Monday, May 14, 2007

Prosperity choices...

I have been speaking about "Prosperity For Dummies - managing success after a long layoff" since January at the Top Producer Seminar. Economist Bill Edwards at Iowa State has been entertaining similar thoughts. We came to different conclusions.

His remarks are insightful to me because they seem ( with one exception) to be the same advice most ag economists have been giving my whole career. After acknowledging the financial reality of higher grain prices and pointing out farm equity positions are in the best shape in decades his primary advice:

Pay down debt. Which leads to the question, are there any circumstances when extension advisers would suggest we take on debt? Boy, if not now, when? Let's fact it - ag economists are dogmatically against using borrowed capital.

And many farmers agree, which is a good thing. These farmers, in my opinion will be less competitive in the rush to control land by rent or purchase, for one thing. And as I have been predicting for some time that explosion is just beginning.

Interest rates are historically low, debt service income looks more solid than I have seen, and the rewards to ownership (not operating) are huge and growing. Moreover, every piece of land I have purchased in the last 20 years failed the "cash flow test" (whatever that means).

Had I not ignored such stern advice to avoid debt, my farm would be much smaller and my equity drastically less. Risk aversion in hard times is one thing. Risk aversion in good times will leave you trailing the pack.

I note the standard call to avoid cash rent leases - good luck with that!

And as for his advice on the kitchen, I think he has it backwards. No other investment impacts every day more than that room. I would spend my first dollar there. It is not a luxury - auto-steer is a luxury.

Consider investing to improve happiness, not just a balance sheet.

[via Farmgate]

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