Trying to make money in a down ag economy is sometimes like trying to make it rain—and can be a losing battle. Many South Dakota corn farmers know this firsthand. Unfortunately, they are not alone—a U.S. Department of Agriculture (USDA) Economic Research Service (ERS) study from 2015 found that more than 50 percent of farm households report losses on their farm businesses each year.
There are 2 million farm households in the U.S., earning an average of $119,880 per year. However, the proportion of farm households incurring farm losses is higher for households that operate smaller farms.
We spoke to two agriculture economics and banking experts to get some perspective on these statistics: Matthew Diersen, South Dakota State University (SDSU) Economics Professor and Extension Specialist in Risk & Business Management, and Brian Gilbert, Ag Banking Manager, First National Bank in Sioux Falls.
Getting Into a Good Financial Position
How can South Dakota corn farmers get ahead on the ledger? Diersen quickly points out that it is not unusual for farms to lose money, as agriculture is a cyclical industry. Gilbert agrees, but notes that there are a few things farmers can do to put themselves in a good financial position.
“First and foremost, know what your break evens are,” says Gilbert. “Today, you can’t farm without knowing exactly what you have in a crop.”
Gilbert also suggests that farmers need to focus on this year and not pine for the higher prices of previous years.
“You have to be willing to market grain or cattle or livestock at modest profits,” he says. “In this economy, the tough part is that our memory is when we made tremendous profits a few short years ago. You have to forget about that and sometimes hit singles and doubles just to stay in the ball game.”
It might also be necessary to even let go of a piece of land, Gilbert says, although it may have been farmed by your family for decades.
“If it’s not profitable, you have to be willing to cut ties,” he says. With that, Gilbert adds that nimbleness is an asset.
“Some of our customers that are performing the best in this environment are not doing something because that’s what they’ve done for the last 20 years,” he says. “They make adjustments on the fly, are trying to control rent costs, maybe sharing equipment with a neighbor or not being afraid to hire a marketing consultant.”
Gilbert adds that once you know your costs of production, adjusting your operation and being willing to modify your rotation a little bit to do whatever makes the most sense from a financial standpoint can make a difference.
“The situation hasn’t changed that much in terms of numbers of farms and farm size,” Diersen notes. “We’ve been in this holding pattern for a couple of years. By maintaining good farming practices, you can obtain high yields, which will really pay off in a year like this.”
Marketing is another area where dividends can be gained, according to Gilbert.
“I can’t stress marketing enough,” he says. “You may not be able to look at it from this year’s standpoint, but think about it for the next three to five years. If you can’t predict everything, and cut down one variable, it helps.”
Gilbert points out that this year, farmers have had the opportunity to lock in corn at a profitable price, so having the tools in place to be able to do that is critical.
“It also comes down to communication with your lender,” he says. “Tell them what your plan is and if you need access to capital. You may need an operating line of credit, or maybe also a hedging line.”
If your farm has had several tough years in a row, Gilbert says that profitability won’t have an overnight cure. Again, he stresses the importance of talking with your lender.
“Let them know you’re aware and what you’re doing to fix it,” he says. “Banks are pretty forgiving if you come to them with a plan. If you don’t have a plan, then it gets difficult.”
The situation may not look as dire as it appears to be on paper, Diersen notes. One factor to consider is average farm real estate values. The USDA ERS study found that between 1990 and 2015, average farm real estate values increased every year except one at an average nominal rate of approximately 6 percent. That may not seem like much, but over time, it all adds up.
“You have to take into account appreciation on the land,” Diersen says. “Even if farmers aren’t doing well on a cash basis, land values are increasing, so that’s why you haven’t seen a lot of farmers leaving the business.”
Another factor is farm size. Diersen notes that different aspects of farming are scale dependent. For example, things like land and machinery require a large initial output of capital, so over time, it’s more profitable to farm more land with bigger equipment to make it the most efficient.
“It’s a subtle difference, but it’s very real,” Diersen says.
Gilbert points out that there isn’t a sweet spot that correlates between the number of acres farmed or head of livestock fed and profitability.
“The most profitable farmers are trying to maximize what they have, with expenses or input costs in mind,” he says. “Sometimes, it doesn’t make sense to put on a fungicide or one more round of fertilizer. You have to look at the cost benefit of every input. We know that we can’t expect farmers to do the same thing and not make any money.”
Diversify for Success
Many farms today have turned to diversification to even out the peaks and valleys of the agriculture industry. Diersen says that there are definitely trade-offs associated with increased diversification.
“If you go back 10 to 20 years in South Dakota, a typical farm would’ve been more diversified than you see today,” Diersen says. “There was a push of corn and soybeans predominantly, because of their profitability, and doing so intensively.”
The push to farming a narrow number of crops resulted in many farmers discontinuing a hog, feedlot or dairy operation. Since then, the industry has swung back to adding more diversification, but Diersen says that may not be the best approach.
“There is always a trade-off in terms of concentrating on a cropping system and doing it really well and large scale,” Diersen adds. “Those additional income streams can be beneficial, but they have to be profitable, as well.”
“Diversification is the key to success,” Gilbert says. “Some have gotten away from that in the past, because they were so wildly profitable in the grain sector, but most banks are good with livestock.”
What’s the Answer?
For some farmers, they may already be farming as efficiently as possible and still having trouble. Diersen says if that is the case, it’s time to branch out and look in different directions.
“If you’re reliant on the sale of collateral, such as real estate or machinery, to repay loans, that’s not good,” Gilbert says. “But if you can show positive cash flow, even with a thin equity margin, a lot of banks are willing to take a look at that.”
“Could you start a small feedlot that would help reduce fertilizer expense by providing manure for added nutrients on your crops?” Diersen postulates. “I’ve heard several times in other parts of the Midwest that that set up could work, if it’s profitable on its own.”
Diersen says the goal is to lower the total cost of production in any way possible. Gilbert adds that expense control is critical, and it has to be done without emotion.
“If you know your break even, don’t be worried about pulling the trigger when profit presents itself,” Gilbert says.
“By getting a lower break even, you can improve profitability,” he says. “There are a lot of moving parts, though, and you do have to have capital up front to add a small livestock operation.”
Having the capital up front can be a challenge for some farmers, Diersen says, especially if their current working capital has been stressed so they don’t have any extra or even enough to borrow more.
If access to capital is an issue and borrowing is not an option, Gilbert points out that there are several programs available to help farmers, such as EQIP, the Department of Natural Resources, Farm Service Agency, and other government programs.
“Most banks are willing to take a look at that and help their borrowers out,” Gilbert adds.
Phone interviews with Diersen and Gilbert