden State Warriors, out of his room. The following are some of the highlights of this year's conference that may provoke some perspectives and thoughts about banking, business, and life in general.
“I like boring”
One of the bankers indicated that he liked “boring” when it came to his customers' marketing and risk management plans. He stated that the most successful managers were base hitters versus home run hitters. In terms of risk management, these individuals were “Gold Glove Award winners” in their defensive strategy, executing and monitoring risk management plans designed to mitigate risk based on their financial situation.
Do not be without a chair
Hallway and conference sessions were buzzing concerning the red-hot land market. It was the opinion of many that land values will soften and even decline in many areas of the country. However, one banker made a reference to musical chairs when acquiring land, particularly with debt. He stated that you do not want to be the one without a chair, meaning holding considerable debt on land with no liquidity. This only leads to being forced to sell land to a limited pool of buyers wanting a steep discount.
Over the top
What could put the agriculture industry over the top concerning an agricultural financial crisis? One speaker clearly articulated that it will take a combination of factors, of which two are already in place. The combination of higher interest rates, producers taking on more debt or refinancing debt at higher interest rates, a long-term decline in commodity prices across the board, and elevated costs could be the ingredients to create financial tension in agriculture.
Stay in your lane
Another one bites the dust! Discussion at Sunday night’s evening social was about a smaller community bank in Iowa that was visited by the FDIC, which actually closed their doors. This was an agricultural bank that attempted to reduce concentration of loans by diversification of lending in the trucking industry. Other banks have been involved with this strategy as well, which is possibly resulting in other bank closings. The lesson learned from this situation is to stay in your lane and critically analyze opportunities outside normal operations. Do you have a management team that can embrace and capitalize on these side ventures?
The 80 percent rule
The FINBIN team from the University of Minnesota did an excellent job, as usual, at presenting and sponsoring exhibits at the conference. They discovered the 80 percent rule by analyzing over a decade of data from the large FINBIN database comprising over 20 states. They found the top 20 percent of producers generated one dollar worth of revenue using less than $0.80 of expenses excluding interest and depreciation expenses in almost every year in the past decade. Contrast this to the bottom 20 percent of producers which required over $0.80 of expenses and sometimes nearly $0.90 in the down cycle to generate the same dollar of revenue. What is the right stuff to back up these farms? Usually, it requires a focus on cost efficiencies combined with asset turnover, which is revenue divided into asset levels, that propels the business to consistent profits.
Working capital burn rate
The FINBIN team also analyzed the grinder years which were seven years post financial super cycle and pre-pandemic. In this era, producers often had to revert to working capital to bridge profit and cash flow gaps. The FINBIN team discovered that the top-level farm operations from a profit standpoint burned through half of their working capital pre-downturn where they had built up excess working capital reserves. The bottom 20 percent burned through working capital at twice the rate. This was a result of working capital levels being less pre-downturn and mounting losses which impacted overall levels. Hallway discussions after the session centered on whether working capital was generated by the banks through a debt restructure or refinance and how family living cost withdrawals elevated some of the working capital needed if losses occurred. The question becomes whether refinancing is building a bridge for recovery or moving the business to the end of the pier where the water, or debt, is deeper resulting in unfavorable outcomes.
Sherri Coale, former women’s head basketball coach for the Oklahoma Sooners, was the closing speaker. She had two very good points about life and desire. One was being aware is much more important than being smart. She emphasized that being able to connect the dots, getting out of your silo, and working together as a team often results in favorable outcomes. When I was at the University, I would cringe when the selection committee concerning a new faculty member would indicate that they wanted to hire the smartest individual. This often resulted in a total disaster when the individual's level of emotional intelligence, which affected their ability to work with others, was extremely low.
She indicated that life does not happen in a vacuum. How you react and respond to situations is critical. Responding is an element you are in total control of and often adversity brings either the best or the worst out of an individual.
Closing points and quick hitters
● In retirement, the financial part is easy. Life management decisions are the toughest to deal with! These words of advice were from two bankers who had recently retired.
● Do not be an oak tree that covers up the seedlings. Allow people to grow. Mentor and nurture them along the way.
● A Tulane University study finds that 50 percent of the beef is consumed by 12 percent of individuals that are males ages 50 to 65. Houston, we have a demographic issue in the beef industry!
● Great steaks and great service: Our pre-conference dinner down at the stockyards provided a delicious tender steak and great service from individuals that listened, were engaging, and responded to our questions. A great work culture was key to their great service!