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Debt free farming operations

If a farming operation is debt free what are the advantages and disadvantages?  Lets assume that the farming operation will be one that will continue on with future generations. I would like to hear from people that have been on both sides of the fence. Also would this slow the growth of the operation? TIA!

79 Replies
Honored Advisor

Re: Debt free farming operations

Hey Husker, being a debt free farmer is a nice pipedream, but it doesn`t work today. If someone was born on 3rd base and wants to sit on their lead then yes, be debt free. To stay competitive it takes more capital than most "old money" will provide. One just has to be responsible in their borrowing and not assume everything`s okay as long as the bank dishes out money. 

Veteran Advisor

Re: Debt free farming operations

Depends on how you handle STRESS if you want to borrow a lot of $$$$--Timing is one of the big factor's;-just ask someone from the 1980's--- also don't look at the neighbor's operation and think it is so great--be your own person.

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Contributor

Re: Debt free farming operations

I don't see any disadvantages with having a debt free operation. That's expecially good for future generations so someone dosen't have to hand down debt to the next generation. It may not look like it but I see that debt free operations are the guys who run 500-1000 acres and is owned compared to the guys that are renting 5000/ac and need all the espensive equip., big grain set up, and pay employees to handle it all. Those small operators may not want to expand anymore but their future generations are the dangerous ones that will have that 500-1000/ac at a reasonable price and will save enough money to go out and get more land or maybe pay a little more for rent. Next 10 - 15 years will be interesting to see who is still around running these farms

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Honored Advisor

Re: Debt free farming operations


To that I would add: most farmers THINK they "handle stress well," but if you talk to their spouses and children, that is not necessarily the case.  Worry takes a person's mind away, even when their body is physically present in a place. 

 

When we borrowed a lot of money to buy and build this place, sixteen years ago, I was in another world (of worry) for a pretty long while.  Once we got to the point that I could honestly say that I could go to the bank and take out enough to pay it all off and no longer be in a hole, I felt entirely differently.  I chose to carry the loan on longer, but at that point it was a choice, not a necessity.  Psychologically, that is a huge difference. 

 

Our situation in hogs in NC is a lot different from anyone else in almost any other farming business.  We cannot by law build any new waste management facilities - or at least not any affordable ones -  and the industry here has essentially stood still since our moratorium passed in 1996.  That limits your options to expand, so you have to satisfy yourself that the present operation - at least that component of it - is "enough."  We diversified a bit here and there, but have done so basically out-of-pocket since 1994. 

 

I grew up in a debt-free farming operation, largely because my father raised hogs to have to sell for offsetting expenses on crop production.  He never made a single interest payment, and made any land and equipment purchases out of savings.  And yes, that was a different time in our history.  Being without debt did not make it a necessarily pleasant work experience for me as a child and teenager..,or, let's say, if debt had made it worse it would have been unbearable, since we were driven like sleddogs as it was.    

 

In all honesty, I think that debt v. no debt is not the essential question, it is more a matter of do you work to live v.  live to work?  Money is, after all, "only money."  You can never have it all, and if it really matters to you, you may never feel you even have enough.  Comfort and security, a few small luxuries and time to enjoy them, is really what it's all about. 

 

People write business plans all the time, but they forget to plan for their lives.....

 

Veteran Contributor

Re: Debt free farming operations

Can I borrow those rose colored glasses for a while? You SEE the debt free guys are the STO's and the BTO's are all up to their necks in debt, huh? Unless you are their loan officer I doubt that you know as much as you think. I think you are sadly mistaken. Our community lost a long time small farmer this winter and the first thing the bank had the widow do is sell all their ground to pay off the loans. The big boy neighbors lined up to buy it. You are right about one thing...it is never what it appears from the outside.

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Contributor

Re: Debt free farming operations

Without debt, there are missed opportunities.  If an expansion of a cash operator is beyond his means then a good opportunity could be overlooked. Expansion, however is not everyone's goal.    

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Veteran Advisor

Re: Debt free farming operations

I pretty much use the 30% rule - -never over 30% leveraged shouldn't be a burden and most of that on 15 year real estate fixed

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Senior Contributor

Re: Debt free farming operations

Good discussion. Lots of good points and it shows the difference in how people operate. I think there is also some evidence of how attitudes change as we age and as we deal with circumstances.

That said I will throw out another thing to think about.

If you have a debt free operation then I assume you are managing hundreds of thousands of $ of assets and if it has any size at all you will probably be over a million $.

Now if that value of assets is totally owned debt free what kind of ROI are you getting? I know of people 'farming' well over a Million $ of assets and their wives work out to put groceries on the table. Is that a good way to run a business.

There is no problem in borrowing money to be able to farm as long as you borrow it for assets that are going to pay back enough to leave some $$ in your pocket after the payments are made.

Some have all the toys and usually in Green or bright Red but are they good businessmen or women?

Honored Advisor

Re: Debt free farming operations

In our area BTO`s partner up with a wealthy businessman. One I know partnered with a very successfull car salesman for funding, another got buddy-buddy with a investment guy....unlimited dough on the cell speed dial. One area implement dealer had a son who caught the farming bug...8000 acres later, he`s in business. So yeah alot of these BTO`s don`t have all their own skin in the game. I try and be nice to them, one day I may have to rent to them.

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