Harvest is winding down and many of you will be focusing on the changes you need to make for next year.
Within our client base, there seem to be two distinctive groups we work with. The first includes farmers who do excellent jobs of production with great yields and timeliness, but who really struggle with marketing and financial decisions.
The other group includes those who are comfortable with buying and marketing decisions. They can get the money, equipment and land for expansion, but constantly face labor challenges.
I've found some ways for the two groups to work together. Let's look at each:
The group of farmers who are getting frustrated with the markets but do an excellent job of raising corn and soybeans is large in number.
The reason I believe this? Prior to three years ago, all you had to do was sell close to the high. Now you have to pick the low to maximize LDPs and pick the high to sell the cash and, in the mean time, manage the downside risk. That makes it more than twice as difficult. All too often the strategy has been to take the LDP and hold the crop. That does not protect the downside and is poor risk management.
Here are some thoughts for that group:
Rent the farms that you own or lease to other farmers and custom farm it for them. I'd suggest negotiating at $50/acre for the custom work. You might even get tenants to pay you to dry and store the crop, thereby utilizing your equipment and storage facilities.
The benefit is that you take much of the risk and headache out of farming and still make use of your line of equipment. You also get to do what you like and are good at doing. You have no decisions to make on inputs or marketing. You net $175-200/acre with little risk and few decisions.
Now let's examine the benefits to the farmers who would rent the farms and pay to have them custom farmed.
Most likely you enjoy buying inputs and marketing grain. So you do what you're good at. Inputs can be purchased using quantity discounts and drop-shipped to where you want them. No additional equipment is needed to expand your farming operation.
With this type of rental agreement there are no geographic restraints to where you farm if you have confidence in the farmers you are renting from and/or have good references. Additional labor, which is likely the biggest constraint to expansion, isn't needed.
In addition, you leverage your talent and eliminate labor and equipment expansion challenges. This arrangement has additional possibilities for working together if tenant and landlord are close geographically. You can share equipment for labor and vice versa on other rented land. The list of ways to work together is exciting.
We need to continually look for ways to improve efficiency and this is a way for both to be better off.
I've heard many farmers talk about “when it gets better” financially on the farm. It may not get any better. If it does, great. But I think it's better to plan for success in the current environment. You win under either scenario.
Some of the best-managed operations we see have equipment costs at $22-25/acre and labor costs at $12-15/acre. This arrangement can get you close to that figure and perhaps with better timeliness.
It's prudent from a risk management standpoint to advise that there are tax implications to rental agreements like these. Check with your accountant or tax advisor first.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell previously spent 26 years with Farm Credit Services as a division president. For more risk management tips, check his Web site (www.russellconsulting.net) or call toll-free at 877-333-6135.