Home Again: To Borrow?

We started small, thinking that was smart. We borrowed from family and friends and built up in small steps. Then we realized we needed to take a leap.

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To borrow or not to borrow.

This month, we watched  “Sweet Land,” a film set in post-World War I Minnesota. The main characters are an austere Norwegian farmer, his mail-order German bride and the blithe farmer next door. 

But, the real main character is the land on which these farmers make their living.

The climax of the film comes when a slick, fat banker auctions off the neighbor’s farm. After the auctioneer finishes with taking bids for the baby’s crib — seriously, and that isn’t the only overdone part of the movie, but I digress — he moves on to the property itself. 

As other people start to bid up the land, Olaf, the Norwegian farmer still dirty from his corn harvest, steps up. He wins the land with a $7,000 bid. Then he tells the banker he doesn’t have the money. The banker says he knows a way to make it all work. 

“A mortgage,” Olaf says. The banker nods. 

Olaf says resolutely, as he has several other times in the film, “Banking and farming don’t mix.” 

Two years ago, when we were first getting this whole farm thing together, my husband had a brilliant idea. We had no money with which to start this farm and we had no assets with which to leverage capital for said farm. 

In the movie Sweet Land, Olaf (Tim Guinee above), still dirty from his corn harvest, wins the bid on some land being sold at auction. They he realizes he must talk to the banker about a mortgage.
What we did have was a whole lot of people pulling for us to make this thing a go. So, how about we leverage that? 

We asked a handful of friends and family for a loan and a small group gave us enough to get rolling. We will pay them all back in three years time with three percent interest. They get a better return than they could in say, a CD, and we pay less than we would at a bank. 

Plus, we have a group of investors who advise us, cheer us on and generally belong to a community that supports us.

On top of that, we have more than 60 people who subscribe to our various community supported agriculture programs (CSAs), which give us start-up capital each spring for seed, poults, irrigation equipment and the like. 

For two years, this system has been great to us. Investors are happy. CSA shareholders are happy. We are doing just dandy as community supported farmers. 

We’ve learned, however, that of all of this can only get us so far and we’ve been thinking that it might be time for us to go to the bank.

We’ve been leasing about 20 acres – just enough for a vegetable CSA, for pasture for our turkeys and 15 acres of grains and lentils for a grain and seed CSA.

Now though, we’d like to expand the grains and we’d ideally like to at least start moving toward living on the land we’re farming. Commuting to a farm just doesn’t work – especially to the labor-intensive kind of farm we’re growing. 

The grain expansion means we need equipment and the living-on-the-land question, for a few reasons, means we will have to buy a piece of ground.

It all makes financial sense. The business plan works. But, it only works if we go to the bank.

That just terrifies me.

I grew up on a wheat and barley farm that trudged through the farm crisis of the 1980s. For a majority of my childhood, the kitchen table was buried in bills and on a regular basis my brother and I knew to get as far away from the house as possible if my parents were in the middle of “doing books.” 

The pressure of debt – of equipment loans, of operating loans, of land payments – was palpable in my family and every other family like mine spread across the American prairie.

We watched farms around us, mostly the small ones, but some big ones too, crumble under that pressure. I don’t know of anyone who had their baby’s crib auctioned off in front of them, but the sentiment was sure there.

In the ’70s, interest rates were low and expansion was necessary to compete in the commodity-driven agriculture economy. To make it, you had to get bigger — and to get bigger, you borrowed.

Money flowed and farms grew. Then, the bottom dropped out. 

And, while farmers learned valuable lessons from that crisis, it’s true that the modern farm economy still revolves around debt, for better or for worse.

Sometimes, banking and farming don’t mix and the ‘80s farm crisis is proof of that. Debt can prop up farms that maybe shouldn’t be propped up. It can make farmers spend beyond their means and bank on outcomes that aren’t reasonable. It can give a false sense of security in an insecure business. 

But, when it’s done right, debt can help a farmer rebound from that one bad year that would have ruined her and give her a new lease on life until the good years come along. 

For beginning farmers like us, without the capital on hand to get into the business, debt is necessary to give us the good start we need. 

If it weren’t for the banks that line the main streets of farm communities across the country, there wouldn’t be any farmers.

In a perfect world, we wouldn’t need an institutional loan to get our farm off the ground. The small friends and family loans and our sweat would be enough.  

But, I’ve watched too many entrepreneurs try to eke their way through and fail, partly because they were under-capitalized. Bootstrapping is one thing, but starving a business to death is another. 

I’ve been in both situations — the overleveraged farm and the under-capitalized business — and neither worked out too well. 

So while I’m terrified of taking on debt, I know that the other route can be just as risky.

We recently sat down with our neighborhood agricultural loan officer and mapped out things like cash flow, collateral and crop insurance. He’s just about the nicest guy in town, but isn’t afraid to tell us how bad things could be if things don’t go as planned.

The 2010 grain harvest. We grow our grains and various seeds (lentils, milk thistle, etc.) for a grain and seed CSA. This month, we delivered almost 100 pounds to each shareholder. Our CSAs give use much needed capital to get our season going, but now we’re needing to look at institutional loans to expand.

As we walked through those worst-case scenarios, I realized that it’s not the debt that’s scaring me, it’s what the debt means.

It’s been easy for me the last two years to think of our farm as an experiment, something we could walk away from. We’re young, educated, experienced people. Surely, we could find something else if this failed. 

In fact, in convincing me to farm years ago, my husband used just that argument to reassure me we would not end up where my parents ended up when my childhood farm faltered. 

So, I’ve held an escape route in the front of my mind. That ability to get out is what gave me permission to follow this folly. It allowed me to take all the small steps we’ve taken thus far.

It has also, however, kept me from taking big steps and that’s no way to start a business — or a life for that matter. 

It’s true that with each little decision — each seed put in the ground and each new customer signed up — marked another small commitment. Two years later, those have added up to a big obligation. But if all we ever take are those small risks, we’re never going to truly get where we want to go. 

So, when we were in the banker’s office this month, I had to remind myself that whether or not we take on this debt, we’re putting everything on the line. 

These loans would just be the means for the big leap – and if this is really what we want, it’s time we leapt.

Courtney Lowery Cowgill and her husband Jacob farm in Montana.

 

 

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