Today, young farmers are faced with challenging grain markets, planting delays and tough financial decisions. While some farmers are weathering the storm well, others are needing to up their management game and finetune their business analysis.
This is especially important for young farmers, says Joe Caffee, president and CEO of the First State Bank of Middlebury, Ind. In some cases, he’s had to have difficult discussions with clients.
“We’ll say, ‘OK, let's step back and take a look at the future and maybe slow down the pace of growth,’ especially if they got started farming in that 2007 to 2010 window,” Caffee says. “It was pretty easy at that point to grow into a very, very profitable operation.”
With more land coming open to rent or livestock enterprises available, young farmers have opportunities amid these challenges. To make smart decisions going forward, Caffee offers three best management practices for young farmers to adopt.
1. Know your breakeven cost.
“One of the first things we talk about, especially with younger producers, is what's your breakeven cost of production? It never ceases to amaze me that's a really hard number for them to come up with,” Caffee says.
Many times, young farmers may have a number in mind, he says, but after doing a thorough calculation, the number is higher than they thought.
“We like to work backwards and say, ‘OK, if you're going to clear your operating line this year and have enough money to feed the kids and put braces on the oldest, all the while being ready to plant next year, where do we have to be?” Caffee says.
The next level is analyzing equity. “Taking a look at what equity they have built and what we're going to do with that equity going forward becomes a real important discussion,” he says.
2. Understand what your labor is worth.
Many times, Caffee says, young farmers struggle with understanding the value of their labor. While personal labor is not a cash expense, it’s important to understand.
“Time is a limiting factor,” he says.
For instance, if you rent another 400 acres, you’ll need to have the equipment and manpower to farm it. So, understand what that cost is if you need to bring in additional labor.
3. Pay attention to the macro environment.
“More than ever, paying attention to the macro economics and not just the micro economy and farm economy is really important for producers,” Caffee says. “Watch the cost of money, what interest rates are doing and fuel prices.”
In terms of interest rates, he says, it will be interesting to watch what the Federal Reserve bank does over the rest of 2019.
“I watch it nearly on a daily basis,” Caffee says. “I feel like we're in a real stale pattern right now. If you look at a three-year rate compared to a five- or even seven-year range, it is pretty flat. I've been encouraging some individuals to look at those longer-term rates, lock something in if their banker is willing to do that, because it's virtually the same cost of money when comparing with shorter-term options.”
Caffee says farmers should consider how these macro forces are impacting the prices they receive at the farm gate. “Be aware of the bigger picture.”
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