Consumer Electronics Show 2021 - John Deere gets a couple of "Worst in Show" awards

[CalG]

Perspective on farming and finance.

Two of my cousins run "Gandpa's farm" in the Dakotas. It's grown some from the couple of sections it was.

Two years ago it took $6 million to start the season. Assets exceed that, or the bankers would never do the deal.

 

[Hay Dude]

Hey I have no idea how much crop farmers are making….hence the entire premise of the question. Just seems as this “technology” drives up the cost of equipment considerably….there has to be enough incentive to keep it going.

It does and I do not see the benefits of new equipment from my operation. I balance between ”almost obsolete” and new, which of course leave a lot of choices in between. Theres a lot of clean efficient equipment out there with a lot of its depreciation paid for by someone else, BUT no warranty and repairs at any time.
Some debt is fine and it allows expansion into more opportunities. If I took away my “other” income, my farm income wouldnt get it done for MY needs. I like the challenge of paying off pieces while theyre still healthy and making money from them “debt free”. Theres good money in custom mowing. Virtually nobody does that kind of thing anymore, so I seized on that opportunity. CX-15’s paid off quickly and still mowing strong. Its complimentary to haying, anyway.
IMO, it’s the BIG repairs that are the killer, not moderate size monthly payments at low single digit interest rates on used equipment. My farming finance company kicks me back a very nice patronage check for my business.

 

[plowhog]

Let's say I need to make an equipment purchase and I could either spend cash or get a 2% loan (simplifying). However, using that cash in other places (marketing, supply purchases, investments) would make 5-6% then I am making more money than I would save by not having the loan.

You don't know this is true until: a) the loan has run its course, b) the investments have done the same. Until then, its only a "projection" of a better return by using debt to increase your leverage.

 

[Torvy]

My best information on a large operation is my cousin's ranch in the Black Hills. 1000+ head of cattle and hay and crops to supplement. They burn the equipment candle at both ends. Like Hay Dude, they have a lot of old equipment and the skills to keep it running. They also have some high tech new equipment like a GPS- equipped windrower. The debt helps to keep 'income' from being taxed. The ranch has been in their family for 150+ years. Without expenses to offset the revenue, the government would take most of their cash. On paper, an operation like theirs is worth many millions. The herd alone is worth upwards of $500k. It functions as an LLC, or rather, a group of LLCs. Since most of the herd is breeding stock, that means every year the revenue on cattle sales alone is $250k-$500k. Remember, though, that is revenue, not income. The complexity of a big operation like that would shock most people. They habe to plan ahead. That fancy windrower is more efficient than any of them at cutting. It also needs to last. Weather and markets make every year a new challenge. If they were not well diversified, they would have lost the ranch years ago. "Debt" allows them to actually sometimes do something besides run the ranch.

 

[RickB]

You don't know this is true until: a) the loan has run its course, b) the investments have done the same. Until then, its only a "projection" of a better return by using debt to increase your leverage.

The meek and unsure typically carry less debt than the bold and confident. The windshield is always larger than the mirror.

 

[Torvy]

You don't know this is true until: a) the loan has run its course, b) the investments have done the same. Until then, its only a "projection" of a better return by using debt to increase your leverage.

Maybe. The loan rate is fixed. The rate of return is fairly predictable despite hand wringing to the contrary. The average rate of return in the market over the past 50 years is about 10%. If anything, his numbers are fairly conservative.

 

[Hay Dude]

Hoping you could explain a bit in more detail. I understand that a publicly-traded company keeps debt to offset cash on hand to keep others from buying out the shares and then taking the money and killing off the company. How does debt help a private company or small farm?

Keeping it simple, heres one simple example that happened with me.
I was a small timer 15 years ago, making hay and doing construction. Had tractors and hay equipment. One day, a conservancy that allowed me to cut hay off their land, offered me an opportunity to mow hundreds of acres of other land every year with a large area (15/20’ bush hog). At the time, I owned only an 8’ bush hog. I borrowed $20K to buy my first CX-15 and made it all back in about 1.5years. Bought another and paid it off quickly, too.
Had I not used debt to buy a piece of equipment to mow their lands, a competitor would have stepped in in my place and the opportunity would be lost, probably forever. I did not have $20 grand at my disposal to buy the mower outright.
Since that day over 15 years ago, I have done field mowing for them with 2 paid off mowers at a cost of 1/10th of what I‘ve grossed. Now I have 20 customers who cut instead of hay. Thats an example of using debt to advance gross income way above and beyond the cost of debt.

 

[Hay Dude]

My best information on a large operation is my cousin's ranch in the Black Hills. 1000+ head of cattle and hay and crops to supplement. They burn the equipment candle at both ends. Like Hay Dude, they have a lot of old equipment and the skills to keep it running. They also have some high tech new equipment like a GPS- equipped windrower. The debt helps to keep 'income' from being taxed. The ranch has been in their family for 150+ years. Without expenses to offset the revenue, the government would take most of their cash. On paper, an operation like theirs is worth many millions. The herd alone is worth upwards of $500k. It functions as an LLC, or rather, a group of LLCs. Since most of the herd is breeding stock, that means every year the revenue on cattle sales alone is $250k-$500k. Remember, though, that is revenue, not income. The complexity of a big operation like that would shock most people. They habe to plan ahead. That fancy windrower is more efficient than any of them at cutting. It also needs to last. Weather and markets make every year a new challenge. If they were not well diversified, they would have lost the ranch years ago. "Debt" allows them to actually sometimes do something besides run the ranch.

I have a corporation and an LLC. One is AG and the other is “everything else”. I have to admit, theres no real “science”. Many times I wish I had a better “advisor”, but I‘m just self taught. I have a decent feel for what will work and what wont. I have off farm skills and that gives me an advantage over guys who refuse to do anything but farm.
Still hope to get out of construction completely and ride off as a 100% farmer/custom farmer/custom mowing contractor.

 

[SgtSluggo]

You don't know this is true until: a) the loan has run its course, b) the investments have done the same. Until then, its only a "projection" of a better return by using debt to increase your leverage

Yes, that is true, but it is also a thing that a good business has to predict. The point was to simplify it enough to show that any person or business might have a reason to take on more debt than they have to when conditions favor it.

 

[ovrszd]

Debt is a tool used by the vast majority of successful businesses. Why would anyone think being debt free would be a requirement for owning equipment of any kind?

Absolutely. My very large farmer good friend counsels me often because I'm debt free. He says I need to be using my debt free assets to pay for debted assets that I acquire. I really struggle with this.

An example, he's 68. He just bought an additional 500 acres of farmland. Financed on a 25yr loan.