resilient farmer

---

MASTER YOUR MARGINS

HABITS OF A FINANCIALLY

RESILIENT FARMER

A creative business plan helps Iowa grower identify enterprises that strengthen his operation’s financial health. BY BA R B BAY LO R A N D E R S O N PH OTO S BY M A R K TA D E

Iowa farmer Billie Danner added center-pivot irrigation to increase his investment return.

ÒW

ork in progress” is how West Liberty, Iowa, farmer Billie Danner describes his operation. But, one thing is certain: Danner isn’t afraid to get creative with his business plan. He works through the kinks and is open to new opportunities that might improve his return on investment (ROI). Danner farms 3,000 acres of corn and soybeans, and feeds hogs on contract. He has three full-time employees and hires seasonal part-time workers, as needed. About two-thirds of his acreage is planted to corn and the remainder to soybeans. He raises primarily non-GMO crops to take advantage of the premiums and has produced seed, waxy and white corn in the past. WRITE A BUSINESS PLAN. “Six years ago, I did not have a business plan. I started working with FamilyFarms Group, and they have become kind of my personal trainer. They hold me accountable to ‘exercise,’ and that helps me run the farm more as a business with specific goals,” he says. Danner relies on the group’s employee handbook and human resources to help manage staff. He also appreciates the Historical Performance Analysis (HPA) that is completed with his records each year to measure key fi nancial metrics. The HPA is a snapshot

20

t h e p r o g r e s s i v e fa r m e r / m i d - N o v e m b e r 2 018

of his fi nancials and compares the critical figures on his farm to suggested thresholds and benchmarks. “My lender is impressed with the HPA. It is all on one page, and it is easy to see where my money is going. It has five-year trends that show my strengths and weaknesses,” he says. During recent economically lean years, Danner has tried to curb expenses and boost income. For example, he stopped trading in machinery to keep capital expenses down. And, he continues to aggressively price anticipated production in what he describes as “base hits, not home runs. “I scatter grain sales throughout the year based on my cost of production. I try and sell a third of the crop before I even plant it and cover my yield with crop insurance,” he explains. “I am not afraid to sell [grain] two to three years out, and the $50- to $150-per-acre premiums increase my profit potential.” OPPORTUNITY KNOCKS. Danner also has taken steps to bolster his future financial resiliency. “If ROI looks good on an opportunity, I will try it,” he says. “My daughter would like to come back to the farm after she finishes college, so we are adding another [2,480-head-feeder-pigto-finish] barn this fall.” Danner evaluated what his returns would be over 20 years with a full barn against the cost for the building— ▶

▶ MASTER YOUR MARGINS

Master your Margins his own money and borrowed money—and maintenance of the building. He did the same for his decision to add seven solarpower systems to the farm, anticipating a high ROI once the equipment cost is covered. He also added irrigation in 2013. “That was a high-profit year. I looked back at the last 20 years of corn production and felt 14 of them would have paid under irrigation,” he says. “Irrigation is a hidden secret on good fertile ground. I can get more aggressive with inputs, use the manure from the hogs and consistently grow 280- to 300-bushel corn. Disease and green snap are still threats, but it has worked so well, I will likely add irrigation to more acres once the commodity-price situation improves.” STRONG FINANCIAL HABITS. Danner’s approach to financial resiliency is not unlike the farmer profile defined in the “Habits of Financially Resilient Farms” research completed last year at the University of Illinois. Led by ag economist Gary Schnitkey, the team explored Illinois Farm Business Farm Management client financial records (2010–2012 and 2014–1016) to determine whether it’s possible for farmers to be successful consistently across time, even when returns are volatile. While the conclusions are not surprising—farms earning higher returns typically do so through a combination of higher revenues and lower costs— digging into the data provides further insight. “Farms earning higher returns do so with bigger yields, higher prices and lower costs across all categories. Devoting time to management decisions related to input use for the most profitable yield and having appropriately sized, well-maintained machinery tend to stand out as most consistent with higher return farms,” says Nick Paulson, University of Illinois ag and consumer economist and one of the research investigators. Paulson says when prices are higher, more of a gap exists between farmers, because more marketing opportunities exist. When prices are low, there is more of a gap on the cost side for fertilizer, seed, herbicides and pesticides. Machinery is maintained not purchased. “Finding creative solutions to decrease input prices is one way to help manage profit when revenue sources are down,” adds Joleen Hadrich, University of Minnesota Extension economist. “Peer groups have shown to be successful in allowing farmers to benchmark their production and/ or financial ratios. Through this process, they may Billie Danner says a find other ways to business plan, which he didn’t have six years ago, improve efficiency or has helped him operate decrease cost to help with specific goals. their bottom line.” 22

t h e p r o g r e s s i v e fa r m e r / m i d - N o v e m b e r 2 018

Paulson adds resilient farmers seem to have a more conservative approach with income in high-profit years and will lower debt before they purchase more land. “They are less aggressive and maintain a better financial position,” he says. “Age and experience also affect approach.” FOCUS ON FINANCIAL FUTURE. From a nuts-and-bolts financial position, Brent Ditmars, regional vice president, Farm Credit Mid-America, encourages farmers seeking more resiliency to develop an operational strategy that provides padding for shrinking margins and to look for ways to improve farm longevity. He expects farmers will continue to cope with leaner margins and tighter liquidity in the short-term. “If your operation has real estate loans on variable or adjustable products, convert or refinance those into long-term fixed rates. With a relatively flat yield curve, ▶

▶ master your margins

Stay the Course Into 2019 Farmers who were able to lock in profitable prices during the spring-crop rally may be in better financial shape than others in 2018. Tariff wars have since played a role in moving many commodity prices lower, which has had a significant impact on profitability, notes Sam Funk, formerly with Rabobank. “Trade is the big factor to continue to watch,” he says. “U.S. farmers are good at what they do and will produce more than we need domestically with another big crop in 2018. We have to have exports to meet the world’s needs. Farm policy will have the market’s attention into 2019.” Funk anticipates formulating strategies for cash-flow to plant the 2019 crop will be challenging. “Look ahead to 2019 harvest futures contracts, and start watching now to lock in prices. They could provide early opportunities if trade recovers,” he says. “You are always better off locking in part of your crop in a risk-management program so you are not forced to sell for cash-flow.”

Master your Margins

afraid “toI amsellnot[grain]

farmers have an opportunity to pay a minimal premium to lock in long-term rates,” Ditmars says. “Interest rates are projected to rise as the U.S. economy continues its recovery after bottoming out in 2009.” Ditmars further suggests – B il l i e Da n n e r farmers take time to examine breakevens on a per-unit basis to ensure they are marketing crops with confidence if prices are relatively flat or in decline. “Capital assets not being maximized hurt efficiency,” he continues. “Those dollars could be utilized elsewhere, such as for reducing debt or investing in an asset with a higher rate of return. Work with your lender to ensure your operation’s debt is structured appropriately for today’s margins. A balance sheet structure that worked when margins were wider may not work today.” Hadrich stresses open communication with lenders and consultants is vital for financial success during lean years. She recommends farmers identify threshold levels for financial ratios where conversations should be held. For example, identify a Profile of a Financially Resilient Farmer liquidity threshold to trigger a meeting with the lender What sets a resilient farmer apart from other growers? or an equity position the team is willing to use to get According to University of Illinois analysis, financially through tougher times. resilient farmers’ priorities, in order of importance, are: “Having a target plan and a contingency plan is ▶ Pay attention to detail. important. Every farm has a different overall goal. Being ▶ Manage operating costs. nimble and adjusting to current market conditions tends ▶ Maximize yields. to be the main skill that allows farms to be successful ▶ Be disciplined in spending. when commodity prices are low,” she says. ▶ Use new technology. “We do a lot of out-of-the-box thinking,” Danner explains. “We are looking at a scenario where we Financial resiliency also requires you to: ▶ Consider using less corn-intensive rotations than neighbors. might try to dramatically increase our acreage and ▶ Know time is money, and devote time to management add more labor and equipment. If the numbers are there on rent, I want to expand acres. If not, I will decisions on input use. ▶ Be willing to shop and use multiple input suppliers. enhance the acres we have. Consolidation with other ▶ Have the right equipment only for the operation, and farmers is another option for more buying and selling leverage. I am not sure I like that idea, but you can’t maintain its condition. ▶ Plant value-added crops for seed or non-GMO, in addition fight what might work best for making sure you can continue to farm.” ⦁ to commodity crops.

two to three years out.

”

24

t h e p r o g r e s s i v e fa r m e r / m i d - N o v e m b e r 2 018

▶ master your margins