COLUMN ONE : Victims to Victors in Farming : Like many, Bob Schmidt lost his holdings in the 1980s but won them back at a fire-sale price. Meanwhile, lenders who abandoned agriculture are in their worst shape ever.

To his surprise, Bob Schmidt now realizes there are details he cannot easily recall about recent years.

The sequence of events, the numbing meetings with bankers and lawyers and relatives, the loud auctions and final notices, the tearful hugs in empty fields, have become a blur. Even the most critical dates remain fuzzy--when the family learned the bankers were pulling the plug, when exactly they lost their 1,572-acre farm, when they moved into town. The spring of 1985 is the best Schmidt can offer for one event. Or the summer of 1985. Or the fall of 1985.

“You know . . . “ he says. Then he pauses. Schmidt, 45, is an unhurried talker with a soothing, nearly hypnotic, tone. His words flow so slowly that his teen-age daughter, Sarah, swears it takes her dad a weekend to deliver a sentence. The effect can seem either mellow or withholding, but both impressions mislead. Soon a deliberate grin full of corked intensity takes hold, spreads, deepens. “It just amazes me,” he finally continues. “There are so many blank spots in my memory.”

It does not really matter to him. Schmidt’s halting efforts to recollect, after all, are taking place as he lounges at dusk on the porch of his farmhouse here in the rolling hills of western Rice County, about 50 miles south of Minneapolis. Before him is a comforting sight--a 1,005-acre farm that last year produced 6,000 hogs, 30,000 bushels of corn, $850,000 in revenue and more than $100,000 in operating profit. Upstairs, on the desk in his office, sit plans for a $200,000 expansion that would almost double hog production.

The story Bob Schmidt is telling only partly concerns how he and his family lost their farm. It is also about how they won it back, at a fire-sale price, from the very lenders who pulled the plug on them four years before. The Schmidts now own most of their original land but carry a mortgage only one-quarter as large.

Such a tale is not all that rare in this part of the country. Lenders who called in loans during the great agricultural depression of the mid-1980s often found themselves saddled with hundreds of farms they could not sell. Watching the value of their holdings tumble unchecked, faced with calving cows and feeding hogs, the lenders soon were eager to sell the farms back to their previous owners at cut-rate prices, usually after the families had worked the farms rent-free for up to two years. Almost 30% of the dispossessed farms sold by the Farm Credit System in 1987 in Minnesota went to the farmers who’d lost them.

Some of those perceived as victims five years ago, in other words, have emerged as victors. After four good years in a row, the farm economy once again is healthy, despite a recent cooling caused by a decline in grain prices. Livestock prices are high, land values have rebounded and the average profit last year of farmers in southern Minnesota was up one-third, to more than $62,000. Meanwhile, the financial institutions that called in farmers’ loans are in worse shape than ever. The places the lenders put their money when they retreated from agriculture--the bond market and commercial real estate--have proved far more disastrous investments than farmland.

People in the rural Midwest, as a result, can’t help chuckling a bit these days. Even though the farmers who aggressively expanded weren’t blameless victims, even though agriculture was overextended, there are plenty in this region who still don’t think the lenders’ ways made much sense. Why didn’t banks just restructure loans and ride out the bad times, they ask, instead of selling farms at 10 cents on the dollar? Didn’t they sort of panic? For that matter, aren’t they doing exactly that again by dumping all those shopping centers and office buildings?

Whatever the answers to those questions, on one point everyone agrees: The lenders took a shellacking, more so than some farmers.

“In reality, this was good for us,” said crop farmer Charles Born, a neighbor of the Schmidts who lost land mortgaged at $2,000 an acre, then bought it back at $300 an acre. “We would have been willing to keep paying at $2,000 an acre. It was the right thing to do. But the lenders wouldn’t let us . . . . The thing is, they jumped when the feller went to the gun closet, not when he got out the gun.”

Thinking back now, talking of the past or reading yellowing minutes of his family farm corporation’s annual meetings, Bob Schmidt sometimes flinches. There were good reasons for the rapid expansion and heavy debt burden, he tells himself. But still, certain decisions haunt him. They’d started in 1969, after all, by buying just 200 acres of land for $40,000 cash.

They weren’t even farmers then. Schmidt’s father, Robert D. Schmidt, was a highly paid executive at Control Data who’d grown up on a Minnesota farm and always dreamed of retiring to one. Bob Schmidt was a newly married English literature major at the University of Minnesota whose wife, Sheri, worked as a systems programmer at Univac. Bob had attended high school in Southern California, worked odd jobs at Paradise Cove and rode the surf at Malibu before reluctantly leaving the beach when his father was transferred to Minnesota. When asked his goals, he talked of being a teacher, but that was just something to say. He did not know.

One day in the fall of 1968 the senior Schmidt invited the family to visit a plot of land he was thinking of buying in southern Minnesota. Bob Schmidt thought the place was beautiful.

That he’d been on a farm only twice before in his life no doubt colored his judgment. In truth, the farm they were inspecting was something of a mess. The land was what agricultural bankers politely call “marginal”--rugged, hilly, full of clay. Those gentle slopes climbing to thick stands of maple and oak were lullingly pretty, but they didn’t easily accommodate the bulky machinery needed to cultivate, plant and harvest.

Still, it was cheap. Schmidt’s father, looking around, thought of walnut orchards, beef cattle and tax writeoffs. Bob Schmidt thought of reinventing himself. Escrow closed on Jan. 17, 1969.

Times were changing in agriculture just then. Old boys who’d run small dairy farms all their lives, working 30 cows and putting the milk cans out on the road every night for pickup, were selling their land and getting out. Why not, they figured, what with people like the Schmidts paying $200 an acre for land they’d always valued at $100.

Tempting offers to sell soon came from neighbors, and within months the Schmidts’ holdings had grown to 885 acres. “We had decided to do a little farming,” Bob Schmidt recalled much later. “It was outrageous. Over 800 acres, and still we barely knew what dirt looked like.”

Schmidt rode along in a tractor with a neighboring farmer, picking his brain. With Sheri, he enrolled in a local vocational school’s farm-management program. They read textbooks, attended agricultural functions, studied computer analyses. By the end of that first summer, Schmidt had decided he wasn’t going back to school.

To farmers just then, the future looked limitless. International markets were ballooning--the Communist Bloc had opened its doors to American farm products, drought-stricken developing countries had turned to the United States for food and the Richard M. Nixon Administration had devalued the dollar, making American farm goods cheaper for foreign customers. The secretary of agriculture, Earl L. Butz, had encouraged farmers to “plant fence row to fence row” to feed the world. U.S. farm exports, $8 billion in 1971, were beginning a rapid climb that would reach $43.8 billion within a decade. Bob Schmidt had caught a perfect wave.

The early 1970s were a blur of work. Schmidt’s uncle, Mike Weltsch, joined the operation, as did his two younger brothers, Bill and Peter, their wives, Wendy and Robin, their sister, Susan, and her husband, Steve Jedlund. The family formed a farm corporation named Tal Bauernhof--German for “farmhouse in the valley”--with Bob Schmidt as general manager. They bought Black Angus calves and started a beef operation. They bought sows and started a pig-finishing operation. They planted soybeans, corn and hay for feed. They increased their cattle herd to more than 500 head and started crossbreeding. They installed three 70-foot-tall silos and built a cattle-feeding facility.

They bought more land, including the 120-acre Vranek farm, which at $792 an acre for the first time did not come cheaply. At 1,225 acres and $300,000 in revenues, Tal Bauernhof by 1975 was among the largest farms in the county.

The farm wasn’t making a profit, but with all the cost of expansion and improvement, the Schmidts were not greatly alarmed. A new mortgage with Travelers Insurance and a short-term line of credit with First Bank Minneapolis kept the cash flowing, while Schmidt’s father took the losses as tax writeoffs and poured his hefty bonuses into further expansion.

In 1979 Schmidt decided to double the annual corn yield and move into the cash grain market. A year later, he doubled the hog production with construction of a state-of-the-art modular hog barn.

By now, land was not at all cheap, but it looked to be going only higher. So the Schmidts bought the 192-acre Dalby farm for just over $1,042 an acre, then the 155-acre Bottke farm for $1,700 an acre. Then they leased 500 more acres on a three-year contract. To work the new land, they leased equipment--a combine, two tractors, a plow, a cultivator, a planter--in deals that carried floating interest rates.

Schmidt shakes his head thinking about it all now. “We were going big time,” he said.

However, they were still not realizing a profit, and for good reason. Over time, the family had built a sizable debt as they rolled more and more of their expansion costs into short- and long-term loans. A $664,000 mortgage and $360,000 short-term debt in 1979 had grown by 1984 to $1.4 million and $1.2 million, respectively. Meanwhile, interest rates, fueled by the federal government’s budget deficit and credit crunch, had ballooned--at one point Schmidt found himself paying 24% for leased equipment.

The Schmidts’ interest bill was $37,000 in 1975 and $115,000 in 1979. By 1982, including leased equipment, it was $400,000. A year later, it was $585,000. Such payments easily swallowed what otherwise would have been operating profits. On revenues of $900,000 in 1982, the farm lost $167,000. On revenues of $823,000 in 1983, the farm lost $503,000.

If such figures suggested a certain lack of control, even a recklessness, they also reflected a not-uncommon business strategy during the farm boom. The losses were largely on paper, after all--with tax writeoffs, the senior Schmidt essentially was channeling his considerable income from Control Data into an ever-appreciating farm rather than sending it to the government. That’s how the game was played, however unwisely.

“The Schmidt cash flow was tight and they were aggressive, but they weren’t all that different from others,” said Mike Taets, then a First Bank Minneapolis assistant vice president and one of the Schmidts’ loan officers, now an executive at a bank holding company. “In fact, without doubt they weren’t among the worst. They weren’t as leveraged as some.”

In the Schmidts’ case, as with most farmers, neither the lenders nor the borrowers were looking at profits; rather, they were gambling that rising land values would make them all money. With an appraised value in 1984 of $5.68 million and a debt of $2.79 million, Tal Bauernhof’s asset-to-debt ratio looked good to everyone involved.

“When you’re in the middle of a farm economy that’s going gangbusters, and everyone else is paying out more, those kinds of things start to multiply,” said David Guimond, then a First Bank Minneapolis vice president and another of the Schmidts’ loan officers, now a vice president at the regional stock brokerage Piper, Jaffray & Hopwood. “You loan on land value. Two years later, you look like an idiot because land values have fallen. You’re asked, ‘You dumb stick, how could you do that?’ But as you’re going through it, you just lend.”

By the early 1980s the risky game played by both farmers and lenders had started to blow up in their faces. International markets were drying up, due in varying degree to President Jimmy Carter’s 1980 grain embargo of the Soviet Union, increased competition from farmers abroad, tightening credit to underdeveloped countries and the rising value of the dollar. Meanwhile, on the domestic scene, federal tax cuts without corresponding spending reductions were creating a growing budget deficit and mushrooming interest rates. For farmers, the cost of doing business was rising just as commodity prices were falling.

Still, to the Schmidts, relatively isolated on their 1,500 acres in southern Minnesota, these problems felt distant, even as late as 1984.

“There was lots of talk in the press, but we didn’t have the context of what was happening in the overall economy,” Schmidt said. “We were in the middle of it, not looking at it later from the sidelines. Those going down around us, we thought of them as bad farmers, poor managers. It was not our problem.”

They’d nearly halved their losses and interest burden from the previous year, and they’d been honored as Minnesota’s Commercial Beef Producers of the Year, so Schmidt believed they were on the upswing. As late as October of 1984, he was even thinking of buying another farm near Onatonka, a 1,000-acre beauty for $3 million. Schmidt had not a clue how they’d pay for it, but he was working on his projections.

Given such aggressive optimism in the face of deteriorating conditions, it is hard for many to feel unqualified sympathy for the Schmidts, or view them as blameless. There are those in southern Minnesota, in fact, who say farmers who expanded too fast were “foolhardy” and “irrational.” Even the Schmidts at times call some of their actions in those days “stupid.”

But they also believe there were legitimate reasons for their general approach, if not for each particular decision.

“Some are angry at people like us,” Schmidt said. “But if you don’t grow, you’re going to get buried, in time. There’s the economies of scale, the need to produce at the least cost. Our situation revolved around my dad’s income and the tax situation in that era. We were improving the farm, riding up appreciation and also expecting eventually to make a profit. We were making all our payments. We were never late. What we were doing all made sense.”

Whatever the judgment on this issue, this much seems clear--the Schmidts were playing by the same rules they and their lenders together had always observed and sanctioned. They were, that is, until their lenders decided they no longer wanted to play.

In February of 1984, Bob Schmidt placed a phone call to Mark Blake, his contact at Travelers, to discuss the $1.2-million balloon payment coming due when their 15-year mortgage expired at the end of the year. Blake was reassuring, but told Schmidt to call back later in the year.

When Schmidt phoned again in late September, Blake once more put him off. Schmidt sensed a problem but set it aside, for it was now time to renew his short-term line of credit at First Bank. In mid-October, Schmidt drove to downtown Minneapolis to make the annual presentation to his loan officer. Not Guimond, but the younger Taets, one year on the job, was then handling their farm account.

“I gave him the projections,” Schmidt recalled. “It was not much different from past years. Mark seemed positive. ‘I got to take it to the committee, but I don’t see any problems,’ he told me. I thought it was a done deal.”

Schmidt returned to his farming. A week passed without the banker calling, then another, then a third. Finally, Schmidt called Taets. “I’m kind of surprised I haven’t heard from you,” Schmidt said. “Is there some kind of problem?”

Taets apologized for not getting back to him. As a matter of fact, he said, yes, there was a problem. He’d been trying to solve it. That’s why Schmidt hadn’t heard from him. But he hadn’t had any luck.

“What’s the problem?”

“Well,” Taets said, “you have to find another bank.”

Schmidt digested the news in silence.

“What the hell are you talking about?” he said finally. “Find another bank? How the hell are we going to find another bank? Are you calling our loans or what?”

“Actually,” Taets said, “the powers that be are closing the bank’s entire agricultural loan department. They think all you farmers should be banking out in the country. They don’t want to have an ag business here downtown. They want to be in other things.”

“How much time do I have?” Schmidt asked.

“All I can tell you is, you don’t want to be around here by next June,” Taets said. Then he hesitated. “Don’t let this screw up your deal with Travelers,” he added.

“No, man,” Schmidt said. “I’m sure it won’t bother Travelers at all that we no longer have a line of credit.”

Schmidt soon enough would learn what did or did not bother his mortgage holder. Just two weeks later, Mark Blake finally appeared at the Schmidts’ farm to talk about the balloon payment coming due at year’s end. With him was a stranger named Ross House, introduced as a “Travelers farm manager.”

They sat in the farmhouse living room, Schmidt across the table from Blake, House off to the side on a couch, saying nothing. Blake began outlining the requirements for renewal of the mortgage. There will be an $800 application fee, he began.

Why? Schmidt asked. All we’re doing is rolling over a loan, not seeking a new one.

Well, it’s not just a rollover, Blake said.

That’s what you told me, Schmidt said. Just a rollover.

Looking back later, he had trouble recalling just what else was said that day and what was said later, on the phone, in the following weeks. What he did remember was that Blake kept coming back at him with more requirements.

First the interest rate was to be raised from 10% to 13%. Then it was to be 13 3/4%. There would be a $12,000 origination fee. Then there would also be a 3% forfeitable deposit up front. By now, they were up to $48,800 in payments before even getting the loan, which would come at an unworkable rate anyway.

“Well, Mark,” Schmidt said one day, after hearing the terms revised for a third time, “it sounds like what you are telling me is, you want to own the farm. . . . Now what would you do with my farm?”

This was no idle question. He could not fathom Travelers’ intent, or First Bank’s. For legal reasons, no one was directly telling them, “No, you can’t have a loan.” They were just making it impossible to take the loan. But what was the point? Did they really want the land? Why?

Years would pass before Schmidt would fully come to understand that the lenders were retreating not from him, but from agriculture.

There’d been plenty of pullbacks by lenders since the start of the decade, but when the country’s farm income suddenly dropped 64% in 1984, the concerns deepened, and for good reason. Given falling commodity prices, even if farmers were making payments now, projections suggested that some couldn’t in the future. With rising interest rates, the debt burden alone threatened to devour operating profits. Agricultural land no longer looked valuable to lenders or buyers, nor farming profitable. As a result, appraisals for farms, machinery and livestock plummeted, and loans soon were worth less than the collateral.

“From the bank’s perspective, land prices were down, cattle prices down, hog prices down, expenses up,” said Guimond. “How can you sell the same product and still expect to repay the loan?”

First Bank was closing out not only the Schmidts’ loan, nor a single downtown agriculture department. The parent corporation, First Bank System, was aiming to sell 28 banks in four Midwestern states, one-third of the banks it owned, as a means to halve its loans to farmers.

Other sectors of the economy simply looked much more alluring. Between 1982 and 1984, First Bank System had added more than $1.3 billion to its syndicated loans, which feed large corporations’ credit lines. Led by its president, Dennis Evans, a shining star from the capital markets, it had also started betting on interest rates by building what in time would become an $8-billion bond portfolio.

“My own impression was that some less profitable areas of the bank were thought to be non-useful,” said Guimond. “We were told if there’s even a whisper that a farm loan might go bad, let’s get rid of it. That didn’t necessarily mean only farmers who were missing payments. It also could mean those who don’t show they can pay back in their cash flow. They weren’t separating out those with alternate incomes or security. They just wanted out of agriculture.”

Travelers, meanwhile, was moving heavily into the commercial real estate market. Hotels, apartment buildings and shopping centers beckoned, particularly in the booming Southwest.

“The staggered signals Schmidt was getting from Travelers were the result of several layers of bureaucracy,” said Ross House, the curiously silent Travelers farm manager, who is now self-employed in a farm-management business. “The borrower tends to see conspiracy, but Travelers simply wanted out of agriculture. If Schmidt was only one problem, we could agree to rewrite. But the Schmidts were one of thousands.”

The Schmidts could not accept the terms of the new mortgage Travelers was offering and could not find another bank to provide the short-term credit First Bank was withdrawing. The turnaround had been stunningly rapid. In mid-October the Schmidts had been talking about buying another 1,000 acres. By the first week in December, they were talking about handing over their farm to Travelers Insurance, their equipment and livestock to First Bank. On March 20, 1985, they decided they had no other alternative.

That day, Bob Schmidt drove to downtown Minneapolis to report the decision. “There is no way we can get financing,” he began, sitting across from Taets and Guimond at a First Bank conference table. “We don’t like it, but we have to face it. So I’ve come to turn over all the assets. We’ll help liquidate. But you can’t just dump everything. It will take time.”

Schmidt looked at his bankers. Taets seemed to be taking the news pretty coolly, but Guimond looked sick. Schmidt hadn’t quite expected that.

Driving home that night, Schmidt avoided the city and the interstate. He wound south on country roads lightly dusted with snow, passing through Chaska, Shakopee, New Prague, heading south with no precise route. He could not recall ever feeling worse in his life.

Negotiations over how to proceed dragged on all that spring and summer. The Schmidts proposed to stretch the liquidation and reduction of debt over five years while they leased and worked the land. But Travelers wanted two years at the most. Then the Schmidts proposed to avoid official foreclosure by handing over a deed to the farm and leasing the farm back for two years. Travelers never would commit. “We were standing there trying to shove a $55,000 lease payment at them and they wouldn’t take it,” Schmidt recalled.

First Bank proved no more accommodating about the livestock and machinery. It just didn’t make sense to Schmidt to auction off everything right away, since there was no one out there with money to spend on cattle and combines.

“In effect, you’re writing off the debt to 200 strangers,” Schmidt vainly argued to First Bank’s officers. “Why not write it down to us instead? Why write it down to 200 strangers? That’s what’s going to happen. You’re going to get 25 cents on the dollar.”

Schmidt was proved wrong about that. The equipment auction in August yielded closer to 10 cents on the dollar. The cattle auction in September, advertised as a select production sale of breeding stock, brought in just about what they would have gotten if they’d shipped the cattle directly to a commercial auction house.

Days later, Travelers officially rejected the offer of the Schmidts’ deed. The formal foreclosure notice arrived in November. One night that month, Bob and Sheri walked far into a field that was once full of corn, and was now stubble, to watch the moon rising huge in the sky. Hugging each other and crying, they decided to give up the fight.

Soon after, Bob took a job at Ballistivet, a fledgling company he’d invested in two years before that was trying to market biodegradable medical pellets for animals. He began commuting to the company’s office in the St. Paul suburb of White Bear Lake, and crisscrossing the country to promote its product.

The next June, the Schmidts made the break with the farm complete when they bought a house in White Bear Lake. A month later, Sheri found a job in St. Paul at an industrial graphics manufacturer. In August, they moved to their new home.

That was quite a day. Four pickups and a cattle truck full of the Schmidts’ belongings and friends rolled through their new suburban neighborhood. After everything had been unloaded, the Schmidts and their friends gathered over beers in the back yard. Bob slouched in his chair, studying the fence that marked the boundary of his new home. He was no longer a farmer. That part of his life was over.

“God,” he said. “I hate this place.”

Times researcher Nina Green contributed to this story.