Build a Better Business

By Marcia Zarley Taylor
DTN Executive Editor

Editor's Note: DTN/The Progressive Farmer will offer two $2,375 scholarships to the next Texas A&M TEPAP mid-career management course Jan. 4-10, 2015 in Austin, Texas. For details go to http://tepap.tamu.edu. Scholarship deadline is Oct. 15.

---

AUSTIN, Texas (DTN) -- Iowa farmer and cattleman Zach Reiter may be only 36, but he's already a master of reinvention.

"Cattle were my life when I got out of college," he said. "Nothing could match the feeling of holding a newborn calf in your hands."

But 14 years later, cattle contribute only 20% of the farm's income and he now concentrates on a burgeoning equipment dealership and a much more disciplined cropping business.

The fourth-generation cattle feeder from Cascade, Iowa, admits he was first drawn to animal agriculture largely for sentimental reasons, not necessarily profit motives. Besides, livestock seemed an easier entree for a beginning farmer than trying to outbid established producers with big check books for cash rents. After college, Zach managed an 80-head cow-calf operation and 1,200 feeder cattle while he and his dad, Jeff, shared duties on a 2,100-acre crop operation. But the grim economics of 2008-2009 -- expensive feeder cattle and a spike in corn prices -- meant the partners were suddenly losing several hundred dollars per head.

"On the crop side, 2009 crop inputs were high and we had a wet-cool year, resulting in high drying costs and not enough dryer capacity," Zach recalls. The combination of losses on both enterprises thrust the young producer into the biggest challenge of his farming career.

Whiplash in commodity prices takes the heaviest toll on young operators. As a group, farmers under the age of 35 carry the highest debt loads of any age bracket, according to a recent Economic Research Service study. Because they rent the bulk of the operations, young operators have not benefited as much from the equity windfalls that accrued to landowners during this last decade. In fact, leverage levels for full-time farmers under age 35 remain as high today as they were 20 years ago, about 19%, ERS found. Should margins thin for crop producers over the next few years, economists and farm lenders expect this group to be most vulnerable to the downturn.

"Established business owners have bigger net worths to fall back on," said the Reiters' financial adviser Ben Espenscheid of Russell Consulting. "The younger generation has to watch their backs. When they don't have the equity, they need a handle on their costs."

Espenscheid thinks the key to the Reiters' turnaround was "their ability to analyze business opportunities and follow economics versus emotions. Once they got a firm grip on their cost of production, they could look at what was making them dollars and cents."

First, the father-son team restructured how they fed cattle, scrapping colored cattle for Holsteins, which could be acquired less expensively. More importantly, they revamped their habit of "riding" the market and hoping cattle prices would rise. Today they use a market adviser and lender Producers Livestock from Omaha that insists they hedge their livestock within 30 days of purchase, but which automatically covers margin calls for a service fee. That nipped the chance to capture some of the $400 margins that unhedged Iowa cattle feeders theoretically could have captured earlier this spring, but it helped a beginning farmer live to fight another day when profits were thin.

Another benefit: "When you have someone phoning for a $40,000 margin call on any given day, it's hard to take the emotion out of marketing," Zach said. "Now my lender does that for me."

The Reiters also hired Russell Consulting to improve their grain-marketing discipline. "In the past, we did most of our crop selling after it was in the bin," Zach said. "Now, at any given time, I am selling three different years of grain, gaining more consistent profits." He's using more hedge-to-arrive contracts and margin contracts to take advantage of basis swings and avoid more margin calls. "A half million bushels of corn can lead to a half million dollars in margin calls real fast," he said, something he'd like to avoid.

Thanks to the addition of a 125,000-bushel bin in 2013, the Reiters can now store 75% of their crop, so they aren't forced to sell at harvest. Although they are just 20 miles from the Mississippi River terminals, basis usually improves 30 cents to 45 cents from September to November. "The ethanol plants, processors and river terminals all know grain will get dumped at harvest. If you can store just 30 days, you've made 15 cents," Zach said.

Zach also sought out a second lender who shared and understood his vision for launching a short-line equipment dealership. At first the Reiters sold seed tenders and later expanded into anhydrous applicator bars, seed pods, fuel carts and tillage equipment. What Zach thought would be a minor sideline to help the farm operation recover its 2009 losses now accounts for 40% of the family's income while cattle revenue has shrunk to 20%. By aggressively advertising in online want ads, Zach's customers range from all over the Midwest and as far south as Texas.

"We started with seed tenders because my dad needed a knee replacement and couldn't carry those 50-pound bags of seed," he said. By mechanizing the loading of 50-unit boxes into planters, the seed tender also saved Zach's back. Each year, sales of seed tenders more than doubled, from 15 in year one to 100 by year three.

Even though sales of high-priced tractors and combines have slipped in 2014, Zach said his equipment business is holding steady. "Now people are using more financing or leasing, but sales haven't dried up. Maybe they aren't buying the deluxe model and they are taking a calculator to their cash flow, but they're still buying," he said. While seed tenders remain popular with older farmers and those seeking time savings, anhydrous bars and nitrogen management equipment are quickly coming to the forefront as states begin to regulate fertilizer use. By using split applications, encapsulating urea and precision farming, the Reiters' own fertilizer use has fallen 20% since 2010.

Zach's business transformation isn't finished. Last January, he attended Texas A&M's mid-career management course, TEPAP -- The Executive Program for Agricultural Producers -- to further hone his business skills. A partial scholarship from DTN/The Progressive Farmer helped defray tuition. Expert faculty drilled attendees on managerial accounting, employee management and family business dynamics during the weeklong course. He also appreciated the chance to mingle with 160 of some of the nation's top operators. He noticed one of Frito Lay's largest potato contractors always called her landlords "land partners," a phrase he thinks might help attract more rental opportunities.

"What I've learned more than anything is farming is a business," he said. "I've got no family ground for me to farm, no grandmother or retired dad who discounts my rent." When the profits in agriculture are a game of pennies, not $2-a-bushel profits, he said, you can't afford to get wrapped up in emotions.

Marcia Taylor can be reached at marcia.taylor@dtn.com

Follow Marcia Taylor on Twitter @MarciaZTaylor

(SK/KM/CZ)

Copyright 2014 DTN/The Progressive Farmer. All rights reserved.