Plain Dirt Financing Financial Information for Amish Farmers Autumn 2021
Thinking Outside of the Barn Ryan Shultz, Farm Credit loan officer
Over the past few years, it has become apparent that small farms will
need to innovate in order to keep up with the ever-changing market. Global trade and modernization have continued to put downward
pressure on commodity prices, inadvertently favoring larger producers that can take advantage of such economies of scale.
For example: A 2,500 cow dairy will have a much lower “break even” mailbox price than a 40 cow dairy; simply because their cost per cow to operate is lower. As commodity prices continue this trend of downward pressure, small and beginning farmers will need to get more innovative in their
marketing strategy. This is where thinking outside of the box (or barn) really comes into play. Here are three ways you can think outside of the barn to get ahead of the market:
1. Do market research to find your niche This is one of the most important considerations a farmer can make in
this day and age. And no, I don’t mean sophisticated research that only an economist can understand. I’m referring to the marketability of your commodity or crop. For a produce farmer, this may mean considering options such as: •
Selling produce at auction (If so, which auction? Factoring
•
Solidifying a contract
• • • • •
transportation, prices at each auction, etc.)
Selling to a more niche market that may pay a premium for quality product
Selling at a farmers market Road-side stand
Transitioning to organic
Growing more or less field produce vs. greenhouse produce
All of the above are ways you can think outside the box and dig into
how you can differentiate yourself from other (similar) operations in your area. While these may be options you have already considered, it’s worthwhile to reevaluate these possibilities at least once a year. (Continued on next page)
Autumn 2021
2. Generate off-farm income
For example: If your mortgage payment on an investment property is
Though some farmers are more tied down to their farm than others, it
considering selling that property. Likewise, if you have a piece of equipment
may be valuable to consider off-farm income to diversify your operation. This could be as simple as working part time for a neighbor, or obtaining a more skilled part time job. Ideally, you will still be able to manage your
home operation, but off-farm income sources can add a level of stability to your cash flow.
PS: If your spouse or children bring in significant off-farm income, let your lender know!
3. Find ways to generate passive income Passive income is a stream of income you regularly receive that is not necessarily due to a specific amount of “work” put in. The most common
example of this is rent income, but can also include income sources such as: royalties, recurring contract payments, lease income (most
commonly equipment), solar or alternative energy income, etc. It may be worthwhile to sit down and consider what passive income possibilities
are available given your situation. And, if you already have some passive
income, think about the ways you may be able to increase the amount.
If you already have an asset that you receive passive income from (ie:
rent from a property, piece of equipment, etc.), it is useful to reassess that cash flow at least once a year. By this I mean analyzing whether it may
be a better financial decision to sell that asset as opposed to receiving the recurring passive income.
$5,000/month but you are only receiving $1,500/month, it may be worth that you pay $3,000/month on in the form of a loan, but only gets rented out a few days a month for $250/day, it may be worth considering selling that piece. Even if you don’t have a loan on that asset, it is always worth reevaluating whether it is being put to good use or if you are better off putting it up for sale. Being a small farmer in today’s economic climate has a lot of benefits. People talk about the benefits of large farms, but small farmers have one
distinct trait: versatility. There are many niche products and markets
that you can explore that the big farms cannot. As a small farmer, you can adjust your operation much more quickly and easily than a large farm likely could.
Consumers are becoming more and more conscious of where their
food (and products in general) are coming from. This is another huge selling point for small farms. As corporations become larger, more
and more consumers seem to desire local products (think quality over quantity). If you are a small farmer, I encourage you to use your size to your advantage. Explore new options and possibilities by thinking outside of the barn!
Give us a call today at 888.339.3334 if you’d like to discuss your small farm’s business in more detail.
Time Value of Money
on Investment (ROI), we need to discount the money saved from owning
Kelvin Ranck, Farm Credit loan officer
can be used for more than five years, and after five years the sprayer will
You may have heard the phrase “time is
money”. This statement is true in more ways than one. While normally this is referring to the fact that time is valuable,
it is also true regarding the fact that over time, the value of money can both increase and decrease from its present value.
There is a greater benefit to receiving money today, than there is to
receiving that same portion of money at a later time. This concept is
known as the time value of money, meaning a dollar earned today is worth more than a dollar earned next year. If you have a dollar today,
you can invest it and earn a return on that dollar so it is potentially worth $1.10 next year.
To better understand the concept of the time value of money, consider this example: Your friend offers to give you $100 for your birthday. The friend says
that he can give you the $100 today or wait and give it to you in exactly one year from now. Which option would you choose? We would all chose
to receive the $100 today. If we receive the money today, we could then
a sprayer by 5 percent each year. From the table below, we see that $1,000 saved each year over the coming five years is worth about $4,280 to us right now in 2021.
Note: This does not mean that buying the sprayer is a bad idea. The sprayer have a resell value. The main point is that if we are going to invest $5,000 in a sprayer, we need to be able to save more than $5,000 in the future years, as money earned in the future has less value than money earned today. 5% ROI
Savings
Discounted Cash Flows
2022
$1,000
$952.00
2023
$1,000
$907.00
2024
$1,000
$864.00
2025
$1,000
$823.00
2026
$1,000
$784.00
Total Amount Saved Over 5 years
$5,000
$4,330
2.Demonstrated through inflation As mentioned in the introduction, the value of money can decrease over time, causing our dollar to be less valuable. When there is a general
increase in prices of goods and services, this is called inflation. When
the prices of products such as food, fuel, and fertilizer increase, it causes the purchasing power of the money in our checking account to decrease. For example: You sell some tobacco and receive $5,000. Then over the winter, the price of fertilizer increases. Now your $5,000 tobacco profit
use that $100 over the next year to buy corn seed and grow corn silage,
can buy less fertilizer than the year before. When we purchase assets such
we have used it to add value to our lives and businesses.
same, our land and equipment is costing more as the years go by.
of money effect my business and my profit potential?” Let’s take a look
3.Cost of production
or buy a boat and go fishing over the next year, or invest the money and receive interest on that $100. Whatever way we chose to use the money,
You may be thinking, “This all makes sense, but how does the time value
at a few ways in which the time value of money can help us manage our money.
1.Helps inform our investment decisions The time value of money helps us understand and value the money saved/earned through the years from a given investment.
as land or equipment, we are protecting ourselves from inflation. This is due to the fact that while the cash in the checking account is staying the
One of the advantages of borrowing money is that we can control our cost of production/operating expenses.
For example: This year we have seen a high rate of price inflation. Many of the normal costs of farming such as fuel, land rent, labor, and equipment have increased dramatically. Imagine how nice it would be to fix your fuel or fertilizer costs for the next five or seven years. Thankfully the cost of
For example: You are considering whether to buy a sprayer to spray
borrowing money has decreased. With the interest rates at their current
your corn and tobacco crops. You do not currently have a sprayer, and
low levels, farmers are able to fix their interest rate and guarantee a low
each year you pay your neighbor $1,000 to spray the tobacco and corn.
cost of borrowing. So while other costs of farming increase, you can fix
It costs $5,000 to buy a sprayer. We might think that if we spend $5,000
and know your cost of borrowing for future growing seasons.
to buy a sprayer, that in five years we will have paid off the sprayer. But if
There are many decisions to be made while managing a farm business:
a dollar earned today is worth more than a dollar earned next year, then the $1,000 saved next year and the year after that is going to be worth less to us than the present value of our $5,000 sprayer. For this example, let’s say that you can place your $5,000 in an investment
and make a five percent return each year. Since five percent is our Return
How much money to borrow, what equipment to buy, how much money
to save, how to invest our money, etc. Understanding the time value of
money can help us make these business decisions and better manage our money.
Autumn 2021
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PAID
15 Eby Chiques Road Mount Joy, PA 17552
COLUMBIA SC PERMIT 1160
GROWING YO U R K N OW L ED G E
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