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Serving: WI

Make a plan to deal with debt

TAGS: Finance
Fran O'Leary Holstein cows in a feedlot
DEALING WITH DEBT: Rainy-day funds likely need to be built back up after several years of low commodity prices. You want to have some breathing room so your farm can withstand future ups and downs.
Agrivision: Farmers should look to increase profits by boosting productivity and reducing costs.

My son and I milk 225 cows and farm 300 acres in central Wisconsin. We have survived the past four years of low milk prices and this year’s volatility. We used all of the money we received in 2020 from different government sources to help pay down debt. We paid off more than $100,000 in debt. We still owe about $375,000, most of it from building a new milking parlor and freestall setup in 2014. We doubled our herd size from 110 cows to 225 cows.

We don’t think having this much debt is sustainable with low and volatile milk prices. Our goal is to pay our debt down to $200,000 by 2025. Do you think this is feasible? Our herd milks 80 pounds per cow per day. We are repairing equipment instead of replacing it, doing as much of our own vet work as possible, and breeding the bottom half of our herd to beef bulls. We are selling week-old beef-cross calves for $100 to $125 each. We have four employees who work 30 hours each per week. I wonder if you think we are doing all we can to cut costs? Please advise.

Tom Kestell: Congratulations on your ability to use the various government subsidies to pay down debt. This is the year to be very aware of tax liabilities resulting from government assistance programs. It is difficult to pay down debt and not have tax liabilities, so plan wisely. Your current debt level should be sustainable, especially because it was incurred on major improvements. These improvements should give the added income to make this debt less burdensome.

On the other hand, debt is debt and a constant obligation for the farm to support in these turbulent times. The ability to pay down debt realizes on a commitment to do so. Any increase of production or lowering of costs can greatly enhance your debt reduction goals.

On almost all farms, feed is the largest expense, so targeting this area for improved efficiency in milk produced to dry matter intake consumed is the first area to look at. Reducing waste and making the most of homegrown forages also offers potential areas of improvement on most farms. It seems obvious, but look to the little things, such as daily maintenance to reduce costs and make funds available to reduce debt; grease and lubrication of equipment is always cheaper than replacing worn-out parts.

In closing, I think your realization that debt is a burden is the first step. Second, form a solid game plan, and third, execute that plan on how you plan to reduce debt. Lastly, do not be afraid to use borrowed money to your advantage. As an example: Borrowing money at 5% to get 10% or 15% discounts on inputs is a moneymaker and not a cost.

Sam Miller: Great job assessing your current financial position and outlining plans to put the business in a place to withstand milk price volatility going forward. Your goal of reducing term debt to $200,000 by 2025 would require about $5,000 monthly payments. This would equal about 5% of gross milk sales and should be manageable for the business.

Take your analysis a further step by reviewing the top three expenses — usually feed, labor and crop inputs — and seek ways to improve the bottom-line return. Lastly, I hope you purchased Dairy Margin Coverage through USDA to protect margins in the event that milk prices decline, feed prices increase, or both occur to compress margins. Setting goals, monitoring toward meeting these goals and making adjustments when necessary will lead to continued success for your business. Good luck with your analysis and plans.

Katie Wantoch: I’m glad to hear that the unexpected government program payments assisted you in paying down debt in 2020. Paul Mitchell, professor of ag and applied economics at University of Wisconsin-Madison, says farmers should look to increase profits by increasing productivity and/or reducing costs. It sounds like you have made a decent effort regarding cost savings and have been putting off replacing machinery. Now might be the time to consider buying productive assets that generate rates of return exceeding the interest rate, if debt is taken on. You should consult with a tax professional before any purchases are made, since these may impact income and self-employment taxes.

I applaud you for setting a goal to pay down your debt. You should not continue paying interest on debt that is dragging on future farm profitability. Consider refinancing or consolidating any debt that you may have to lower your interest rates. However, I encourage you to have sufficient cash (working capital) for any unexpected costs or opportunities that may come along. This rainy-day fund needs to be built back up after several years of low commodity prices. You want to have some breathing room so your farm can withstand future ups and downs. Focus on replacing capital assets and increasing working capital for your farm business.

Farming full time

My wife and I farm 400 owned and 800 rented acres in south-central Wisconsin. We both also work part-time jobs. Our off-farm employment basically pays our family living expenses. We had excellent crops this year despite a dry August. We use our income from farming to pay down debt, replace old farm equipment, and buy seed and fertilizer for next year’s crop so we don’t have to borrow money for operating. We would like to rent an additional 300 acres and eliminate my wife’s off-farm employment. We have two kids, ages 8 and 5, and if she were able to be home, that would get rid of day care and allow me to work full time. I can schedule my vacation time in May and October and work overtime hours during winter months. Is there something we’re not considering? What are your thoughts?

Tom Kestell: Wow! It seems you and your wife are quite ambitious. I would caution you to not only look at the total number of acres you are running, but also the quality and profitability of the individual acres that make up your operation. I would be very cautious not to lower your standards for the additional 300 acres, just to acquire more land. Sometimes less is more.

Sit back and take a hard look at the profitability of the land you are now operating. Is it all profitable? Or is some of the land robbing from the bottom line? On the 1,200 acres you are now operating, can you make improvements on yield? Or better marketing of the crop? Can you reduce operating costs by making timely input purchases? Is there opportunity for a more precision-farming approach to increase yield and reduce costs? I think a hard look at the details of your operation could yield the extra benefits you are seeking so your wife can stay home and help take your operation to the next level.

After looking at all aspects of your present operation and finding them in good order, the addition of 300 acres can then be a real plus. As always, the devil is in the details, but that is always where we should start.

Sam Miller: Test your plans by completing a budget with the new plan. Consider how you are covered for health insurance or other benefits if one spouse will be leaving off-farm employment. I suggest both a partial budget for the increased acres and a comprehensive budget for the business as a whole. The partial budget will indicate what you can afford in terms of rent for the incremental 300 acres so you have a return equal to the lost income minus day-care costs for your wife’s employment. The total farm budget should consider the added wear and tear on equipment for taking on 25% more acres. Your banker, a farm technical college instructor or Extension agent can assist in completing these budgets. Good luck with your analysis.

Katie Wantoch: It sounds like you have done careful consideration for these changes to your family and farm business. I understand how part-time farming can feel like a full-time job, but I would caution you to take a few steps before going full speed ahead. Your next steps should be to develop a plan and write down how your current income and expenses will increase or decrease with this move to full-time farming. Hopefully this activity will match your initial thoughts and achieve the goals you have mentioned. Besides making a profit, what other goals do you have for your farm business? Good goals should be SMART: specific, measurable, achievable, realistic and timely.

Also, will you need to invest in capital assets to take on the additional acres? What other income and expenses do you need to account for with your new business plan? University of Wisconsin-Extension provides budget and benchmarking tools for farmers on the Farm Management website. Each farm situation varies, so take the time upfront to analyze your options and determine what might work best for you. Farming is a business and you want to ensure that this transition will be profitable for both your farm and your family. Good luck!

Agrivision panel: Tom Kestell, dairy farmer, Sheboygan County, Wis.; Sam Miller, managing director, group head of agricultural banking, BMO Harris Bank; and Katie Wantoch, Dunn County, Wis., Extension agricultural agent specializing in economic development. If you have questions you would like the panel to answer, send them to: Wisconsin Agriculturist, P.O. Box 236, Brandon, WI 53919; or email

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