Debt-Free Dexterity

January 25, 2017 02:10 AM

Rare farm financial path offers risks and rewards for these producers

When corn prices soared close to $8 during the 2012 drought, many producers expanded grain systems and bulked up their living standards. Kevin and Lori Green of DeWitt, Iowa, held fast to a simple but powerful motto: Do the opposite.

“We put all of it into getting out of debt,” explains Kevin Green, a finalist for the 2004 Top Producer of the Year Award.

The Greens’ decision to farm without debt happened intentionally, but not necessarily on purpose. They say no debt is the reward for years of sacrifice and good business decisions. It required debt along the way to get to this point. Today, the Greens and their team farm 13,000 cash-rented acres of corn and soybeans in eastern Iowa. They’re just 30 minutes from Mississippi River ports. They use a combination of machinery ownership and some leases to secure equipment. Iron is custom-ordered to include options that will make it attractive at resale.

An Alternate Path. They’re not alone. Although rare, debt-free farming isn’t unheard of. For farmers who have loans, debt-free operating can be appealing, particularly during the present multi-year period of commodity prices that are below some farmers’ production costs. Farmers who have paid down their operations in full say the benefits include flexibility to focus on commodity marketing and relationships with landlords. 

Experts caution that while aversion to debt can limit a farm’s expansion opportunities and add new layers of complexity, it can also provide bandwidth to weather a downturn.

“You really need to find ways to cut costs,” says Danny Klinefelter, ag economist at Texas A&M University in College Station, Texas. “Most farmers wait until they’re in trouble, and you don’t have as many options unless you start liquidating things.”

In 2003, the Greens formed Greenview Partnership, which consists of Kevin and Lori, their two grown children, Kevin’s brother, Keith, and Randy Schoening, a non-family partner. They used high corn prices and a large land base to pay off debt. 

Profit is the first priority. They typically forward-contract all of their average yield by one year and have sold ahead by as many as two and a half years. A written scale-up hedging plan is used to make sales, which are typically executed when corn moves up another 5¢ or soybean prices move up another 20¢.  

Farmers can still borrow money at historically low interest rates, despite the Federal Reserve’s recent decision to bump rates higher, says Vince Bailey, vice president credit and ag lending at Farm Credit Mid-America. Yet a lack of debt can be the “best of opportunities” for the right operations because they don’t have to worry about managing an asset base to service debt payments. That’s especially true given the challenges in agriculture aren’t likely to let up for a couple of years and will provide opportunities for operations in a financial position to take advantage of them.

“If you were a publicly traded company, you could be scrutinized for being debt-free if you could realize cash by borrowing and providing greater returns to the shareholders,” Bailey explains. “But in farming, most shareholders are the owners of the operation. They set the direction for the farm.”

Dryland And Debt. For a guy who grew up on a row-crop farm in the cheerful-sounding city of Happy, Texas, finances haven’t always been so optimistic for producer Casey Kimbrell. He started farming 
full time at age 23 after a year in college and quickly began taking on debt to grow. 

“My brother and I rented a small dryland farm together and probably had a net worth of about $5,000, so I started with nothing,” recalls Kimbrell, who with his wife, Annie, paid off close to $3 million between 2008 and 2014 to become debt-free. “A couple years later I rented an irrigated farm and operated on an FHA loan. We stayed with FHA until we could convince a bank to loan us money.”

Kimbrell eventually paid off the FHA loan. He and his wife maintained commercial credit as they started buying land and their farmstead in 1999. Kimbrell credits a wise banker, personal finance radio host Dave Ramsey and his own poor money handling with pushing his family to make a change.

“When I first started farming, I figured if someone was dumb enough to loan me money, I was going to take it,” says Kimbrell, who now farms in the northern Texas Panhandle city of Sunray. The operation includes 3,520 owned acres and 870 rented acres of row crops including corn, cotton and grain sorghum. “If I had a chance to borrow money, I would. I was pretty reckless with debt.”

The decision to aggressively pay down debt is one that shouldn’t be taken lightly, says Mike Boehlje, ag economist at Purdue University. The merits of multiple approaches to financial risk-management should be evaluated. Make the best decision for customers and future development.

“You should at least give consideration to ways to ‘safely’ borrow money,” Boehlje says. “One way is to be much more proactive in managing the operating risk in your business so you have a very, very low probability of ever having inadequate cash flow to make the principal and interest payments on the debt.” 

Boehlje points to contract-based hog production as the ag sector most attuned to the practice of using debt responsibly. As the hog market consolidated beginning in the 1990s, farmers found by securing contracts with end users, they could obtain higher returns per dollar of equity using money from a lender. They added financial risk with debt but lowered operational risk by producing pigs on contract that reduced their price risk compared to open-market pricing. 

Klinefelter recommends producers use measurements such as earned net worth—which doesn’t include appreciation or asset revalues—and tools such as cost-basis balance sheets to accurately understand their capital position and related risks.

The Greens and Kimbrell say they’ve crunched their numbers and are comfortable trading debt for benefits such as added time to think strategically about their businesses.


Stronger Ties. In Iowa, Kevin Green hires truckers on a contract basis to haul in the fall. Soybeans are sent to CHS on the Mississippi River, up to three times as far away as corn travels. The profit is about the same as selling closer to home, but more importantly, it ensures their truckers have steady work.

“We build relationships and try to figure out what grain-buyers need,” Kevin Green explains. The farm stores and resells grain through the bi-state River Valley Cooperative, which upgraded three facilities, resulting in 5-minute turnaround times for trucks that are unloading. 

The team also invests substantial effort working with its 70-plus landlords and creating win-win situations, a focus from Day 1. “All we needed was control of the land,” he says. “We didn’t need to own it.” 

The scars of the '80s farm economy left Kimbrell’s family wanting something better. Annie’s family built its wealth with a multi-national farming operation in Texas and Venezuela, only to go bankrupt. That contributed to her fiscally conservative viewpoint, a focus that aided the couple’s own efforts to get out of debt. 

“Even now, I have some struggles because I grow quite a bit of cotton, and I’m still using the old conventional cotton stripper,” Kimbrell acknowledges. “I would really like to have one of these new strippers that bales the cotton with an onboard round baler, but a new stripper baler is $700,000. I’ve just got to think pretty hard about writing checks that big. If I were only thinking about the payment, I’d already have one.”

Like the Greens, Kimbrell attributes his financial strides to everyone but himself. He recommends several basic steps, including paying taxes and not financing things that lose value over time.

That, and playing the long game.

“To me, growth at all cost is not beneficial. It just makes all your neighbors hate you, and you don’t have anything more than you had in the first place,” he says. “I think growth needs to be careful and calculated. Will it actually be a benefit, or are you growing to farm more land? Bragging rights don’t look good when you’re standing on the courthouse steps watching your stuff be auctioned off.”  

How to Pay Down Loan Balances to Zero


Sacrifice is the operative word when it comes to getting rid of farm operating debt. Yet for some producers, the trade-off is business flexibility and financial opportunities. Here are some of the strategies Iowa producers Kevin and Lori Green and Texas producer Casey Kimbrell have used.

Become More Disciplined. Both farm operations spent years keeping business expenses in check and operating conservatively. Kimbrell recalls that as a boy, he once asked his dad why the family couldn’t buy a new tractor. “He said, ‘I don’t want to spend my life working for John Deere,’” recalls Kimbrell, referencing monthly payments on equipment.

Focus On Profit. Work to forward contract a substantial portion of your average corn and soybean yields, and take advantage of scale-up hedging opportunities, Kevin Green says. Hire out jobs such as spraying that contractors can do for a better price than you.

Assess Commodity Risks. Buy crop insurance for major losses and consider setting aside cash to self-insure smaller ones, Green says. 

Pay Your Taxes. Don’t be afraid to pay taxes routinely, Kimbrell advises. As you pay down loans, you’ll invariably be faced with a hefty tax bill. Think long-term about the benefits of not having those payments.

Manage Family Expenses. Identify areas in your personal budget where living expenses can be cut back or held steady. When commodity prices pick back up, resist the temptation to outsize those expenses and you’ll have more liquidity for down times.

Even Debt-Free Farmers Can Benefit From Lenders

It makes good financial sense for some producers to operate without debt, acknowledges Vince Bailey, vice president credit and ag lending at Farm Credit Mid-America, which has headquarters in Louisville, Ky. At the same time, a good lender can provide sound financial guidance to farmers, meaning it’s important for producers to foster relationships. 

Lenders Can Provide Benchmarking. Go through your finances with a local lender. Although not all ratios will apply if you have no debt, Bailey says, you could learn more about your company’s financial health than you would by doing an independent analysis on your own.  

Lenders Expedite Growth. If an unexpected opportunity to buy a chunk of land or invest in a side business presents itself—and you find yourself in need of financing—an existing relationship can substantially speed up the timeline of the transaction, Bailey says. 

Lenders Add Structure. Farmers who have worked with a lender in the past have a deeper appreciation for the institution’s guidelines about borrowing. By extension, the lender has more knowledge of the farm operation and its capacity to manage any financial responsibilities.

Some Level of Debt Can Provide Discipline. Some people without debt might find themselves tempted to take cash revenue and put it toward living expenses or non-income-producing assets. Those with manageable debt can add valuable assets and equity to the business.


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Spell Check

Western, NE
1/24/2017 04:40 PM

  I paid all of my debt to zero when prices soared. I'm all dryland and consistent yields would be nirvana to me. I paid the taxes, built up a cash reserve, forgoed buying new machinery, and kept close tabs on expenses. Most important though, keep very thorough financial records in case you need to borrow for a capital item or operating money should the need or an opportunity arise. My only regret, (hindsight is always 20/20) is that I didn't seize an opportunity to buy 1,280 more acres in 2004.

aberdeen, SD
1/24/2017 06:49 PM

  I have operated my business which includes ag land debt free since the 80's. I like the smaller risk no debt gives me and have learned over the decades not to waste money on myself and be happier wisely giving to good ground causes. With that said i still have a growing standard of living and if i can not beat the returns of the vanguard 500 index i just invest more in that. I also keep a large cash balance so i can sleep better at night and know my checks will still clear even in a depression but hope to never experiance one.

aberdeen, SD
1/24/2017 07:02 PM

  Remember George Washington said nothing is more dangerous than excessive debt and he saw up close the horrors of war.


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