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 transportation, prices at each auction, etc.)

• Solidifying a contract

• 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.

2. Generate off-farm income

Though some farmers are more tied down to their farm than others, it 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.

For example: If your mortgage payment on an investment property is$5,000/month but you are only receiving $1,500/month, it may be worth considering selling that property. Likewise, if you have a piece of equipment 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.

Ryan Shultz, Farm Credit loan officer