cancel
Showing results for 
Search instead for 
Did you mean: 
Honored Advisor

Re: Debt free farming operations

It's been my observation that some families just cannot manage to live off of a family-owned business, whether it's farming or non-farming.  They just do not have the discipline it takes to balance business needs with family needs, and often muddy the water between the two, or lose focus.

If your business doesn't support a household - especially if it takes both partners in the marriage to run it day-to-day - then it isn' t much of one in my book.  Some people hang onto the illusion of being self-employed long after the family's needs exceed the ability of the family business to provide for them.  That is false pride. 

I have known quite a few women whose off-farm job meant health insurance for the family got paid for, and thus the farm was protected against catastrophic illness or serious accident.  It is okay for one spouse to earn the benefits, but the business ought to be able to provide this degree of risk management for itself, whether it actually has to or not.  

A matching amount of money ought to go into savings for the family every month if the benefits are paid for off-farm.  That way, you know you can pay for it out of the business if you ever have to, if the off-farm job falls apart, as many are doing these days.  Businesses and families both need emergency funds, to carry them through hard times. 

Net worth is not a very important number, unless you are looking to leverage something against it, or you want to sell out.  I used to track our net worth formally two times a year (June and December), and make a report to our lender,  but haven't done that for a quite while now.  It gave me a good indicator of our progress, and we always gained ground, so it was encouraging to a large extent. 

I should probably do an updated statement for our own reference, and compare it back to the last one I did...but it is just a number.  I don't want to borrow against it, we are noy at all inclined to sell out as well as things are going, and we've made enough of an estate plan to hold up for now. 

A million dollars in the bank will give you about $10,000 in interest income these days, before taxes, if that.  A couple of decent little rental houses worth one-tenth that (or less) will earn more.  I have yet to find better-paying  tenants than the feeder pigs we raise, though. 

0 Kudos
joel_guarita
Senior Reader

Re: Debt free farming operations

Well, being a farmer without debt is a dream, a goal to be achieved, but you wonder: is that possible?
To get out of debt depend on a number of factors, which are needless to say, we all know.
For us in Brazil think that the situation is much more difficult.
But nothing is impossible.
We must leave our attractive business for future generations.

0 Kudos
Contributor

Re: Debt free farming operations

I would agree that most rumors in the neighborhood are just that, rumors.  Don't judge an operation by what you think you may know, or what you heard.  The most shocking learning experience for me when I got into this business, was that it was impossible to judge a farm's financials.  It didn't matter how clean/dirty, fancy/junk equipment, new/old house.

 

Yes debt would allow you to grow faster, it also brings more risk into the business.  I would argue that MOST farmers pay no attention to ROI/ROA, and probably shouldn't look at it since it wouldn't look good! Smiley Happy

 

 

 

0 Kudos
Advisor

Re: Debt free farming operations

I always tell my banker that my net worth just equals the proceeds of my liquidation. Unless  i'm going to sell out or mortgage everything the no. is pointless. cashflow is king.

0 Kudos
Veteran Advisor

Re: Debt free farming operations

Bernie Madoff had an excellent ROI/ROA until it all went bust!  I have gotten my equipment paid for I still owe on cattle and land.  It is nice but I think that in the end Debt is a tool for enhancing your business not your lifestyle. JR

Veteran Advisor

Re: Debt free farming operations

I agree cash flow is great  -although this doesn't mean you can service a ton of debt--look at dairy and pork.!!! As for return on investment how much ROI does a 500000 house return--that is what keeps the lid on the economy--to much $$$$$ tided up in 30 year mortgages --5 years ago the expert's said everything is just fine--

0 Kudos
Honored Advisor

Re: Debt free farming operations

The real problem experienced by our eonomy, and the world's economy ultimately, was the assignment of new debt (mortgage re-fi and HELOC loans) for consumer items that ought to have been bought out of pocket, or at least with shorter-term instruments.   

When banks were writing new loans to get fees, appraisers got their chuck for making the property value fit the new loan's needs, and no oen was bothering to verify in any way the ability of the borrower to repay, all so people could have dinners on the town and the latest i-Whatever, it was only a matter of time before teh manure hit the fan. 

Also, a house can take 15, 20, or even 30 years to pay for in an ordinary mortgage scenario.  All sorts of creative mortgage "tools" came out of the box in the past decade or so...interest-only loans (I have not really studied them, but isn't that what we used to call "rent"?) being just one example.  A lot of the meltdown was coming when teaser loan rates re-set, and people simply could not pay anywhere near what the actual monthly cost of owning their home. 

When you add on the fact that every new house generates additional debt for furnishings and a lot of people were then turning around and re-financing the house to cover credit card debt that was run up to provide that, then the vicious cycle became self-perpetuating.  An awful lot of the overall economy depended upon people being able to repeatedly reach into thier house for equity to find money for a new RV, a pool, and just about anything that had nothing to do with the worth of the actual house itself. 

Financing a lifestyle that people could not really afford is preccdisely what got us into the mess we are in today.  Using debt loosely, in a system that did not verify anyone's income, in a way that allowed the foxes to guard the chickenhouse, was lunacy.  Leaving the only rescue recourse on the backs of the taxpayer was predictable. 

I happened to ask a young woman I know about her recently-mentioned plans to add a garage with office to their residential lot.  Her husband is a geenral contrator, and he had evidently tried to float the loan on his business alone.  She has a fantastic career in medicine, and owns a nice side business, too. 

She said his loan, based on his income alone, had been declined.  Her rationale was that the lender had counted all of their joint debt - for the home, a HELOC fro improvements to it, vehicles and her business - against his income, and the repayment ability to debt ratio was insufficient.   The verification process had stopped them in their tracks.  She was convinced that when they recalculated the loan with her income in the paperwork, it will fly easily.  Honestly, after hearing how much they owed on, I was not sure that "yes" was the best answer they could hear.   

0 Kudos
Highlighted
Contributor

Re: Debt free farming operations

I agree Kay, there is/was a problem in general population.

Not to point blame, but there is some that needs to go back to the people who don't know any better and keep borrowing.  The predatory lenders love scooping them up! 

But lets ask one more question, why don't those people know any better?  Did our education system fail them?  should we be teaching basic financial management in high school instead of geometry or English?

0 Kudos

Re: Debt free farming operations

Us there any other way to farm, but debt free?  There is not enough money in agricuture to pay both the farmer and the bank.

0 Kudos
Honored Advisor

Re: Debt free farming operations

Honestly, schools do not teach as many necessary skills as they used to, with Home Ec on the decline and other practical programs being phased out in favor of a "college for all" mentality. 

I think this is largely because the powers that be have realized that if children learn real financial management skills, they cannot be turned into such mindless consumers...which is actually what our economic system needs more of to keep on moving in its present direction. 

Our educational system used to concentrate on producing workers, and readying kids for a useful life.  Now, some educational administrators want every kid pointed towards college, even though it is not in their own best interest or that of our society.  Banks, of course, have to love the treadmill of bankruptcy-proof student loan candidates...parents do not save, so that is the only stream of tuition funding.  Vicious cycle.  Start life with a hundred grand in debt, and carry it until you die.   

Also, if kids were taught good financial habits, their homework would probably really p---off their parents. 

Think about it:  If Little Johnny learns that credit cards make absolutely NO sense, then his parents might have to face the fact, too.  If consumers got smart in droves in a hurry, our financial system might just collapse, for real. 

Some economists see the latest unemployment figures as drastic danger signs...and falling prices in recent months point to  the possibility that stagflation is possibly underway.  We are worse off in some real economic indicators than at any time in eighty years...and we all know what happened 80 years ago, don't we? 

Money management gets all wrapped up in value systems and virtue v. vice, too, and God forbid that any school should  teach VALUES! 

Money is the "last taboo."  People will talk openly about sex, mental illness, or anything else that used to be kept out of public conversation, but they will NEVER tell you their bank balance, even though with online banking access, they have minute-by-minute ability to track that factor now. 

Most of what I know/knew about money management I had to learn the hard way, by trial and much error.  I still have a lot to learn.  As a young adult, I often complained that "no one taught us how to do this in school,"...and I had the top SATs in the whole class, so it wasn't that they taught it and I didn't get it. 

But, that is the crux of the problem.  Financial savvy isn't on any standardized test, and that is all that is taught anymore:  teach to the test until eventually, you actually teach the test...and the test doesn't prepare you for real life. 

I don't ask myself why things are done a certain way anymore...I look for reasons why they aren't.  When you do that, the answers are a lot asier to find....

0 Kudos