I’m not saying sell out and quit raising
cattle or growing grain. I am saying learn a new skill that can work for you
for many years to come
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Here’s an interesting question: Is what you know now good for yesterday or are you learning what you will need for your future? Now, I’m not saying you or I should scrap what we are doing now. This is what got us to where we are today, good or bad. From time to time, however, we should look in the mirror and ask ourselves if we’re putting in the time and effort to make sure we’re ready for what’s ahead. But what is coming at us tomorrow? There is no easy answer. Maybe all we can do is make educated guesses.
As I pondered this topic I did come to one conclusion, and that is that more than ever, the survivors of tomorrow will be the people and businesses that have a competitive advantage. What is competitive advantage?
In my opinion, competitive advantage is something that is either naturally around us or a set of conditions that we create for ourselves and our business that will help us deal with tough times. If we can survive tough times, then making a go of it will be quite easy in good times.
Here’s an interesting example. I was talking to Boyd Anderson a few weeks ago about the cattle business. He and his family and fellow ranchers have ranched for decades in southern Saskatchewan. They have tough prairie grass, good water, coulees that grow grass pretty well every year and winters that might be hard but not for long.
We agreed that those natural conditions give cattle producers in that area a natural advantage over cattle producers that, say, have to feed cows 210 days a year, have lots of rain that make putting up feed hard to do and have harsh winters where animals need extra feed.
CREATING COMPETITIVE ADVANTAGES
I recently spoke at High River, Alta., and a rancher there picked me up at the airport and he and his wife generously put me up for the night. I learned a lot about how a rancher can create natural advantages for his business. Compared to years past, this rancher now runs his tractor very little, winter and summer.
I was out there in late February and his cows were still grazing swaths. This rancher seeds a crop and swaths it for his cattle. That is cheap compared to combining the crop and or baling it.
Yes, I know a lot of cattle producers tell me “That will not work in my part of the country.” Then I have to ask, “What is going to be your competitive advantage?” And if you don’t have one or can’t create one, then the harsh truth might be the cattle or hog business is not going to make you money while our dollar is high. The low Canadian dollar gave Canadian export industries a natural advantage years ago when the country carried too much debt. Now that Canada is exporting expensive oil, gold, potash and so on the dollar is strong compared to many currencies. But that means Canadian cattle and hog producers have lost the competitive advantage the low dollar gave them for years.
Back to the rancher. If he has extra hay he lets grass go to seed, and lets his cows eat the mature grass, which helps to naturally reseed his pasture land with a little starter fertilizer built right in. I recall in my extension days that I used to suggest that cattle producers add some bird’s-foot trefoil to the loose minerals so cattle would seed trefoil as they went about their daily walks. It’s nice to see someone picking up the idea in their own way.
This swath grazing, re-seeding strategy has to be creating a lower-cost cow management system compared to putting up bales, hauling them to the cows and then cleaning up after them. There’s also the advantage of not breaking up pasture and re-seeding it.
Yes, I think that rancher from Alberta has created a natural advantage for his ranch.
LOOKING LONG TERM
At this time, the folks who look into the future are split. Some believe the livestock industry is in for rough sledding for years. Others feel the number of sows and cows has dropped so much that there will be a shortage of beef and pork and prices will rise. I hope so.
I just can’t see that prices will go up enough that producers without some competitive advantages will make decent money, however. In the meantime, my “cows” (that’s what I call my stocks) can give me the equivalent of eight to 10 “calves” per year. I can bring cash in the day I sell my first covered calls while most farmers have to wait months to get paid. I’m not saying sell out and quit raising cattle or growing grain. I am saying learn a new skill that can work for you for many years to come.
I often talk about needing a critical mass when it comes to farming or any other business. A farm with a critical mass should provide the family with the income it needs to live a decent life, service debt and have some spare cash flow to help the farm grow. With shrinking margins, however, growing a farm to that size isn’t very easy. A lot of families have instead set up a system where some combination of off-farm income and the farm provide the family with what it needs.
Of course the question remains: do families prepare themselves for that combination or do they wait until tough times force them to create that combination of farm and off-farm income?
This is where my five-legged stool financial plan comes in. I’ve written about that system so often Grainews readers should know it by heart. Briefly the fivelegged stool includes: Your farm or business or job; a second skill for emergencies or for a dual career; an RESP if you have young children and an RRSP as you get older; proper insurance for your
time in life; and, finally, learn how to make money with stocks. This includes managing a Tax-Free Savings Account and a Trading account. That pair can create cash flow where 75 per cent of the money we make is tax free.
This strategy is not talked about anywhere except in my columns in Grainews and in my newsletter StocksTalk. I listened to a presentation one day on helping farmers plan but there was no talk about a strategy like the five-legged stool.
So think on it for a minute. If you could learn to make extra money where most of it was tax free, would you have a competitive advantage? And what about your children? Sure they might have a good education and a good job or business, but if the fivelegged stool is good for you, I’m sure some day it will be good for your children. That would give them a competitive advantage. Making tax-free money is a good place to start.
Tax-free money would keep your tax rate down. It could reduce the claw back on your Old Age Pension and it would buy a lot of groceries or fun. But this strategy requires a skill you and your children might not have now. OK, so you learn a new skill which can lead to a competitive advantage. Remember that there is magic in compound knowledge, the same as there is with compound interest. The more you learn the easier it is to learn more and that is how to learn a new skill. Why not get started sooner than later?
USE YOUR BRAIN
In the book “8 New rules for Money”, Robert Kiyosaki asks the question: what is your biggest asset? He answers the question for you; it’s your brain.
Kiyosaki goes on to say that most people make 80 per cent to 90 per cent of their money with or from physical work. Very often working with our hands can end with age, an injury or the skill becoming obsolete. He goes on to say that there’s a lot more money out there if we learn to make money with our head.
That reminds me of a chat I had with another cattle producer. He told me 20 per cent of his income can be traced back to production, working with his hands. The other 80 per cent comes from marketing — working with his head.
That reminds me of another example that I likely wrote about before, but it fits well with this business of working with our head. Say you had a few bins of canola (I will write as if you did this last fall). Canola was $8.50 a bushel, a stock symbol TCK. B was $34 and the premium for selling a covered call for May was $4.10 per share. Of course we could use almost any decent stock. I just used TCK. B because I know the stock well.
A canola grower could have sold 4,200 bushels of canola for about $34,000. He could have bought 1,000 shares of TCK. B for that money and then sold a covered call on the shares and collected $4,100 or almost $1 per bushel. That money would be taxed as capital gain.
Let’s examine this. Say it cost $5 to grow a bushel of canola. Selling for $8.50 brought in $3.50 of profit, or about 70 per cent. Growing canola is part working with hands, part working with the head. By selling a covered call there was another $1 of profit. That’s another 28 per cent, and the money is taxed as capital gain, so we can pretty well double that (capital gains are taxed at a lower rate than income, typically).
Imagine if you could boost your profits by 30 per cent on 20 per cent of your gross income, by working with your head. Eventually you will be able to do that inside your Tax-Free Savings Account and all the profit will be tax free. And all by working with your head! Of course the cash could come from selling other products besides canola, from a cash advance from a commodity group or from your AgriInvest Account.
So, I have to ask the question: Is your knowledge good for yesterday or tomorrow? In 10 years, will your knowledge be good for the past or the future?
Andy is more or less retired. He manages his own portfolio and publishes a newsletter called StocksTalk, where he explains what he does with his investments. If you want to read it free for a month, go to Google, type in StocksTalk, click on free month, click on form, fill out four lines and submit.