A recent article by Rheal Cenerini (March 14 issue ofGrainews)on what it takes to be successful in farming highlighted the research of Kevin Dhuyvetter from Kansas State University (KSU). Dhuyvetter says most success can be traced back to having a critical mass size of farm where costs per acre or bushel or pound are spread over an almost ideal amount of investment. I’ve been talking about critical mass for years and it’s nice to see some research on it. But I do have a couple comments about this study.
Dhuyvetter’s study suggets that selling at the right price is important, but critical size is more important. To me that suggests that farmers and perhaps their lenders are much better at buying or renting more land, taking on more risk with irreversible decisions and working longer and/or harder than they are at learning how to sell their crops for top dollar. Just look across the country and see how many lenders make a living in the farming industry, and how few marketers there are. I do believe more farmers are better marketers than ever since they do grow crops that let them or force them to learn how to sell instead of taking an average price.
Most farmers are price-takers and many farmers are afraid to sell at high prices because they think prices for crops will go higher. But since the price of farmland has been going up for years most farmers and most lenders are not afraid to take on more land. It seems to be a lot easier to farm more land and work with mind, body and machinery than with the mind and maybe some technology to learn to sell at top dollars.
Reading about this study made me wonder: what if you farm in an area where you cannot build a critical size of farm? We first need to look at where we’re at and where we’re going.
When we work what do we work with? In the past, much work was done by hand, then more and more work was done with tools — first horses and then tractors and equipment. One day much farm work will be done with equipment that won’t need a driver. Technology will drive the tractor, and we already have the technology to lift the air seeder at the end of the field and put it back down at exactly the correct spot.
More and more farmers will make more money with their mind and some technology than by driving a machine. Maybe by then farmers will be great sellers and selling correctly will make more money than farming more land.
Our hands and equipment can only do so much work in a day. The mind has almost unlimited potential and usually the people who work with their mind make a lot more money than the ones who work with their hands.
With some technology an educated mind could easily sell calls on good stocks one minute, check on crop prices the next minute, buy or sell the next, think of kissing the wife, cuddle the baby and be able to chat with a specialist the next.
Think on this. The next $100,000 or $200,000 you invest can buy you a quarter section of land that needs irreversible decisions every spring to make a return. As you know, the quarter section will need all the stuff farmers use to put in, protect and harvest a crop. That could cost you $30,000 and you will be using equipment that costs a few hundred grand. And of course it will need your knowledge and care. Then you wait four months to harvest a crop at more cost and then sell it over the next six months or more.
Conversely, $200,000 worth of shares will need a computer, laptop or cellphone and a knowledge base. As I write on March 25, 2011 the $200,000 could buy about 4,600 shares. The same day I could sell a covered call at $44 for May and collect $2.92 per share or $13.40 (I risk losing the stock each time I do this, it should be noted). And I could do that six times a year and the money would be taxed as capital gain in a trading account. It is the same $200,000. My decisions are totally reversible and if I’m too busy to deal with this one day I could do it the next. This might tick some of you off, but it’s reality.
OK, just what is the critical size of farm? To me it means you have a farming system around you that provides a decent living for you and your family; makes the payments and leaves you some money for reinvesting, upgrading and/or expanding. I’m quite sure most farms do not run at what is called the critical mass. I don’t know what critical mass size is in your area or in your mind, but I will say that we would have much fewer farmers if we expected every farmer to be at a critical mass size. In other words, I think most farms are not at a critical mass size and hence many farmers need to bring in other income to provide the things a critical size of farm needs to provide.
Now, let’s bring this down to your farm. How hard are you prepared to fight or work or call it what you will to grow your farm to a critical size? And what if you are in an area where getting to a critical size is almost impossible?
Why impossible? Well maybe there won’t be enough land available for you and a bunch of your neighbours to grow to critical size. In the past, many farmers could reach the critical size by adding a hog barn or a cow herd to their operation. In many areas one or the other or both are not allowed due to environmental rules. Maybe
the market isn’t big enough for you to produce enough to have a critical size of business. When the Canadian dollar was low many enterprises helped a farm have a critical mass but cannot now.
Maybe a labour shortage will limit the size of your farm. A few articles back I wrote about how more and more farmers likely will hire their own crop, livestock or equipment specialist. That would help improve your labour supply but you pretty well need to build a farm for another family if you plan to do that. Many farmers have tried non-farm on-farm business and odds are more failed than worked.
THE FIVE-LEGGED STOOL
At the risk of mentioning the five-legged stool too often I think this is a good time to bring up my farm boy version of an overall farm financial plan. The five legs are: your farm, business or job; proper insurance for your time in life; learn how to make money with stocks; have a second skill; and, an RESP for your children and an RRSP for yourself.
The Tax Free Savings Account (TFSA) fits in with learning how to make money with stocks, and once you have learned that skill you might be able to boost your overall returns in your RRSP, a trading account and RESP.
What if you can see that building a critical size of farm is just not going to happen on your farm? There likely is a way you can develop a financial system that can match what a critical size of farm would do for you. Maybe even do it better. And when it comes time to slow down you won’t face the heartache and stress of selling down a farm that your kids don’t want.
Rest assured I don’t want to get between you and your financial adviser or broker. They provide a service. But I do want you and your family to have a critical size of financial system.
The stock market is bigger than most any other market, and I’m quite sure a lot of farmers will be able to make money with stocks long after they can’t or won’t feel like pulling calves, driving large
equipment or they give up trying to build a critical mass size of farm.
As I see it, many farms are not likely to grow to a critical size mass. There might not be enough land for everyone to grow, there might be new environmental rules that prevent growth or expansion, some farmers might decide the growth required to be a critical size just isn’t worth it and so on. But if you have a second skill odds are you could put it to use within driving distance of your farm. If you learn how to make money with stocks you should be able to manage money from anywhere in the world. It might take a few months or a year to learn how to make money with stocks but compare that to taking 20 years to pay off that next quarter of land.
There will be ups and downs in the market. But don’t tell me you don’t have ups and downs in the crops and livestock business. In fact, most bear markets in stocks last 18 months or so. The beef market was down starting in 2003 until recently. Grain prices were too low for comfort from 1984 until just lately. No bear market has lasted anywhere near that long. Even this last big bad bear has turned into a pussycat or a tiger, depending on how we treated it. If a person knew how, he or she made a lot of money as the bear market chewed up many investors’ portfolio.
But making money with stocks takes some time, skill and patience. As with any new venture there has to be a learning curve for making money with stocks. Some investors jump in and learn “sort of on the job.” They might win that first jump in and they might not but they will learn. Some investors want to learn everything before they invest a dollar. They will never own stocks. Some investors wade in, learn how to swim and grow and most of them will succeed. Any investor who learns how to make money in flat to rising markets should do fine. Any investor who learns how to make money in flat, rising and falling stocks should be able to make more money than he or she needs.
Why patience? First, some people want to make money from day 1 and we do by selling covered calls on our stocks. This is like renting out our stocks. Most investors want to use the idea of buying low and selling high. So do we, but we have learned how to make money even if a stock doesn’t go up. Learning how to sell calls is new language and new way of thinking and hard to learn in an hour or two. It took me many hours to learn this stuff on my own. There was no teacher. Now that I know this stuff I can shorten your learning curve but it will still take time to get things straight in your head. But so what? It is a skill that could work for you and your children for years.
Some of our readers now come into the house for coffee or lunch so they can check their stocks. Some have a computer in the shop. Some put in orders the night before to buy and sell stocks or covered calls. Some call in on their BlackBerry or other cellphone. Some have laptops and air cards that can work almost anywhere. Sure they cost money but again so do more cows and more land.
It’s nice to think that every farmer can have a critical size mass of a farm. The reality is most won’t. But you can build a critical size of financial system around yourself if you can think the five-legged stool financial plan.
Andyismostlyretired.Besidesmanaging hisownportfoliohepublishesanewsletter calledStocksTalk.Init,hechronicleswhat hedoeswithhisstocksandcoveredcalls soonafterhedoesit.Ifyouwanttoread itfreeforamonthgotoGoogle,typein StocksTalkNet,clickonfreemonth,clickon form,filloutfourlinesandclicksubmit
I think most farms are not at a critical mass size and hence many farmers need
to bring in other income