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Contributor

Re: Debt free farming operations

Here is the interesting situation about this topic.

 

A farm comes up for sale. 120 Acres @ $5,000 / Acre. = $600,000. Lets say one farmer borrows all of the money @ 7 % for 30 years. With simple payment schedules .....The total dollars spent on that farm is $1,450,000!with interest (the cost of owning that land) accounting for $850,000.

 

If a farmer could pay that in cash....look at how much he saves. But a farmer cannot make money without having assests to earn money....so there is this dynamic dillema.

 

Cash is King but sometimes people have to borrow money.

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Re: Debt free farming operations

Farming is primarily weather dependent in most places. I am from Australia and run cattle. I am also a CPA. Debt continues to accumulated interest on interest in bad times when loan repayments cannot be met. The bank may allow an extension of time to pay, but that only lets the debt grow bigger. Bad times come with bad weather or bad prices. The trap in farming is if income is received pretty much only once a year. Farmers often borrow all the money to run the farm for a year until the check for sale of cattle or grain or whatever comes in. Then when it comes in they repay the bank, haviing lost much of the gross income by way of bank interest and charges. If weather or prices cause the amount received to be less that what is needed to repay the loan, then the farmer is stuck in the debt trap, as money then has to be borrowed to run for the next year on top of what could not be repaid last year. Once the moneylenders have you caught in that debt trap they can raise  the interest rates and charges at will and from then on have a virtual licence to transfer your earnings and assets to themselves. If that takes a decade or so while you work hard and wonder why you are not getting ahead, it does not worry them because they will be getting something along the way and most of the rest when they sell you up.

 

Debt is okay if strictly managed so that you do not default ever. That means low debt to asset and income ratios, good budgets and financial statements and very moderate spending to ensure that money received exceeds money spent. I work on the principle that once money is borrowed it shoujld be your major concern until it is repaid. Do that and pay it back eaerly rather than late and farmers will mostly go okay.

 

If you are going to borrow, get ongoing advice from a CPA or experienced farm financial adviser who undedrstands the way banks work, from before you borrow until after the debt is cleared and the mortgage discharged.

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Politics of farm debt

Being an Aussie farmer I know nothing about US politics. But I have also spent 30 years running FairGO, an organization through which individual Australian voters can get government doing what they want by asking ALL politicians to assist. I don't know that it is possible with the US Congress because I think congressmen refuse to deal with voters outside of their own electorates. 

The result of my 30 years is to conclude that politicians really do not care (any more than the next American or Australian). They are there for their own benefit, not that of the people. Just like most farmers farm because they want to, not because of some passionate desire to feed the Australian or American people. That does not mean politicians are bad. They are "representative of us". If we want them to do something we must firstly approach them all because Congress is a voting forum. If you do not have more than half the congressment on side you do not get what you wanted.

 

Often farm organisations do not really get across to politicians what it is that ordinary farmers want. That is because these Agri-politicians have their own agendas, which can be party-political. Farmers, not peak bodies, need to tell congressmen what they want and explain why. Then they need to vote in those who will do what they want and vote out those who don't, instead of just voting according to party preferences each time. We have found in Australia that because most politicians do not care that much about any specific issue (despite what they say), they are just as happy to help us as to annoy us. What they most want is to be elected and they next want as many of their colleagues to be elected as possible so that they can enjoy the spoils of government.

 

Individual votes working with ALL politicians can work miracles and often get the bureaucrats doing what is needed.

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Veteran Advisor

Re: Debt free farming operations

One great thing about being debt free is that you limit how many other eyes see your business. You don't need to share sensitive financial information with loan managers that may or may not have loose lips. Your tax returns stay with you, and only the IRS. (Just be sure to not list the conservative causes you support, or you may get audited by the communists!)

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Senior Advisor

Re: Debt free farming operations

Another thing Red Steele, debt free farming means your $1.00 is worth about $1.05.  Doesn't sound like a big deal but it beats the hell out of $0.95.  Take that dime and multiply by a few hundred thousand and it makes a huge difference.

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Honored Advisor

Re: Debt free farming operations

I watched my father farm debt free all my life, until he retired.  He did so largely by farrowing enough sows to keep hogs going to market almost every week of the year.  That also allowed him to add value to cheap corn, with supplement his only real purchased input.   

 

That largely explains why Mike and I ended up in the hog business to start with, and are still up in it at this late stage in the game.  We know that direct deposit from our contract is going to be there on time, every time.  It is steady money. 

 

The arrival at a debtfree life is so liberating.  I used to worry about money, even though we really didn't have to worry, just because we owed some to someone.  Now, being able to say it is all free and clear lets me sleep more easily. 

 

I think cheap interest is lulling some people into thinking that debt is not all bad...it isn't, but none is better, even at 3% interest.  Some people see the low rates and get sloppy with noticing the principle.  It all comes due....

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Highlighted
Veteran Advisor

Re: Debt free farming operations

In our state (Minnesota) we have this "young/beginning farmer" loan program that enables sons of established farmers to get cheap interest rates, and I see them bidding up farmland just like it was 1980 again ( when the state had the same program, and the fathers were using it to bid up farmland.)

 

I don't know of anyone in 1980 that managed to hang on to the ground they bought with "cheap interest" and doubt that much will be paid off this time around either. $11000 at cheap interest ...what is it 1%??? ,,,,may give you a payment of only $110 plus taxes and principle, but without inflation when you get near the 20 yr balloon, you are ( expletive deleted).

 

Oh well, there will probably be another round of debt forgiveness or inflation. Or both.

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Honored Advisor

Re: Debt free farming operations

It would have never occurred to me to encumber any of our kids' names with debt that served our needs;but, evidently it is widely done. 

 

Our youngest daughter's best friend in high school, whose dad was a consulting forester, told me his father had screwed up both sons' credit to the point that they were practically destitute, when they went out on their own.   

 

You see it on Judge Judy all the time...a parent getting utility accounts in a child's name, then running up sums they never intended to pay. 

 

I figure that everyone ought to have a chance to make their own mistakes, not borrow some or inherit any.  I think we are goingto see a lot of fallout of this farm economy down teh road...it will be just a matter of timing and degree. 

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Senior Advisor

Re: Debt free farming operations

It depends on your status in life. If you are younger and growing your business, It is almost impossible to operated debt free. The trick is to use borrowed money responsibly. That means buying equipment and stuff you really need instead of investing is stuff you merely want. For example, I bought a quality trailer sprayer for around $25K and I used it to spray a thousand acres twice each year. 2000 acres of spraying at $5 per acre equaled $10K in custom spraying avoided. Of course that was not all savings but on top of that you could shop for chemicals at a savings instead of relying on the local coop. So it's making good use of borrowed dollars that count.

 

If you are older and out of the expansion mode than you may find it comfortable to operate on your own money. You make managment decisions based on their merits rather than whether a lender wishes to influence your decision making. eventually everyone wants a cash surplus as a safety net or a down stroke on a real estate investment.

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Senior Advisor

Re: Debt free farming operations

Only an idiot with a low interest rate and a balloon payment in the future would fail to retire debt early or at least prepare for the expected maturity. One thing about prepayment is that it makes it more likely you can get refinanced should you need it

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