Pain in the Plains - 3

How to Cope with an Ag Correction

Elizabeth Williams
By  Elizabeth Williams , DTN Special Correspondent
Off-farm income bolstered staying power for farmer Larry Hoobler during the 1980s. (DTN Photo by Elizabeth Williams)

MANHATTAN, Kan. (DTN) -- Call farmer Larry Hoobler part of the Silent Majority. Like the bulk of Great Plains farmers, the 68-year-old grain producer from eastern Kansas can't churn out much profit at today's threadbare commodity prices. By drawing off the lessons of the 1980s farm crisis, however, this veteran crop producer is hoping to weather the cycle and perhaps even prosper.

Banks in the Kansas City Federal Reserve report roughly 78% of their borrowers had no repayment problems at mid-year. Many of the other 22% are fixable, credit analysts believe, especially if borrowers hold sufficient amounts of equity. Hoobler believes the bulk of farm borrowers in his region possess the resources and willingness to adapt to a downturn. He also knows lenders are prepared to work with most of them, since he sits on the board of directors for Frontier Farm Credit, an eastern Kansas farm lender.

DIVERSIFY YOUR INCOME

Most commodity grain farmers already have attempted to cut production costs, with some forgoing chemicals, lenders say. Some larger scale Great Plains irrigators are finding specialty contracts like organic alfalfa and non-GMO corn for dairies, or popcorn or kidney bean contracts to beef up their margins. Those with cash rent are renegotiating terms with landowners, to help match the slide in commodity prices (See "Wheat Belt Grapples with Record Lows" at http://bit.ly/…)

If those options aren't feasible, Hoobler recommends diversifying your income. He is a first-generation farmer who started farming in 1973 and survived the 1980s farm crisis with an off-farm job. His wife also worked off the farm.

"If you don't have equity to borrow against, off-farm income is the only way to keep your farm going," advised Hoobler.

This time around, Hoobler owns about half the 1,000 acres he farms and has accumulated enough equity to help him weather the tough times. Roughly half of his no-till grain farm on the outskirts of Manhattan is irrigated, minimizing yield risk. Like many operators who thought $8 corn wouldn't last forever, he hasn't bought land since 2008 but has financially positioned himself to buy more land at the right price.

"I know land is never a 'good price' but at least it is coming down some," noted Hoobler.

Hoobler's strategy to surviving the next major downturn in the ag economy has been a long, carefully laid roadmap.

"The key is to have a plan," said Hoobler. "Write your goals down. It's amazing how much it works. But first you have to analyze how you can make money." Hoobler started with a small cow herd. "But that didn't work," he said. "I couldn't make money; I did not have enough land."

Later he raised hogs on his small acreage. "You might have to manage someone else's feedlot before striking out on your own or work as a custom harvester," he said. "The key is to find something that makes money."

The strictly grain farmer now is not afraid to borrow money. He bought his first 40 acres in 1977, just before Federal Reserve policy reversed, taking interest rates with it. "Borrowing money won't hurt you, but you need to do it wisely. Most of the time you can always borrow more money than you should. It helps that interest rates are so cheap today," said Hoobler.

During the 1980s financial crunch, Hoobler's land mortgage had a 14.5% interest rate and his operating loan rate was 18% for his farrow-to-finish hog operation. When the 1980s hit, it was a surprise. "We thought prices would recover in a year or two. The banks and producers were unprepared. Today [farm lenders] have been talking about the current economic downturn for three or four years. It won't likely be as tough as the 1980s," Hoobler said.

WATCH THE NUMBERS

Hoobler is a stickler for detailed financial records. "Where you make the most money is at your desk," said the retired high school vocational-agricultural teacher who taught for 31 years.

"Know what's making you money and what's losing you money," he advised. Also, keep personal expenses separate from farm income. "People think they have money to spend when they don't," Hoobler noted.

Financially, he likes to know where he is every four to six weeks. In July, Hoobler looks at his financial records in detail and evaluates how to position himself to go into the next year. He has some corn priced for 2017 and is 30% priced on his 2016 crop.

"We will sell some corn at $3 but I hope to average $3.90 per bushel," said Hoobler who is not afraid to price corn one or two years out.

"There's not a lot of changes you can make on the input side, to be honest," said Hoobler. "Seed, fertilizer, chemicals ... I haven't seen anybody sacrificing for the farmer. We're fortunate in Kansas, we don't have the high cash rents they have in the middle of the Corn Belt."

Hoobler said there is very little dryland cash rent above $100 per acre and irrigated ground is rented 50/50 with some adjustments for harvest and trucking. He also rents some irrigated land with a 70/30 lease. He pays the landowner 30% of the crop and Hoobler pays all the expenses.

"I've run the numbers for higher rents and you can't make any money," concluded Hoobler. "We simply don't have the yield potential they have in Iowa or Illinois and we have higher risk."

The veteran producer has harvested more than 50 crops. "They say starting out in farming is tough. But any business you start is difficult. The key is to start small, keep your debt under control and keep detailed financial records so you know where you stand throughout the year," he said. If it takes an off-farm job or two to help you get through the low-income years, and wise choices in the high-income years, he believes you may be set to survive and thrive in the next downturn in the economic cycle.

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Editor's Note: This is the third and last story in the Pain in the Plains series. See Pain in the Plains - 1 at http://bit.ly/… and Pain in the Plains - 2 at http://bit.ly/…. To see the DTN Reporter's Notebook video about the series, go to http://bit.ly/….

(MZT/ES)

Elizabeth Williams