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Debt and your farm's future

Jeff Caldwell 07/18/2010 @ 11:00pm Multimedia Editor for Agriculture.com and Successful Farming magazine.

Every farmer yearns for that day when the last nickel of debt is paid off. But, don't trip over your toes because you're looking too far into the future; though a debt-free farm is the ultimate goal, your farm's nearer-term goals shouldn't be neglected in favor of the ultimate debt-free goal.

"Being a debt-free farmer is a nice pipedream, but it doesn`t work today. If someone was born on third base and wants to sit on their lead, then yes, be debt-free," says one farmer in a recent Agriculture.com Farm Business Talk forum. "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."

But, don't rely on prudence alone. Before determining whether becoming debt-free is your foremost goal, think about where you are in your farming life, says Iowa State University (ISU) Extension economist William Edwards. If you're still in growth mode, zero debt should take a backseat to the growth your farm needs to be financially sustainable.

"The real key question here is 'Are you talking about a stable operation or one that is still hoping to grow into the future?'" Edwards says. "That operation that has reached the size it wants to be, probably at that point, reducing debt does become the overriding goal of the farm."

If you're having trouble nailing down which camp you're in, look at your labor situation. If you've got ample human capital to fill your labor needs well into the future, expansion -- and continuing to shoulder more debt -- may still be in the cards. If not, it's likely time to start working toward debt-free status.

"If you see another generation of family members or another operator coming in, you're going to want to increase the scale to the point of utilizing the labor and providing a living for another person," Ediwards says. "The expansion decision is usually tied to labor more than anything else."

There's one more growing factor to the equation: Today's farms are dealing with higher numbers on both sides of the balance sheet. Costs are higher, but so are returns. If you're trying to determine whether it's time to start paying down debt or continue to grow both acres and debt, recent history should be a big consideration in the decision.

"We have more dollars, higher commodity prices and higher costs of production, so in some cases, when people haven't had to borrow operating capital have had to do so because the dollars are higher on both the income and expense side," Edwards adds.

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