Should You Pay Down Debt?

Look at your strategic plan first

Initially it seems right to take cash that you've generated as a result of sound decisions and pay down debt. Those who have been farming for decades and survived challenging times such as the 80's find this especially tempting.

Before making the trip to pay down debt there are some things you should consider.

First, take a look at your strategic plan. What is your long term goal, and how does paying off a specific note affect that goal? How would it leave your working capital? 

I've seen farmers in the pork industry during boom times go into the bank and pay off hog buildings. It was a good feeling at the time, taking that debt off the table. But a short while later when prices were lower and they needed the money again to pay for short term operating expenses, they went back to the bank where those paid-off hog houses didn't count for much. They had lost their value in terms of equity because of quickly-dropping pork prices.

On the other hand, growers who kept their working capital strong were able to weather the lower prices and were positioned better. It pays to think long term first.

Typically, paying down an operating note or pre-paying some expenses that are on the horizon would be a good place to start. If your working capital is strong, consult with an expert or do a feasibility study to be sure you make the best financial decision. If you're considering putting a dent in some longer terms loans, our ag finance experts recommend knowing the terms and interest rates of each loan. Again, think about your long term, strategic plan while you're doing this. If you anticipate buying more land in the future, the best decision might have you paying off a note that you could borrow against later, even if the interest rate isn't the highest.

Think outside of the box. With interest rates where they are right now, and as long as working capital is strong, take into consideration all of your investments. If you have a higher interest rate loan at the same time you have low-yield CDs, shuffling some finances may put you in a stronger position over all.

And finally - we always have to talk about taxes. We worked with a farmer recently who had some extra cash but wanted to keep his land note because of the ability to use that as a tax write-off. An analysis of the situation uncovered a surprise. The farmer was going to make more money paying off the note than keeping the tax write-off. 

The fact of the matter is, if you are not certain that you are making the best decision for your farm, seek professional advice to keep yourself in a strong financial position. Keep the strategic plan first.

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