What To Do?

[farmers_son]

I noticed in the news today that “Japan's gross domestic product, or the total value of the nation's goods and services, dropped at an annual pace of 12.7 per cent in the fourth quarter of 2008, the government said Monday”

See:
http://www.cbc.ca/world/story/2009/02/16/clinton-japan-korea.html

It seems to me that we are living through the worst financial wreck that most people alive today have seen. It also seems to me that it would be very optimistic to believe it will not have an impact on our farm, in one way or another. But I am not sure just what that impact will be.

This is the time of year we do a lot of our planning for the rest of the year. Capital budgets, crop planning, decisions to expand or not to expand the herd and so no. There is a saying that those that fail to plan plan to fail. However I am seeing we have a train coming right at us and frankly I am pretty unsure what to do. Our farm has debt as most do and it may be a real interesting time to have to make debt repayments. I am mindful of the dramatic drop in commodity prices from their highs only a few months ago. They could drop more.

Is the world economic crisis impacting your farm and your decision making or is it pretty much business as usual?

[smcgrath76]

We are thinking in a similar manner FS. We have consolidated some loans and changed lenders to an interest only product and changed our payment timing, all with the idea of giving us added flexibility. We are busy working on fences and grass and are working on eliminating diesel from our strictly grass and cow operation. All of these moves are designed to reduce risk and add flexibility. We are trying to reduce the impact of commodity price fluctuations on our input side.
We are also working on rapidly improving our record keeping systems (easier, faster, more informative) among other things.
On the value added side we are trying to sort through some cooperative ventures (the packing plant investment is not going so well) however finding like minded guys is kind of difficult.
As well, we are sorting through some new types of contracts for grazing land that we rent.
We are in a good position of having a very low debt load, so now the goal really is cash management to gain flexibility. I am 95% sure that our future expansion will have very low levels of debt related funding.

[per]

We have already done much of what Sean has described. The train wreck will for sure cause hardship. The one part of our plan that we are counting on is we have moved assets to include much more off farm investment. This has been paying so far but will also depend on the economy to keep moving. There are going to be winners here but early recognition and action will be the hard part. If all the money completely disappears being in the food creation industry will at least give us bartering power.

[kato]

As far as I'm concerned we're involved in a train wreck that started almost six years ago. A wreck that just won't quit. We've been in paydown mode for a long time, and will keep to it for the foreseeable future.

As for expansion plans? No. But we will still keep on going at our present capacity, being very mindful of deciding between needs and wants. That being said, there is always opportunity in a downturn, so a person needs to keep an open mind if something comes along. Some of the best business moves we've ever made brought on comments like, "You're doing WHAT?" LOL.

There are some things we have going for us as a group that sets us aside from the general population. For one thing, everyone has to eat. For another, is it just me ... or have we not had any good times to drop back from? It seems that when the rest of the people we know are all rolling right along in prosperity, we, as a group, are on the outside looking in anyway. We seem to miss out on these so called boom times that everyone talks about. Therefore I don't think the drop off the high will be all that big of a deal for most in agriculture. It's not like we have to worry about losing the BMW, or the cottage at the lake or that trip to Paris. ;-)

Just think back to this time last year, when everyone was all over the news with talk of never ending rising corn prices, fuel so expensive that they were parking ships, and fertilizer that cost more than gold. And all they could talk about was how it was never going to come down again, and the sky was the limit to how high it could get. That was no fun either. To us, it seemed like there was no way to move, and profit was an impossible dream, because everything was going up except what we produced.

I felt a lot more worried last year, during the so called "good times" than I do now.

[PureCountry]

We're buying the rest of the farm from my folks, well below market value, many thanks to them. More debt I don't like at all right now, but it means seeding down another 450 acres, and utilizing 860 in total, that we didn't have last year. We need this land to enable us to graze longer, and cut out as much purchased feed as possible. The debt payments have to be made, so other things have got to go. $30-40,000/year for hay doesn't cut it. Pardon the pun.

We're downsizing the cowherd, and expanding into other things to compliment the direct marketing. Chickens and hogs will be on the agenda for spring, in order to have free-range eggs, pork and poultry on the price list mid-summer.

I've started brand inspecting for LIS 1-2 days/week, mostly out of curiosity. A buddy down the road got promoted, and they needed someone to fill in, so I'm having fun with it for now.

As for financial planning, I agree with F_S - he who fails to plan, plans to fail. I've never been good at planning admittedly, but I can see that I am going to have to learn from the wife and watch our pennies. My waist ain't all that big, but my belt is probably going to feel snug anyway for the next few months.

[grassfarmer]

It certainly looks like we are going to experience "interesting times". Financial management is going to be crucial for as long as this meltdown lasts whether you are a farmer, a baker or a home maker.

On the farm front we carry virtually no long term debt having cashed in higher EU land values for cheaper Canadian land and invested quite a lot off farm. The off farm investments have been in the toilet like everyone elses - at least your farm operation doesn't tend to lose 40% of it's paper value inside 6 months!
We were a little apprehensive on our direct beef marketing venture given that our customer demographic is very much young working couples living in the city with a huge morgage on a $3-500,000 house. We thought job security worries may have limited demand but thus far however demand has been good and we have the biggest list of new customers we've ever had this time of year.
Just as well as the commodity cattle on our farm turned in very disappointing returns last year. Still profitable - but at levels that are ridiculously low given the capital investment, labor and thought the business requires. I hate to think what the average cow/calf operations profit/loss was last year as we consider ourselves low cost producers and above average marketers. We don't drive around in shiny new vehicles like many in the area do either.
I guess this winter the reality has finally got through to me - trying to be the lowest cost producer is maybe not enough to ensure a sustainable profitable, business. Instead of spending probably 80% of our time trying to invent cheaper ways to do things we should be spending 80% of our time trying to figure out ways to increase the price we get for our produce and aim to increase our net returns substantially.

[smcgrath76]

Amen to that GF. The lowest cost will tend to support larger farms where capital is spread over more head, and labour is scrimped. I think the low cost commodity approach is generally a race to the bottom (not that cost control is not hugely important).
The question is always, what adds value? breed of cattle, timing of market, product specifics, etc.

[grassfarmer]

What adds value? Unfortunately I do not see anything that adds significant value to the commodity cattle side at the moment. On the purebred side we have some opportunities to add/capture value. Direct marketing is our most obvious route to adding value since we are free to set our own prices.
Did any of you guys read the article in Stockman Grassfarmer about the guy with 200 leased acres, 35 milk cows and with a few grassfed steers and pigs plus cheese he was bringing in around $350,000!! Now that's what I call revenue generation. Location was a big factor as he was close to NY city but still, charging $12/lb hanging weight for his steers to gross @$6500 per head was astounding and made me pretty really stupid. He was not born a farmer and sometimes I think that helps. I know I am constrained when it comes to setting my retail beef prices by thinking in terms of commodity price a margin whereas I should probably work out the maximum price the market can sustain and charge that.

[greybeard]

I’m sure I saw that guy from the front page of SGF on one of those food channel chef shows that my wife makes me watch. The cheese and the wood fired oven were the feature. There weren’t too many wide angle shots, but the place definitely looked low input. I remember thinking if he sold those crow-bait steers as grass fed he wasn’t doing that part of the industry any favors. Very obviously no farm experience but he knew he was selling an experience. It might have been Anthony Bordain if you can catch a rerun. I remember I laughed out loud when I saw those steers.
Thanks for bringing this topic up, FS. I was discussing it with a friend the other day, as I feel at a loss for ideas too. I suggested to him that I don’t think a cow calf operation can contribute more than 50K per 100 cows and we need a lot of cows if we are going to survive. He pointed out that you had better know your costs and if you can’t see a profit you sure don’t need more.
I know they sell calves on many bad days in at the markets for a lot less than I can raise them. I’m not sure I can buy them for the prices they go for, as 2 bidders make a good sale.
I have never been to a Bud Williams course but I think the basic principle he teaches is buy low cost cattle and upgrade them. I am sure there are days that there are lots of bargains at the market as I talk to lots of people who have been on the wrong end.
I saw weaned calves sell in late October for $400 that are worth $700 now. I’m sure not getting $100 a month for keeping my cows.
I’d appreciate some comments, especially from Kato as I think you have been doing some of this.

[kato]

I know that the backgrounders we buy have not made their original owners one cent. We pretty much usually buy them for less than they cost to raise. It's a sad thing, but then again, the first owners chose to sell them, and we did pay more than the next bidder. We usually get bull calves, not steers, and nothing has ever been dehorned either.

I used to work off farm, but since I'm not doing that anymore, I have found that we are actually farther ahead. Go figure. Our cost of living has dropped a lot without travel and the convenient stuff you do when you are too tired from working all day. The books are getting done on time and the extra time we can spend on management has paid off quite nicely. We used to both be so tired at the end of the day that things just didn't get done.

I have turned my former over sized and underused garden into a sideline business by taking in farmer's markets in the summer. Last year was my 'learning' year, so this year I'm going to really pursue it and see where it takes me. There seems to be a lot of potential there.

On that note, grassfarmer, I'm not surprised that your direct marketing has grown despite the economy. There is a huge cultural shift taking place right now in urban consumers. They are very keen to know where their food is coming from, and who grows it. Personally I think it's going to become a very mainstream way of doing business in a very short time. It's probably the best path to follow if anyone is looking for a secure future for a farm.