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Production agriculture without debt

Melissa Beck for Progressive Forage Published on 31 January 2020

How many people do you know who started out in production agriculture without debt? I’ll wager it’s not too many. It’s a personal choice and comes down to deciding what risk you’re comfortable with.

On one hand, you’re avoiding interest payments and the risk of overextending yourself. On the other hand, you’re accepting the risk of leasing land and not capitalizing on economies of scale. It takes planning, creativity, patience and willingness to go slow, capitalizing on opportunities.

Know your why

Cody and Hannah Gray work full-time off the farm in northeast Arkansas and have been in the cattle business for seven years. For the first three years, they didn’t own a single cow. They concentrated on building infrastructure on land rented from family. Their pastures are fescue and bermudagrass, and they harvest high-quality hay. They own their hay equipment, which consists of a baler they bought for $900, a cutter they bought for $1,500 and a rake they borrow.

They started with four cows purchased from family; today, they own 16 head and share ownership in a bull with Hannah’s dad. Hannah says, “The proceeds of the calf crop go back into paying for feed, fertilizer or expanding the herd.”

Cody says, “We decided to go debt-free because we see young farmers get in over their heads with loans; we decided we didn’t want to owe anyone, and we’re willing to take it slow.”

Rachel and Brandon Hough have been in the cattle business eight years and partner with Brandon’s brother in a debt-free cow-calf operation in north-central Oklahoma, where they run over 200 head on around 1,000 acres. They both have full-time off-farm jobs. Rachel is a teacher, and Brandon is a master cabinetmaker and employs 25 people in his shop, which is located at their farm. They rent 560 acres that has been in the family for 87 years, and the rest is leased from others but in a unique way, through bartering agreements.

The Houghs decided to avoid debt because at one time, according to Rachel, they were swimming in it. “We both had student loan debt when we got married, then we had a premature baby and were faced with $200,000 dollars in hospital bills; we had to work our way out of all that and we swore we would never go back; we don’t want to be in debt to anyone,” Rachel Hough says.

Rodney Jones, agricultural finance professor at Oklahoma State University, views debt as a potentially valuable tool and says, “Individual producer[s] need to ask themselves why they want to start a cattle operation without debt? From the most basic financial management perspective, if you run a profitable operation, it doesn’t make much difference if you use debt or not. It’s a tool that has a place but can also be used inappropriately.”

Jones says, “Avoiding the risk associated with debt may set you up for other types of risk, like limiting your access to land or the number of cattle you can run. You could lease land and cows, but when you lease resources, you give up some of your control.”

Jones says someone who inherits land or has a good income from an off-farm job can get started by supporting a significant portion of the family living from those revenue streams while reinvesting the farm income into the operation. It’s challenging, but it can be done.

Jason Bradley serves as agricultural economics consultant in the producer relations program at Noble Research Institute. Bradley says, “In business, debt is a tool – if used improperly it can get you into trouble; when used properly it can be a great benefit.”

Bradley says, “If I were working with someone wanting to avoid debt, I would start by asking them ‘What is your goal? Is it retirement supplementation, sole livelihood or simply a lifestyle farm?’ If their objective is to grow the cattle business quickly, they may need to use more debt; if they are more of a lifestyle operation, they should start slow and build over time.”

Discover your strengths

According to Jones, the first questions everyone should ask themselves are, “What’s my competitive advantage? How am I going to be a low-cost cattle producer regardless of the objective of little or no debt?”

Cody Gray says, “I wanted to take my time to do it right the first time; I welded the fence corners at night, after work, with lights.” The Grays built their operation by looking for opportunities to save money on necessary equipment and infrastructure, “knowing what it’s worth and buying it for less, whenever the opportunity presents itself. None of our stuff is shiny, but it’s usable, and we invest in equipment when it makes our job easier on the farm.”

Hough advises to never get into debt to begin with. She says, “Get creative; there are ways to accomplish goals without debt. Look to your talents, barter for machinery and land leases. Don’t listen to the noise that you have to rely on debt to be successful. Be patient; it takes time to build a successful farm business, but it is so worth it.”

Starting small

Bradley recommends starting small, leasing land and building equity in assets, then scaling the business as the opportunity presents itself. Producers need to maximize efficiencies, investing in fertilizer, increasing stocking rates and purchasing hay as needed. Finally, purchasing equipment when it’s sensible, utilizing smart opportunities when they present themselves; get what you need but not necessarily the newest and best.

Hannah advises, “Have a plan, go slow, be willing to sacrifice, agree on how to allocate the returns on investment, and enjoy what you’re doing.”

Have a plan

According to Jones, among the costs feed is the highest, accounting for at least half of the variable costs, including supplement, hay and pasture. To be most successful, producers need to meticulously manage feed costs and have the ability to obtain feed resources economically and efficiently.

Jones says, “It is impossible to manage input costs without enterprise budgets; they tell the true story, and low-cost producers pay close attention to those summaries, periodically and especially toward the end of the year.”

According to Jones and Bradley, leasing resources rather than owning them could limit the need for debt. However, this approach should be considered a different type of risk, and they advise producers to have fair rental arrangements and look closely at contracts to manage other risk.

Bradley says, “They need strong relationships and key communication points with veterinarians, neighbors, mentors and can call on the Noble Foundation for help as needed.”

It is possible to start out in production agriculture with minimum to zero debt. To succeed in any agriculture business, it is important to set goals, have a plan, and utilize enterprise budgets to ensure you’re controlling costs. end mark

Melissa Beck is a freelance writer based in Stillwater, Oklahoma. Email Melissa Beck.