Farming requires frequent evaluation and assessment. It forces you to be honest with yourself and your decisions. The story of two good friends illustrates the benefit of honest assessment in farming decisions.
John and Jim had been neighbors for most of their lives. They attended school together and for 35 years lived next door to each other. Their operation size was almost the same, each farming about 1,500 acres. They personally owned approximately 600 acres each. From an outside perspective, they both appeared to be successful.
However, there are some important differences between John and Jim’s operations. John had almost all his land paid for and had very little debt on his machinery. Jim, on the other hand, had purchased his land later in life and still had significant debt both on the land and on his line of machinery.
Every January through early March, John and Jim met on Tuesday mornings in Jim’s machine shed shop. They drank coffee and talked about management decisions they were considering. They also discussed politics, the world economy and everything related to farming. They really enjoyed their Tuesday morning discussions.
This year their meetings revolved around politics and African swine fever. In early February they started discussing the coronavirus and the state of the farm economy in general. As they spoke honestly about both of their operations, Jim was increasingly concerned about the lack of profit for the last four years. He worried about his banker’s attitude toward extending credit for the next crop year.
While John also borrowed money to put in his crop, his banker was not concerned because John paid off his operating note every year.
One Tuesday morning was different from the others. Jim was truly stressed and worried about his situation. On the shop wall was a large whiteboard. Jim and John wiped it clean and started writing 2020 predictions on the left-hand side.
The first few predictions were simple things. They predicted all of the land in their neighborhood and state would be planted to corn and beans. They predicted all of the hog buildings would be filled with hogs and most of the cattle feedlots would have cattle.
Next, they drew a line from the top to bottom and started a new section and listed things that could go wrong. There were three categories in this new area that included war, pestilence and drought. Both predicted there would not be a war in 2020. However, the pestilence or diseases had predictions of African swine fever and the coronavirus. They both agreed that African swine fever in the United States would cause a panic on the East and West coasts and no one would buy pork.
If swine fever killed a significant amount of hogs, it could have a serious impact on corn and bean prices. Perhaps there would be a hedging solution to defend against some of this.
Coronavirus was a much more difficult risk to evaluate. It posed a much bigger impact on the world economy and trade. It was hard to see how this would be a benefit to either Jim or John.
The possibility of drought was also difficult to predict. They both agreed that drought everywhere but their area would be a good thing for them. It did not seem that there could be marketing strategies to help them take advantage of a drought.
Next, they drew a line down the whiteboard and started the third and final section called “2020 Actions.” Jim pointed out he had not made much money in the last four years and he would need to do better. He was at a loss to know how we could change his operation. He had excellent yields the last four years and had done an average job of marketing. He had not purchased any new equipment.
Jim reviewed his other expenses. Each year his health insurance premium was almost $30,000. He and his wife did not live an extravagant lifestyle. Their family living was maybe $50,000. Over the last four years their operating note had increased by $40,000 a year. This was a problem.
John, on the other hand, had almost identical cash costs as Jim. The difference in the income and expenses was the amount of interest and principal required each year. John’s numbers were significantly smaller and he was easily able to pay off his operating note each year.
With the whiteboard now covered with three sections of information, both men had switched from coffee to Diet Pepsi. They sat and studied their work in silence. Five minutes went by, then 10, then 15. There was a fair amount of chair twisting, toes tapping on the floor, and arms behind the head with fingers interlocked, looking.
Jim was first to speak. What came out of his mouth was not particularly useful as he recited the old adage, “The rich get richer and the poor get poorer.
John looked at the white board and then suggested something Jim had not considered.
“I think you should sell the Smith farm,” John said.
He went on to explain that land prices are good now but have the potential to drop. The farm was not part of the family’s original land, and it was 5 miles from the rest of Jim’s property. There is significant equity in the land and so it could be sold and used to get rid of debt. Jim could eliminate either all of his operating note or some of the debt on his other land.
Jim sat quietly thinking about John’s suggestion. If the farm economy or world economy went down significantly and land values fell, Jim would be in a world of hurt almost overnight. It did not appear that anyone in his family was coming back to farm, so having a little less land would not hurt future generations.
There was another 15 minutes of silence as both men stared at the board, sipped on pop, and tapped their feet on the floor. Eventually they looked at the clock and realized it was time to end.
Over the next two weeks, Jim looked at the board and sat in his chair considering what his larger goals were. In March, the Smith farm sold to the highest bidder, who ended up being an investor. Jim then rented the land back. His debt was reduced, and life was better for him and his family.
In farming, we can choose to be accountable to ourselves or let others have power over us and be accountable to them. The choice is ours. We should always remember that land is a means to an end and not an end itself.
Bob Dunaway and Associates offer estate and retirement planning. Gary Johnson can be reached at 563-927-4554 or by emailing him at email@example.com