Guest Article: Riding Out the Storm

Riding Out the Storm

How to Manage Rising Costs and Economic Uncertainty in the Wake of the Pandemic

By Sarah Kearbey

Many Farm Credit West customers have spent the last several years pivoting their business plans in response to unprecedented shifts in global markets and supply chains related to the COVID-19 pandemic. Today, producers are experiencing a new set of challenges in the form of rising interest rates, soaring gasoline and fertilizer prices, and rapidly increasing inflation, among others.

To help customers navigate these uncertain times, we gathered insight from two pillars of the Farm Credit West management team: Jon Kennedy, Senior Vice President for the Tulare Branch in Central California; and Marc Ehlers, Regional Vice President for the Southwest Region in Tempe, Arizona. Each shared both universal wisdom and perspectives unique to their regions. For Marc, one of the most important things for growers to do is know what their costs are and secondly, to have solid, realistic contracts. He suggests growers talk to their peers and compare costs, and look down the line at their business. “If you’re in pistachios — a long-term crop  — are you going to be able to handle them in 10 years?” he said. “Ask yourself what it would cost you to grow and whether there is a more cost-effective way to get the same result.” He also recommends looking at hard costs like equipment and labor. Old tractors are convenient, but may cost a lot more to run than newer, more efficient models. Similarly, growers should be analyzing their labor costs, and considering investing in more cost-effective solutions. To that end, some dairies in Central California are converting old barns to a rotary milking parlor, which requires just three or four workers to milk instead of a half a dozen or more, Jon says. For him, maintaining relationships with loyal buyers and suppliers as well as a consistent product is a key business strategy during these uncertain times.

“In times like these, the really good operations continually try to get better, rather than sitting on their laurels,” Jon said. “Like Farm Credit West, they’re always trying to improve what they do.” Both Jon and Marc agree that hedging in the futures market can provide producers with an opportunity to guarantee a sale. “If you can lock in a price in the market that allows you to make money, you may miss out on the highs, but you are at least guaranteed a sale,” Jon said. That kind of certainty may be more valuable in times like these than the chance of making a large profit. “It’s kind of like insurance,” he said. “There are costs to those contracts, but if you have a lot of debt and don’t have the capacity to ride through the tough times, hedging can be a useful tool for you.” Looking at other ways to reduce expenses and increase profits, both suggested producers look at investing in water infrastructure and efficiencies. Farm Credit West’s Irrigation Stewardship Loan and Lease Program can provide affordable access to funds aimed at improving or replacing irrigation systems and wells, resulting in significant savings on both water and energy costs. In the same vein, the Association’s Solar Leasing Program may be a good option for customers dealing with high power costs. With energy costs becoming very challenging in California, saving through a solar array can make a major difference in profitability, Jon says. “If you’re in California and you have a solar array, it may be time to put in a second one,” he said. “Ask yourself where the biggest bang for your buck on capital would be.” With interest rates rising to levels not seen since the last century, growers have to calculate how much debt they think they’ll have in the future and how high they think rates will go, Marc says. “You have to figure out your risk tolerance,” he said. “Can you afford for interest rates to increase 4% to 5%? “If you’re farming, you are already in a business with uncontrollable risks,” he continued. “Try to eliminate as much risk as you can and figure out how to guarantee a profit.” Ultimately, Marc says, growers should be analyzing their relationships and contacts closely, and making sure their buyers are viable. “If you’re buying fertilizer and it seems too reasonable, maybe check again — you don’t want to end up paying twice for it,” he said. “Know your risks. Do everything you can to mitigate them.” For Jon, now is an ideal time for customers to think about diversifying their offerings and providing higher yield products. He encourages growers to resist the temptation to cut corners during tough times, but rather get creative in looking for ways to increase profitability. For dairies, he says, adding a biomethane digester can help reduce methane emissions as well as offer access to substantial government incentives, grants and an additional income stream. Almond growers can offer a line of salted or seasoned almonds, and dairies can offer products through a creamery that yield more profits, such as yogurt and flavored milk. Harris Farms is a great example of an operation that successfully built a private label on high quality, distinctive beef. He admits there’s risk: these kinds of offerings often require an investment in technology, labor and equipment. But the payoff can be great. “High-quality products made to a high standard and shipped well, get a better premium,” he said. “Quality over time is a benefit in a tough market — people will buy it and pay more for consistency.” ■

Maintaining relationships with loyal buyers and suppliers as well as a consistent product is a key business strategy during these uncertain times.

Marc Ehlers has worked in the financial services industry for over 35 years, primarily servicing the dairy industry throughout the United States. Marc currently serves as Regional Vice President for Farm Credit West, prior to which he served as Chief Lending Officer for Farm Credit Services Southwest and managed the San Joaquin Valley Region for Bank of the West, a subsidiary of BNPP. Jonathan Kennedy is one of two dairy portfolio managers located in the Tulare Regional Office of Farm Credit West. He has been in this position since April 2011. Jonathan has been employed by Farm Credit West, and its predecessor Associations since June of 1989 working in the Bakersfield, Wasco, Tipton, Visalia and Tulare offices starting as a loan officer and working his way up to his current position. Jonathan attended California Polytechnic State University in San Luis Obispo, California and obtained a B.S. degree in Agricultural Management in June 1989.