Rookies at Risk - 1

EDITOR'S NOTE: For a workshop on how young farmers can position their businesses for tight-margin years like 2015, attend DTN's four-hour workshop "Risk Management for Rookies" Dec. 7 in Chicago. Early-bird discount ends Nov. 27. For details go to http://goo.gl/…).

OMAHA (DTN) -- Midwest row-crop farmers will have a tough time making money next year, economists warned agricultural bankers last week at their annual conference sponsored by the American Bankers Association. Projected losses range from a $90 per acre loss on corn for an Illinois farmer paying $300 per acre average cash rent to a possible $20 per acre loss on a typical rented Minnesota farm where a grower switched to a two-thirds soybeans-one-third corn rotation.

Farmers who have built up substantial cash or "working capital" from recent profitable years should be able to shoulder a short-term slump in commodity prices. But just like in the 1980s, young, beginning farmers with little equity are likely to be the most susceptible to economic downturns.

Unlike seniors whose land ownership padded their net worth during the last decade, agriculture's newcomers shoulder the highest debt loads, rent the highest percentage of land and must support young families on limited budgets.

The average full-time farm operator's debt-to-asset ratio hovered near 13% in 1992, but slid to 9% by 2011, the most recent data available from USDA. That's less than half the 22% rate farmers averaged at the peak of the farm credit crisis in 1985, before years of loan write-offs and debt pay downs began in earnest. However, leverage levels for full-time farmers under age 35 remain as high today as they were 20 years earlier, at about 19%, according to USDA.

This two-part series from DTN will examine how lenders view risks posed by agriculture's newest entrants and how these susceptible operations can reduce their financial exposure.

DIVERSIFY INCOME

The best advice: "Take action early so you don't have to panic later," advised Mike Hein, with Liberty Trust and Savings Bank in Durant, Iowa, who started his banking career in the dark days of 1985.

"Diversity was a plus in the 1980s," noted Hein.

If grain prices don't improve, Ryan Brodersen from Randolph, Neb., hopes livestock will help generate profits in the years ahead. The northeast Nebraska farmer farms 3,000 acres of mostly irrigated corn. But he also finishes 4,000 head of drug-free hogs, has a 300-head cow herd and a small trucking firm.

Brodersen started farming in 2002. Technically, he is the fifth generation of his family to farm, but since his family had been out of farming 10 years before he got in, Brodersen and his wife started farming from scratch.

Sometimes it's the niche market that older farmers don't want to mess with which gives a young farmer an advantage. Brodersen gets all his feeder pigs from a Kansas Amish colony which farrows their hogs in pens and pasture. Twice a year, Brodersen is audited to be sure his hogs are drug-free. "This summer, a girl who had just graduated two weeks prior from UC-Berkeley came out and sat in a chair in the middle of our hog barn for two hours to 'see if the pigs were happy,'" Brodersen said. "I guess we passed."

Diversity is key to making a profit for 35-year-old Josh Jones in Troy, Idaho, whose main crop is winter wheat. Jones also raises garbanzo beans, grass seed and malting barley (which he ships more than 500 miles to his buyer), is a grain bin dealer and offers custom no-till seeding services.

"Our acreage base is limited, so we look at diversified crops to help spread our risk," said Jones.

FIND A MENTOR

"It helps to have someone you respect and look up to and can have an honest conversation with," Jones noted.

Danny Klinefelter, ag economist at Texas A&M and DTN farm business columnist, encourages beginners to seek out a mentor. "Find someone over 60 without an on-farm successor and ask if you can do something together," he said. "Start with something you know will be a win-win and he isn't taking much risk. It could be something as simple as combining your input purchases with his so you can get a volume discount. Actually, that's a good idea to do with an area farmer of any age."

"Maybe an older farmer doesn't use all the technology available for his equipment because he doesn't know how to utilize it. A tech-savvy younger farmer can help him," said Andy Huneke, director of relationship management with AgStar Financial in Minnesota. "Or, perhaps one day you can say, 'I'm farming today because of my willingness to assist a livestock producer with his daily chores on the weekend."

DEVELOP RELATIONSHIPS WITH YOUR LANDOWNERS

Brodersen uses a Facebook page to communicate with his out-of-area landowners and he texts them often to keep in touch.

Nate Franzen, president of First Dakota National Bank's agri-business division in Yankton, S.D., has a young farm client who sends two reports a year to each landowner. The client makes a point to highlight environmentally sustainable practices; he also sends pork to his landowners at Christmas.

"Sometimes I only half-jokingly say, 'If you can move snow, you can find land to rent.' Making that extra effort to nurture what a landowner values is critical to a good relationship with your landowner," said Franzen. "One young farmer told me what sets him apart from other local young farmers is that he is always at church on Sunday. People in his area notice that."

KNOW YOUR NUMBERS

"Take a step back, analyze every aspect of your business. Be pro-active now," advised AgStar's Huneke. "Don't assume things will change. It's up to you to keep your margins in balance. Understand what is making you money and what isn't necessary for your operation."

A starting point is to compare your financial ratios and expenses to those of your peers. The Center for Farm Financial Management at the University of Minnesota compiles data from 3,000 farms across the upper Midwest, but commercial lenders and private consultants also benchmark their operators. Sometimes just tweaking something here or there can push you from average to a top quartile. "There are good benchmarking numbers out there. Use them to measure how you compare and where you are out of line," Huneke said.

CONCENTRATE ON MARKETING

Leveraged young farmers cannot afford risk, said Franzen. Like pork producers and others with volatile markets, new farm operators can't afford to gamble, lenders emphasize. Many lenders counsel the young farmers that they need to market on their margins so they live to fight another day.

"You're better off locking in a small profit and staying in business than waiting for a large rally," Franzen added.

Idaho farmer Jones typically sells 50% to 70% of his crop before harvest. "My grain bins mainly help me speed up harvest. I want to convert my crop to cash as soon as possible," Jones said.

TAKE ADVANTAGE OF GOVERNMENT PROGRAMS

"The Conservation Stewardship Program through the Natural Resource Conservation Service basically pays you to be a good steward of the land," said Jones. "Also, the Transition Incentives Program pays a Conservation Reserve Program landowner two more years of CRP rent if they lease the land to a young, beginning farmer."

Several states, including Iowa and Nebraska, offer state income tax credits for landowners who lease to beginning farmers. Farm Credit associations offer special loan programs for beginning farmers. Also, USDA offers favorable terms on direct and guaranteed loans serviced through lenders.

For high-risk borrowers, it's usually not just one thing that will reduce their risk. It's playing all the angles. "The sooner you make adjustments, the more likely you'll be successful in getting a financial package you need," advised Hein, who is preparing his borrowers to avoid the financial mistakes of the 1980s.

(MZT/ES/AG)

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