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Post by garyfunk on Mar 31, 2021 20:42:57 GMT -6
I have no problem whatsoever with using someone else's money to make a profit. The notion that borrowing to buy a depreciable asset is any different than using one's own money (that has an opportunity cost btw) is false IMO. If the purchase makes economic sense then it shouldn't matter if you use your own money or someone else's (I've done both).
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Post by SWMan on Mar 31, 2021 21:32:45 GMT -6
I have no problem whatsoever with using someone else's money to make a profit. The notion that borrowing to buy a depreciable asset is any different than using one's own money (that has an opportunity cost btw) is false IMO. If the purchase makes economic sense then it shouldn't matter if you use your own money or someone else's (I've done both). I won't argue that some level of debt is useful to get ahead in farming, especially when interest rates have been pretty low in recent years. I guess the discussion basically boils down to the level of debt one is comfortable with. I am assuming that most farmers have land debt(if you don't you probably can easily handle some machinery debt), so also holding debt on equipment could be asking for trouble given crop failure/interest rate increase/deflationary event... I guess what I'm saying is often good dirt costs what it costs, you have to pay to play the game. Equipment is something that can be done on a shoestring budget, even today. When I started farming we ran older tractors, old airseeder, I put fert on for a long time with a chisel plow that cost me $2500, pull type sprayer, we did all our own fixing except engine and A/C repairs, etc. When I needed a high-clearance sprayer I bought a used Hy-Trux(look it up, it was a pickup on a steel frame with a sprayer mounted) for 25K and it paid for itself in one year by spraying Tilt on our wheat. We've all been to auction sales where they couldn't give a 20 year old piece away, some of those still work fine. Yeah I get the whole thing about doing it the hard way and wearing yourself out, my knees wish I had bought a nicer stonepicker way before I did. But the money is made on farm management, not on the type of equipment you run. I've ran a ton of new stuff too, it has problems as well. I do know that it takes capital and it will eat your capital no matter what. At least with land you usually have an asset that is generally worth more as time goes by.
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Post by kenmb on Mar 31, 2021 22:53:25 GMT -6
I don't think there is a discussion needed regarding debt. There are no rules to follow. When things pencil out, they pencil out. It's no more complicated. But this ties into what I said earlier - if taking on debt involves anything to do with a calculated net worth, or for addressing depreciation and thus taxation then I beleive that debt needs to be rethought.
Again, net worth is a fictitious number. It only exists at that moment in time and can change dramatically over a few years regardless of what you did. Inflation, high interest rates, new tax scheme, sever drought can all impact your net worth. Yet all your assets,the equipment you own, the buildings, everything are still the same. So why would someone consider net worth as a relevant reference.
So if a person takes on debt without regard to net worth calculation, and it pencils out, then I don't see how it is an issue. We can take a manufacturing plant as an example where you have a fixed operation capable of producing a certain amount of revenue and thus profit. But you have the customers who will give you more orders but you are maxed out in capacity. Either you stay the size you are or expand with debt. And the expansion does depreciate because it is a building with equipment. I would expand. What I would caution is someone who is taking on debt to expand, and the added business revenue is not quite making the numbers work but says the building is a capital asset that is always increasing in value and so that is your ultimate deciding factor. And then 5 years later that does not hold true.
There is always good debt. But it should pencil out based on real numbers. Penciling it out solely based on inflation making the numbers work may be a risk. The problem with high inflation to justify some asset purchases is they will require that much more wealth or debt to be obtained by someone else to purchase at the future price. So if it does not cash flow now to justify without including asset inflation, how does it cash flow for the future guy.
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Post by Oatking on Apr 1, 2021 8:12:32 GMT -6
The only caution to ignoring depreciation is the fact if you wait to long you have lost the ability to upgrade. I know guys who will never be able to buy a new pick up at todays prices. New pickups at 60 to 80 grand vs a trade in at 5 puts alot of people out of that league of ownership.
This topic is the toughest for young guys entering farming now. I dont know how they will start from scratch or even take over dads farm. For most of us old guys who have put in the lean years in our younger days have been able to reap a good living.
I am on my home stretch farming and have been thru some pretty tough years, that felt like i was spinning my wheels. Its really nice to be able to afford some nice equipment to make my job more efficient. The last year was probably the most enjoyable in 25 years.
Point is , living within your means and good management and you will be rewarded later in life. If you are aggressive to expand than there is nothing wrong with borrowing smart money to move the business forward. Basically know your limits and than push them to your comfortable limit.
I don t consider net worth a fictitious number Kenmb, I get your point though and can appreciate where you are coming from, but I considered net worth or debt equity ratio as a measuring stick to my success over time. It is interesting net worth combines cash decisions, inflation, depreciation, asset appreciation you name it , all into one number each year. Banks love it because its a snap shot of your business year in and year out.
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ltk
Junior Member
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Post by ltk on Apr 1, 2021 8:41:57 GMT -6
The only caution to ignoring depreciation is the fact if you wait to long you have lost the ability to upgrade. I know guys who will never be able to buy a new pick up at todays prices. New pickups at 60 to 80 grand vs a trade in at 5 puts alot of people out of that league of ownership. That is true IF you feel you have to have "new". Last year I "upgraded" my 2003 Dodge dually diesel with 520,000KM and bought a 2010 Dodge dually diesel. My "new" truck had 107,000 KM, had a REALLY nice deck on it but came with the original box, new tires and batteries, the leather seats had never been sat in (seat covers since new), has an espar engine heater as well as an espar cab heater (the original owner did not like to idle his stuff unnecessarily) and had already been deleted. The truck was mint and cost $36,000CAD. The same model new would have been $90,000. IMO, the truck I bought had the same (perhaps more) intrinsic value than the new one at almost 1/3 the price. The reason I say "perhaps more" is that the truck I bought has less emissions stuff to go wrong. Even still I feel a little guilty since there was nothing wrong with the '03 (which I begrudgingly sold for $5500CAD). When it come to anything with a motor, I just can't see the value in buying new. The cost is too high and the reliability is just not there.
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ltk
Junior Member
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Post by ltk on Apr 1, 2021 8:54:18 GMT -6
My rule of thumb has been to "Never borrow money to buy a depreciable asset". Some may remember I had that as my signature on the old forum for awhile, but it triggered a lot of guys so I got rid of it. I do feel it makes sense though. I agree with that sentiment when it comes to pleasure items, cars, trucks, boats, trailers, sleds, SXS etc. However, when it comes to an item that MAKES you money, I see no reason to wait until you can pay cash, in fact, if the numbers work you should NOT wait but, rather, borrow and get making money. However, IMO it is unwise to borrow to the hilt and especially unwise to KEEP your debt level to the hilt. Not only are you spending a lot on interest (even though the rates are low right now) but, what happens is that when a truly spectacular deal comes along, you are in no position to take advantage of it. For this reason I believe that debt should be kept to a minimum and retired asap. The real bargains come along on the heals of a disasterous year in farming and it is those that manage their debt well (keeping debt low) that take advantage of it. That is why the rich get richer and the poor get poorer.
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Post by snapper22 on Apr 1, 2021 10:14:53 GMT -6
I've read that before somewhere about that guy spouting off about old stuff costing money to sit there, like Torriem said, was depreciated out years ago and as NVW said, worth more every day. Other that some stuff I bought for parts or just to have, most of my older hardly used stuff is worth more today that when I bought it. I liken advice like that as typical that we get all too often from ag groups and more, its from people who went broke and or couldn't do it on their own, but now those of us that do know how to do it, are supposed to pay them to "tell" us how to do it proper to qualify for things like the sustainable beef designation and such. Perfect example is that loser Steve Kenyon with Gateway Research Group out of Westlock, and is also a common contributor to the Cattlemen magazine. F'ck me, even the SPCA has a file on him and he's supposedly some pasture and cattle "guru"...yea right. Ask any of his neighbors around Busby So true. Around here local reserves have/had cattle operations and as typical they hire a white guy to run them. Problem always is they hire windbag know it alls and hucksters who could f’ck up a free lunch. The result is always the same with eventual failure of the enterprise. One earth was run the same as well.
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Post by kenmb on Apr 1, 2021 10:47:33 GMT -6
I get what you are saying Oatking so this is more for others: networth is something banks love to see. But a guy needs to work for himself, and not for what the banks want to see. Assets add to networth, but then there seems to be a saying that goes "don't let assets become your liabilities". Is this even possible? I would say yes. I can give many examples, but will give the easiest one most can relate to.
Dad had a great net worth when he bought land in 1982. Land always goes up so his networth was going to increase. It was baked in the cake. Banks even said so. Sign here. And what happened in a couple years? Land stopped going up, eventually was cut in half over the next 20 some years. How is that possible? And what happened to the networth? It didn't fair so well. And that newly acquired asset now was a liability because the debt was still there but the networth was down dramatically.
Basically dad found himself way over extended. All because networth said all is well. It was tough times for many years on the farm because land and networth no longer went up. Yet it was the exact same farm with all the same components from 5 years earlier.
Net worth can change. It's a fictional number. If it didn't change then I couldn't call it fictional as it would therefore need to be considered legitimate.
Right now we are looking at governments policies of increasing taxes and also the talk of higher interest rates in a economy where guys honestly can't pencil out the purchase of new land based on revenue, they only justify it by saying "it will always go up". This is dangerous thinking. Of course grain prices of the last 6 months change the numbers. Once again showing things change.
I can't say it will happen. But I will say with 100% surety that it has happened already. And managing based on net worth is a dangerous idea because it is making assumptions that just are not true. No matter how many times people say it is fact does not make it true. 25 years is a long time to run a business when burnt by the idea land always goes up and therefore net worth also.
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crtoney
New Member
Farming, Ranching and Fixing Kitty Litter SK
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Post by crtoney on Apr 1, 2021 11:42:44 GMT -6
The right equipment makes you money the wrong equipment costs you $. The right equipment could be brand new or 40-50 years old. Some of my equipment is worth more on paper than when I bought it. Other pieces I’d rather not think about what they’re worth. Balancing cash flow is paramount. I owe a ton of $ but also hit reset in 2015. Slowly but surely I’ll get out of debt. My banker and accountant say I’m in not such bad of shape. I have other views. I think that’s a good thing.
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ltk
Junior Member
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Post by ltk on Apr 1, 2021 12:18:43 GMT -6
I get what you are saying Oatking so this is more for others: networth is something banks love to see. But a guy needs to work for himself, and not for what the banks want to see. Assets add to networth, but then there seems to be a saying that goes "don't let assets become your liabilities". Is this even possible? I would say yes. I can give many examples, but will give the easiest one most can relate to. Dad had a great net worth when he bought land in 1982. Land always goes up so his networth was going to increase. It was baked in the cake. Banks even said so. Sign here. And what happened in a couple years? Land stopped going up, eventually was cut in half over the next 20 some years. How is that possible? And what happened to the networth? It didn't fair so well. And that newly acquired asset now was a liability because the debt was still there but the networth was down dramatically. Basically dad found himself way over extended. All because networth said all is well. It was tough times for many years on the farm because land and networth no longer went up. Yet it was the exact same farm with all the same components from 5 years earlier. Net worth can change. It's a fictional number. If it didn't change then I couldn't call it fictional as it would therefore need to be considered legitimate. It's like the people that got into BRE-X stock early then rode it to the top. On paper they were uber rich but unless they cashed out, it was, as you suggest a fictional number. Most rode it right into the basement and lost bigtime. "Net worth" only counts when you cash out. Until then it is kind of meaningless.
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BJT
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Post by BJT on Apr 1, 2021 16:12:06 GMT -6
Networth matters the day you sell out and retire.
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Post by torriem on Apr 1, 2021 17:50:05 GMT -6
Yes it's true machines do wear out and if you cut your margins too fine when they are done you can't afford to replace the equipment. Happened to several of my neighbors. And if you plan to pass the farm onto a new generation, the state of the machinery and their future is something to consider. When I was young my Uncle farmed very frugally. His machines were old and his kids hated driving them and at the time none of them wanted to farm when they grew up. We farmed frugally too, but my dad wanted to have quality machines (he dreamed of John Deere tractors). We slowly bought nicer and more powerful machines and having a level of comfort as well as reliability did provide impetus for my brothers and I to farm. Now I must be old because I see very little that's offered by trading machines at this point. Our combines have remained nearly identical through the last 4 machines. New tractors have more screens! I guess that counts for something
Definitely we're struggling to know when to replace combines, for example. I think we can rebuild most of the wear parts easily enough, although the vertical unloading auger seems like a nasty job.
If interest rates rose even a little bit, that could really change the calculus across the industry. Cheap debt seems to be a part of the economy now, but surely near zero (or negative) rates are not sustainable. Seems like we're robbing the savings of the older generations to pay for it. Banker told us that he has numerous farmer clients who could not survive even a 1% rise in interest rates. Pretty sure it was 1%. That's pretty scary. But he assured us the rates would stay low for years to come. ha.
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Post by Oatking on Apr 2, 2021 8:29:54 GMT -6
Hey that 1% interest rise is not just a burden to farmers. On a much bigger scale is all the city folks with six hundred thousand to over one million dollar homes who would suffer major fiscal pain. I think farm debt in land is smart debt because you are earning an income from it and also I always consider equipment as an extra perk when crop earnings justify it.
Kenmb what are your thoughts on debt to equity ratio.? Through out my farming career I have always used this ratio in my farm plan. When I started farming the ratio was .9. Very high debt?yikes! But over the 25 years I have watched it plummet to .13 and bounce around .25 to .3 when I bought more expensive land. But the key point , IS THE RATIO rose because of land debt not from combines or semi truckspurchases. If I could go back in time I would of told my younger self to be more bullish on land and farm with cheap equipment. Although that said, An excellent air drill or disc drill is the smartest equipment to sink your big bucks into.! The funny thing, those wernt available back then! he he!
The guys in this thread are good mangers and have to be to have survived all these years. No one farm is the same and that is what makes individual attitudes to finances so interesting. We sure have it good compared to our grandfathers, although I am sure they thought they had it pretty good when they brought home a new cockshutt tractor!
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Post by kenmb on Apr 2, 2021 12:26:08 GMT -6
I think it all comes down to what pencils out. But do the math without using depreciation and net worth as main components of the calculation. Net worth is a variable. And depreciation is simply a way to hide reality.
I don't mind debt. And I won't say there is a rule for a good or bad debt to equity ratio. I gave my dad's experience on that matter. That is a real life story. A debt to equity ratio can change very drastically in a matter of a couple of years. When living in a rising inflation economy then you can probably run a debt to equity of 1.1 debt to 1 equity. Because inflation says your equity will always increase. In a deflationary scenario I would say 0.5:1 is too much. Because once your equity starts to fall, the bottom on everything falls pretty darn fast. And when your outlet is to sell to someone else who is being subjected to the exact same market forces then you find you can't even sell for what you think is fair market value for the day. A lot of land around here rented out just to pay taxes in the early 90s. No sale after listing for a few years. That hurts your debt to equity ratio when you can't unload debt and your equity continues to fall. As I say, net worth is a variable. And assets can become liabilities.
We have been conditioned to an inflationary economy for 10 years now. Suppose you live through 15 years of deflationary next. Yes, I know it will never happen. People will always be able to borrow more as prices keep inflating and once interest rates are 0% to maximize debt, the next logical step is to pay people to borrow which will keep land going up in price. Of course, we could see a situation where central banks make a "policy mistake" and stop buying debt and so that means cheap interest loans end. Who wants to buy a zombie companies debt for 4% return when they have no business model to even generate a profit to pay their interest to you. If central banks don't buy the crap, who does. And if no one does, the step is offer 8% pay back to buy your crap debt. Because you probably can't pay your loan obligations at 8% if you can't at 4% but maybe a sucker will take your debt at 8%.
Yes, interest rates can go up. Otherwise the alternative is to demand central banks keep buying more junk loans/debt, pump more currency into the system, and blow the bubble bigger. This is exactly what everyone is hoping and betting on. The funny thing is, when you actually think about it - it's not a good thing to hope for.
It's why I say to pay attention to your numbers. Don't assume things. Understand what is a variable. And understand what numbers are meaningless. And then simply work with a pencil and a piece of paper. Because assumptions and experts saying "that will never happen", have been wrong before. 25 years a paying for that belief here.
Honestly, we are in a hole that is impossible to get out of. Something will change. For good or bad remains to be seen. But I am pretty sure net worth will be shown as a variable. Up or down is the unknown.
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