A wealthy man walks into a bank New York City and asks for the loan officer. He says he's going to Europe on business for two weeks and needs to borrow $5000. The bank officer says the bank will need some kind of security for the loan, so the man hands over the keys to a new Rolls Royce, which costs quarter of a million dollars.
“The car is parked on the street in front of the bank,” says the man, “and I have all the necessary papers.”
The bank officer agrees to accept the car as collateral for the loan. After the man leaves, the loan officer, the bank's president and all their colleagues enjoy a good laugh at the man for using a $250,000 Rolls Royce as collateral against a $5,000 loan.
One of the employees drives the Rolls into the bank's underground garage and parks it there. Two weeks later, the wealthy man man returns, repays the $5000 and the interest, which comes to $15.41.
The loan officer says, "Sir, I must tell you, we’re all a little puzzled. While you were away, we checked you out and discovered that you’re a multimillionaire. Why would you bother to borrow $5,000?"
The man replies, "Where else in New York City can I park my car for two weeks for only $15.41?"
> It charges between 3% to 5% interest, depending on the quality of the cheese, and a fee for making sure the cheese matures properly in their air-conditioned, humidified vault.
Because the guy who owns the Rolls utilises the bank well when it would be otherwise left idle & gets a loan in the process to his benefit. This is similar to the Cheese which is left idle and cheaply let to mature while the guy can take a loan on it.
Or would it be better to mature the cheese in their own more expensive facility which doesn't get the same economies of scale?
It was a light hearted piece of humor where a bank accepts an object for collateral. You know that, of course, but comments like that make you feel special I suppose.
> You know that, of course, but comments like that make you feel special I suppose.
Is that tone really necessary, or constructive? The question seemed to me perfectly civil; if it was snark for snark's sake, then it was a pretty harmless instance of that practice. It may have been disingenuous, but automatically to assume so seems more harmful than just answering the question (or even than ignoring it).
Isn't this just a specialised pawn shop? The more interesting thing is that the 'value' of the cheese goes up over two years so there is an incentive to purchase back the cheese, although I suspect the 'bank' sells the cheese on behalf of the farmer for a fee and writes off the loan and gives the farmer any profits.
I'm guessing a similar approach could be used for some hams but not sure if there are that many food products where there is relatively high value in very small amounts of space.
You need to read up on futures contracts. That's essentially what's going on here, but the bank is providing a secure location for the product to mature, and given the nature of the product, that's a sensible step for all involved.
It has the contango element of a future with an underlying that has higher storage costs than the value inflation rate, but, unlike a future, the asset already changes hand, hence it resembles more a collateralised loan.
Contango is the key element of a futures contract, at least in my opinion. The only real difference between this and, say, a grain future is that the nature of the product allows the farmer to deliver on the immature product than with many futures, and thus the bank has to take less of a risk while giving the same benefits to the farmer of a regular future. There's less fear that something disastrous will happen before the cheese matures because the bank can control that to a great extent, unlike a bad summer, which could ruin a grain harvest, rendering a grain future worthless.
It's a futures contract because they don't yet have a finished product. Even after the wheels have been produced, the cheese hasn't matured yet, and they have no idea what the quality is going to be. That's why it's a futures contract rather than a loan against collateral.
Financing of these types of thing has been going on for centuries, the article mentioned that the cheese loans had been going on since the Medici era. Most of this type of business has been credit funded for centuries too.
That, or a mortgage of sorts. It's basically a loan using cheese as collateral, instead of a building. But with the extra added service of taking care of said house for you (to draw the analogy).
There was something called the Commodity Credit Corporation, which was a wholly owned government organization; still exists; sometimes called the CCC, which is a New Deal-sounding acronym, and it was. And that corporation, run by USDA, bought corn. Just went out and acquired corn, through a complicated loan process. They would loan money to a farmer at harvest time, or actually well before harvest, at planting time, based on a price guarantee at harvest. If the farmer decided not to sell or had a price below that loan rate, the farmer had the right to turn that corn over to the government. Which they did. And the government owned warehouses but they also contracted with private people who had warehouses. They did this--in the case of milk, the government didn't buy raw milk from the farm. They promised to buy cheese and butter and dry milk powder, so that we had, outside of Kansas City, caves full of government-owned cheese at one point. As well as piles and piles of dry milk powder.
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?
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.
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.
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.
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.
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.
There are also 'Gold loans' in India where you can give up your jewellery for a loan. What's interesting is that there are specialised banks that do this rather than an ordinary bank taking it up as collateral.
I guess other items that could work this way more interestingly than gold are whisky & wines.
But let's say that the bank buys conterfeit cheese, and start mixing it with the original cheese (since that kind of cheese has designation of origin) and then sell the surplus? Nobody would suspect since the bank can say that the cheese it sells it's just defaulted loans?
A recent college graduate walks into a roomful of people with a PowerPoint slide deck and prototype software he spent the last three months on. It's using the most hyped technologies available and his presentation is fully buzzword compliant.
He walks out of the room with a cool "one meeeellion dollars" with the promise of more to come. Ten months later he writes a sorrowful admission that there was no way to make money even though the idea was cool - and cuts his users off from something they'd become attached to.
He also walks away debt-free, but didn't lose his cheese.
BONUS ALTERNATE ENDING:
His start-up was accelerated by all the media furor over the new cryptocurrencies and troves of wishful Bitcoin investors deposit their hard-mined treasures. Those new technologies seemed so sweet until a hacker found a vulnerability and stole everything the company AND its customers owned.
BONUS ALTERNATE ENDING:
His start-up was accelerated by all the media furor over the new cryptocurrencies and troves of wishful Bitcoin investors deposit their hard-mined treasures. Those new technologies seemed so last week but a twentyish guy shouldn't be burdened with the rigors of running a company - and look at all that money! (Transfers it to his own account and says they were hacked).
MORAL OF THE STORY:
Build a business that has a clear path to a profit (or better yet, can be built with profits).
A wealthy man walks into a bank New York City and asks for the loan officer. He says he's going to Europe on business for two weeks and needs to borrow $5000. The bank officer says the bank will need some kind of security for the loan, so the man hands over the keys to a new Rolls Royce, which costs quarter of a million dollars.
“The car is parked on the street in front of the bank,” says the man, “and I have all the necessary papers.”
The bank officer agrees to accept the car as collateral for the loan. After the man leaves, the loan officer, the bank's president and all their colleagues enjoy a good laugh at the man for using a $250,000 Rolls Royce as collateral against a $5,000 loan.
One of the employees drives the Rolls into the bank's underground garage and parks it there. Two weeks later, the wealthy man man returns, repays the $5000 and the interest, which comes to $15.41.
The loan officer says, "Sir, I must tell you, we’re all a little puzzled. While you were away, we checked you out and discovered that you’re a multimillionaire. Why would you bother to borrow $5,000?"
The man replies, "Where else in New York City can I park my car for two weeks for only $15.41?"