Nov Cattlemen - Risk article page 12

[ALLFARMER]

At the last part of the article on page 12 it says

"As you pay down debt, ask the bank to return the land titles they are holding as collateral but no longer need to cover the outstanding debt."

Has anyone actually successfully done this? I am pretty sure the bank won't lend me money because I have lots of debt but I did buy a quarter section this year with cash?

My big time farmer neighbour has this theory.....If you by borrowing the money can make your payment plus interest and pay yourself more interst than the bank is charging go for it. So if the bank is 7% and you can pay yourself that or more your good!??

Everyone looks at debt differently, many of my inlaws because of strong Christian belief feel business's should pay there own way and be run debt free, but on the other hand he has 90k in old receivables. He fixes cars/motors and people come to pick up their vehicles and the bill is more than the vehicle is worth and can't or decide not to pay. Or it people how give him a sob story and he gives them the keys????

[grassfarmer]

As you say everyone looks at debt differently. I was always told the story of my Grandpa taking a huge risk in the early '30s to buy out various relatives that had a stake in their farm. He was borrowed to the point that the bank would get everything but the clothes they were wearing and a litter of piglets born the morning after an asset valuation was done. Quite a risk with 3 young kids, no welfare system and few other paying jobs in that recession.
Anyways it all worked out but after that he always warned that we were never to take risks like that again with debt - my Dad worked on the philosophy that if you couldn't buy land and pay it off with retained profits inside 7 years it was overpriced. Hard to imagine now but that worked in Europe from the '40s through to the 80's until land prices got driven up by non-farm money.
I've always been averse to debt with this upbringing and find that the easiest banker to get on with is yourself.

[AllisWD45]

Did exactly that over the years i was
farming/ranching. As i paid down my land debt i
asked for titles back. Today with the $ at stake and
the risk to finance a viable farm/ranch i would
guess it would be next to impossible. In my day i
bought all the poorer land cheap and in a block and
sucssessfully ran cattle on that land.
Every time the mortgage was paid down i asked for
titles back holding the CU to their lending criteria I
did it with the local credit union not banks or FCC.
nothing against them but that would have never
happened there.They also i felt were too stringent
in how they set things up especially the banks.
Also never ever missed a payment so i could do this
and worked off farm for 20 years on rigs, and in the
debt resolution crisis of the 1980's early 90's to
make sure that happened.
Have to admit to some i did it it ass backwards
because i never ever owed a cent against the cows
even tough the creditors could never have them if
things went to shit. Just my personal way of doing
things i guess

[farmers_son]

Yes, lenders will release land held as security against a debt as that debt is repaid. Both FCC and AFSC will do this if asked assuming enough security remains to guarantee the debt.

Alberta Ag has a page on debt at:

http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/agdex1841?opendocument

The right amount of debt is a good thing and can help the farm grow. I have never been scared of debt, my father was never scared to borrow money either, but I do not borrow for foolish things. In general Canadian farms carry a lot of debt but the debt carrying capacity has increased substantially the last year or two due to higher commodity prices and greater profits.

There is no right or wrong amount of debt. Every farm is different.

See:

http://agmarketing.extension.psu.edu/Business/PDFs/HowMuchDebtCarry.pdf

[smcgrath76]

FS - you are right with each farm has a
"right" amount of debt. The debt
carrying capacity has increased, but so
has the risk. Small commodity price
fluctuations in highly leveraged, large
scale operations, or weather related
risk, or... is a lot riskier than highly
leveraged smaller operations where other
sources of income can be used to support
the infrastructure.

[smcgrath76]

I guess my thoughts are that no one goes
broke when times are bad, they go broke
because they leverage up to far in good
times. That said, lenders aren't usually
keen to lend at the optimal time to get
in.

[ALLFARMER]

For sure SMC when cows we cheap FCC kept
telling me no money in cattle but thankfully they
handed over the cash. Then when the land by
me came up for sale they said you owe us lots in
cattle and machinery no cash for land. I told them
fine I will sell off the cows to buy land and that
pissed them off. To bad for them I guess I got
what I wanted, maybe after a year they will cool
off or it sounds like they are looking for a full time
office here and a new manager to run it.

[farmers_son]

Talking about large scale operations and risk...

Tyson Profits Down 54% As Feed Costs Soar

http://www.cattlenetwork.com/cattle-news/latest/Tyson-says-profit-down-54-percent-sees-high-grain-prices-in-2012-134262713.html

Tyson is a large vertically integated firm yet is sensitive to feed costs. Tyson has a $4 billion feed bill annually. I know I just hate it when my quarterly profits drop $116 million.

Being big does not reduce risk.