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Farming Without Debt
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Article by Raylene Nickel
Photos by Rick Mooney
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John Schaap remembers how his father struggled for years to pay off debt after buying a dairy farm. While his father faithfully made the payments on his debt, he lamented the interest he had to pay. "It's just like money gone when you have to pay interest," he would tell his son.
From his father's discomfort with interest payments, the son learned an early lesson that would pay him dividends in the future. When the time came for John and his like-minded wife, Eunice, to begin buying their own farmland, the two agreed to take on debt cautiously and pay it off as quickly as possible.
Initially, they did borrow money to buy 800 acres of prime land for growing corn and soybeans near Leota, Minnesota. Their plan was to be debt free in just 12 years or so. Then, with foresight as a backdrop, they followed their plan and worked to make that hope become reality. They paid off their last loan just fifteen years after beginning to buy land and farm equipment.
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John Schaap, Edgerton, Minnesota. |
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And they did it without winning the lottery. More realistically, they have applied a practical and methodical approach to managing money and running the farm profitably in order to earn the income needed to cover operating costs and pay down debt.
"We've never been afraid of debt," said Schaap. "But there's good debt, and there's bad debt. We've tried to stay away from the bad debt and pay off any debt as soon as possible. Our primary aim has always been to be debt free, and we reached that goal about six years ago."
Guided by two principles, they depended on their own discipline to prepare for major purchases: First, they saved money. Second, when money was short, they tightened their belts, carefully considering the necessity of each purchase they made.
Those twin practices helped them make the down payment on an automobile body shop business in Worthington, Minnesota, 37 years ago when John was just 23 years old and had a trade education under his belt, along with a couple years of employment in the body shop business.
John scouts his fields a minimum of once weekly during the growing season. |
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Money saved from the body shop business bought the Schaaps' first quarter of land 22 years ago. This cash land purchase provided a debt-free production base that helped them buy additional land in the years that followed. In Schaap's view, the wise use of off-farm income is the key to getting started in farming today, especially for someone who does not have the launching pad of a generational family farm.
"I don't think we'd have been able to get started without off-farm income," he said. "The extra (off-farm) income pays for family living needs so that income from the farm can be applied to land payments." Throughout all the years the Schaaps were paying off debt for land and equipment, they were using off-farm income to pay for family living costs. |
The foundation for the debt-management practices that carried them to a debt-free status rests on their determination to discern between "good" and "bad" debt. Buying land is good debt, in Schaap's approach. "Our way of thinking is that if we can buy a piece of ground and pay it off within five or seven years, we are investing in property that appreciates. But buying a new car or a new pickup, for instance, is a terrible investment, because these purchases depreciate rapidly."
Operating loans fall into the category of "bad" debt, in Schaap's view. He used income from his body shop to pay for the operating costs of his first year of farming his own land. After that, he saved money from farm income to cover the following year's operating expenses.
"Operating loans are terribly poor debt," he said. "Every fall I estimate what my costs will be for the next year and save that amount of money out of the income from the crop. That saves the interest we would otherwise have to pay for an operating loan."
Paying for operating costs without borrowing gives them more flexibility in marketing because when they don't have to meet a loan payment deadline they can hold on to their crops and market them when prices are higher.
Of course, earning enough income from crops to pay down land debt on a short term while also paying cash for operating costs assumes they will have a healthy annual income from crops. Nature and Schaap's farming practices have combined to make that happen– in 22 years of farming he has not had a single crop failure.
There is no doubt that some of this long-term success may have resulted from the relatively temperate region where he lives. Farmers and ranchers operating in areas frequented by floods, drought, heat, hailstorms, and grasshopper outbreaks will find it more difficult to earn and save enough money each year to service both operating and debt costs. To accomplish this, their methods of advance planning will, out of necessity, become more complex. Nevertheless, the principles he follows for cropping, marketing, and money management can work to an advantage for farmers everywhere. |
John Schaap with three of his eight grandchildren. |
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While the Schaaps have worked hard and planned wisely to stay out of debt, they acknowledge that they "have been unbelievably blessed." They express their gratitude and spiritual faith by routinely sharing 10 percent of their income with church and charities. They also share their time and labor by volunteering for a number of organizations.
Their spiritual focus strengthens their commitment to manage debt rather than allow debt to manage them. "We always thought that if we were to take on too much debt, it would control the way we live," said Schaap. "And life is not a rehearsal. It's the real thing. People should have the freedom to enjoy their work (and not be chained to debt)."
Debt Strategies
1. Purchase Inputs in Advance
Schaap begins each new cropping year by saving eight to nine percent on the purchase price of inputs such as seed, chemicals, and fertilizer by pre-paying for them in December. They cost less in winter than they do when purchased in spring.
He also buys tractor fuel in winter, when fuel prices are usually the lowest. "This past winter ('05) I filled up all my tractors and two 500-gallon tanks," he said. "I should be able to operate into summer before I have to buy more fuel. If the price spikes in the spring, I should have enough fuel on hand to ride through the price spike."
He also uses winter cash purchases of inputs and fuel to regulate his tax burden. He does a tax estimate in the fall and purchases inputs in a timeframe that best suits his tax obligations for the current and upcoming year.
2. Forward Contract
In most years, he markets the crop in advance of even planting it, by using forward contracting. He might sell, by forward contract, the coming season's soybeans in January for the price being quoted by the futures market for that year's crop. The forward contract locks in the price he will receive for the beans. By buying inputs in advance, he already knows his season's costs, so he can figure out what his profit will be before even planting the crop.
The potential downside of forward contracting is the risk of crop failure. Farmers who forward contract are obligated to fill that contract. If their own crop fails, they must purchase crop on the open market to fill the contract. To offset this risk, Schaap forward contracts only 60 percent of his crop. This, coupled with the fact he has never had a crop failure, enables him to get by without spending money on crop insurance.
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John Schaap and his wife, Eunice, going over books. Eunice manages the farm financial records. |
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He then watches the cash markets carefully to market the remaining 40 percent of his crop. "I believe I'm doing well if I sell it at a price that earns a profit and is in the top third of the (average) price range for that commodity," he said. "If I were to try to sell at the top of the market every year, I might sit on that grain for a long time."
3. Reduce Fertilizer Use
To save on the actual cost of production, Schaap will attempt to get by with reduced amounts of fertilizers. Soil tests determine how much fertilizer to apply, but he reduces the recommended amount by 10 percent. Crop yields have not suffered as a result.
4. Store Crops and Sell High
Schaap’s on-farm grain storage. |
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Schaap places even greater importance on the marketing of crops as a money-management tool. "It takes a whole year to grow a crop," he said. "I want to earn as much money as possible for that crop. In my experience, marketing can make the difference between being able to make a payment for land or equipment, and not being able to make that payment."
He has storage capacity on his farm to handle 36,000 bushels of corn and soybeans. This gives him the time and flexibility to market his crops when prices are high. With on-farm storage he is also saving the three cents a bushel per month that grain elevators typically charge for storage. |
5. Use Cost-Saving Tillage
To further reduce production costs, Schaap plans on experimenting with new tillage practices. He already uses reduced-tillage to help cover the soil with crop residue, reducing the risk of soil erosion from wind, a hazard in that part of Minnesota. But he hopes to reduce tillage even further, which will save fuel and provide even more protection for the soil.
With his present tillage system, he deep-tills his corn stubble each fall, ripping it with a disk ripper to a depth of 10 to 14 inches. The ripper loosens compacted soil while still leaving residue on the top. But deep-tilling uses a lot of fuel because it requires a lot of power.
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Timing seed purchases helps John trim his input costs. |
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Buying fuel in bulk is one of John’s strategies for keeping a lid on input costs |
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"This fall instead of deep-tilling the corn ground," he said, "I'm going to chop the stalks at combining and then just disk the field lightly after harvest. Disking uses much less fuel than deep-tilling. In the spring I usually till the field once with a cultivator and then plant the soybeans." He incorporates herbicide at the same time he cultivates.
The second experiment he plans to try would eliminate the field cultivation before planting soybeans in the spring. On one field he will plant soybeans directly into the fall disking on the previous year's standing cornstalks. To do it, he'll put heavier down-pressure springs on his soybean planter. "The price of diesel fuel just keeps going up," he said. "I'm hoping these changes will reduce my fuel costs."
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