Dunno if I’m in the wrong forum, so admins can move ad lib, not that they wouldn’t, just sayin’ sorry in advance if I’m wrong.
So, I’m watching CNBC at the oil change place (because I don’t at home) as the bailout passes, and the wall street/main street cliche gets kicked around as it usually does and they bring up how the drying up of credit is a critical problem, particularly for ranchers, who only bring their product to market once a year.
I was kinda floored. I’m guessing I had carefully formed the preconception that the only people who lived on day to day credit were profligate townies, or people who’d overreached themselves with their mortgage, and a little belt tightening and fiscal responsibility would be a good thing that might even help the financial crisis we’re in.
So I’m asking for the assembled wisdom of Dopers, is ranching and farming, by definition, run on credit, with the hope of a major windfall at the end of the season, to payoff principal, interest, and leave a profit?
Because, if so, I’d expect fewer members of congress acting all snide with regard to the bailout (yeah, I’ll keep using that loaded term, don’t feel like typing in the bill’s entire name) than there are. I’d expect large group representing ranchers and farmers to be really concerned about drying up credit, and to have tried to influence the congress more in favor of a bailout. But the soundbites I’d heard didn’t seem to bear that out.
I don’t know about ranchers in particular, but LOTS of small businesses rely heavily on business loans to get them through the lean times of the year. It’s not rare at all for businesses to borrow to meet payroll, for example. It’s not a sign of a weak business per se; it’s simply that the flow of a business may have peaks and valleys, and you can’t just lay off all your workers because you happen to be in a valley (but the next peak is just 3 weeks away. People don’t take kindly to being told to wait 3 weeks for their paycheck).
Rumor has it that in my small town two business have closed because of the credit crisis - a plumbing & heating place that’s been around forever, and a coffee shop.
Exactly so, except “hope of a major windfall” is not so applicable a term.
A farmer or rancher does have only one or a very few paydays each year. He does, however, have a reasonable expectation of income and knows, within market fluctuation, what that income will be. All that assumes the weather cooperates.
Agricultural lenders know this and it’s a accepted way of life for farmers to operate/live off of credit and make their agreed payments at the end of their crop year.
Once one of my fellow students in an agricultural production class asked what’s the best thing a farmer could have. The prof replied: “A wife with a job in the courthouse”.
I agree. In just about any business, there will be a mismatch between receipts and expenditures. To deal with this problem, you need either a line of credit or a ton of cash lying around (“working capital”).
It’s not like a regular job where you get a paycheck every week or two and you pay your bills once or twice a month.
I suppose the problem is more pronounced for agricultural businesses, since receipts are presumably concentrated around harvest time.
It’s great if you have enough cash lying around to finance your business, but most people have to borrow.
I don’t know about now, but when my dad was a kid all small farmers ran on credit. How else were you going to make it? You bought seed and stuff on credit and hope to hell your crop is good and nobody else’s is. I assume it’s still like that, since one of the selling points mentioned by my CSA is that since people pay up front for the produce it frees them from some of that credit burden.
It’s my impression that small-scale farming and even more small-scale ranching are simply terrible businesses to get into. You have to do an enormous amount of work for rather small profits.
I’m not an expert, but it seems to me it would depend on how much you pay for your land. Perhaps the problem is that farming is seen by many as a romantic business, much like restaurants and country inns. So many people overpay for farmland, country inns, and restaurant space and end up getting little or no return on their investment.
I own a small business. Initially, I knew nothing about running a business (I still know very little). When, at the end of my first year in business I had a bunch of cash in the business’ account, I thought I was doing great. Then my accountant told me I needed to do something with that money, or risk tax consequences.
So, I made some improvements in the business, spending much of my cash “pillow”. I still don’t really understand why I can’t just have a cash reserve year to year.
> I’m not an expert, but it seems to me it would depend on how much you pay for
> your land. Perhaps the problem is that farming is seen by many as a romantic
> business, much like restaurants and country inns. So many people overpay for
> farmland, country inns, and restaurant space and end up getting little or no
> return on their investment.
Perhaps there are people somewhere who think of farming and ranching as romantic and go into it for that reason, but I don’t know anyone like that. Most of the small-scale farmers and ranchers are the sons of farmers and ranchers. Their fathers were able to make a living at it, so they decided to try to do so also. After a few years they discovered what a terrible job it was. People go into the jobs they know, even if those jobs are no longer profitable.
Here’s a question for you (and I don’t know the answer): Suppose that somebody handed you a decent-sized chunk of prime farmland. So you will be able to run a farm without any mortgage payment. Would you be able to make a decent living?
Back when I was farming, which is certainly not romantic, more like stoop labor in the hot sun, the joke was, “What would a farmer do if he won $10,000,000 in the lottery?” Answer, “He’d just keep farming until it was gone.” The big agribusinesses make money, the family farms struggle year after year. If you have a bumper crop, so does everyone else, and prices fall, if prices are high, it’s because nobody has a decent crop, just like you. I sure got out of it as soon as I could.
It’s the nature of business (and I’m not making a pun on farming) is that you grow or die. So the farmer/rancher/small businessman reaches the point where they have some cash laying around. At that point it’s probably wiser to invest in needed equipment or improvements that will improve the efficiency and productivity (and hopefully the profits) of the business. The next season they can go back and get the loan or tap the credit line to start the cycle again. Credit fuels business.
Wow. Um. I’m as naive now, as you were then. I live my life like brazil84 described – bi-weekly pay, monthly expenses, and a large enough back account balance to pay a couple months rent.
OK, so the whole world can’t exist and run a business in like manner. Fine. But a tax punishment for deigning to keep a cash cushion for your business? I’m just flabbergasted, it’s like if we don’t enter the morass of bad credit, we’re doing it wrong, and must be stopped. I may never be able to read the financial news the same way again.
Agriculture has lumpy cash flows (long streams of outflows, with one or two inflows). It often makes most sense to even out the flows by using credit lines. There is nothing profilgate about using credit to even out cash flows, in fact good money managers use credit lines all the time, as it usually inefficient to site on a year’s cash reserve, in liquid cash. The "vetbridge poster probably misunderstood his tax advisor.
Nobody ever said that taxes were easy or made sense.
Basically money sitting in your company is tax free. If it gets paid out as salary it gets taxed. If you accumulate too much the tax man looks at you funny, as he wants some of your money.
If you have a valid business purpose for the money, no problem. An example of this might be; I am saving up for the down payment on a building for my business. On the other hand, if you have a big pile of cash with no purpose in mind, the tax man will want some.
Please note that farmers and ranchers aren’t the only operations that need to operate for periods on credit while they await receipts. The State of California is afraid it cannot obtain its annual short-term loans that cover the part of the fiscal year before the Xmas season sales tax receipts, followed by the April income tax receipts, flow in. They are asking the federal government for up to $7 Billion in credit so that they can issue the short term notes they annually issue to cover their obligations (including a semi-annual payment to schools this month in the billions of dollars) until they get cash-rich early next year.
Right, this makes sense. Assuming that you are a small proprietorship, accumulating a large amount of cash that sits in the business make raise suspicions - quite legit on the part of the Gov - that you are evading tax by using the business as a cash account for personal usage. Of course if one has a good reason, and can show that one is not mixing personal and business expenditure, well then one should be in less of a spot.
> Here’s a question for you (and I don’t know the answer): Suppose that somebody
> handed you a decent-sized chunk of prime farmland. So you will be able to run a farm
> without any mortgage payment. Would you be able to make a decent living?
I will speak here of grain farming, since that’s the sort of farm I grew up on. Well, first of all, it would have to be at least 300 acres. Perhaps one could make an acceptable living on it. In any case, neither I nor any of my seven brothers and sisters live on a farm now. We know how poor a living it is.
Ahhh, but that pile o’ cash, to me, is security. I don’t want to be in a position where I am borrowing to meet payroll in case of some slow time or a downspiral in the general economy. The tax code doesn’t understand this, jsut as I do not understand the tax code.
As much as I enjoy what I do, if I had it to do over again, I’d be working for someone else.