View all past Braintrust Ag newsletters here.

Edition #26

February 3, 2024

Good morning and welcome to the Braintrust Ag newsletter. Providing all the ag folks quality reading material as they jet off to the various farm conferences…in the hopes of arriving in one piece.

A couple notes to begin:

• We ended January with 176 members - a big “thank you” and welcome to one & all!

  • Become a member by clicking here.

• While in Montana last weekend, I got to meet up with a couple Braintrust Ag members in person - that was great! Gotta say, that was a highlight of the trip. (also, apologies that my trip caused no newsletter last Saturday)

Alright, let’s get to the topics that will help you build a strong, sustainable ag operation.

-Clint

Here’s what we have this week:

• 🛣 Pathways Into Ag

• 🌱 Seeds

• 📉 or 📈? 2024 Outlook

• 📲 There’s an app for that

• 💪 2 Flex Lease Examples

• and more…

THE BIG IDEA

5 Pathways for “Beginning Farmers” to break into their own operation.

Last weekend I had the honor to present to a great group of Montana farmers and ranchers at the Montana Next Generation conference.

Side note: Turns out “Midwest nice” extends west throughout MT. Incredible time to meet online friends & followers in real life, and get to meet a ton of new connections as well. Real salt-of-the-earth people within MT agriculture.

Anyway, one of the topics we discussed was opportunities for people to eventually manage/own their own farm or ranch.

Here’s 5 such paths with real world examples:

1. Family Succession

Example:

Jason from MN grew up on the family crop + cow/calf farm.

Went to college.

Spent 3 yrs off-farm w/ another operation.

Came back.

→ Now, he's buying into the operating entity on a predetermined vesting schedule at a discount to FMV.

2. Non-Related Succession

Example:

Andy from SD has no kids who want to ranch.

He's found a young ranch couple to lease-to-own the cow herd over 2 years.

Same young ranch couple is buying all of Andy's ground on a 5 year contract.

Andy is fully retiring after 5 yrs.

3. Employee to Ownership

Example:

Jim in KS has 3 kids - none who want to farm.

He's hired someone to learn the ropes, get paid a wage, and have ownership vesting in the operating entity over 7 yrs.

Land rented to entity.

Jim will keep the land, live off the rent, & retire.

4. The Side Farm

Example:

UPS driver Dale bought an acreage & now is renting pasture & tillable ground.

Farms cattle & row crops evenings, holidays, & weekends.

In 5-7 yrs he'll switch to part time job as his farm expands.

His eventual goal is full-time farming.

5. Investor Benefactor

Example:

TJ & Sue moved from WA to IA to buy a sheep farm.

Started w/ 40 acres & wanted to expand into accelerated lambing.

Local bank owner & high net worth individual invested $900K in facilities.

Tripled their flock & expanded their land base over the years.

Honorable Mention: High paying corporate gig → farm

Jeff worked 25 yrs as an executive for telecom company.

Piled up cash.

Left the company & bought a working hay & row crop farm.

Now has 2 sons looking to join & expand the operation.

One thing these paths all have in common is they take time. So, watch for opportunities, lay out a plan, and have patience to chase those ag dreams.

SEEDS

• 🐂 Income Tax: Cattle folks can learn about income tax strategies and impacts with this article from the Ranching For Profit School. Also, they wrote one on Windfall Profits and How To Think Beyond Profits.

• 🛂 Equitable Inheritance: This link has some thoughts on setting up separate “buckets” to off-set the high value of leaving land to on-farm heirs and keeping things equitable with non-farm heirs.

• 💵 Riveting Reading: For those of you doing your own 2023 taxes (and are a glutton for punishment and enjoy reading IRS publications) here’s the 95 page “Farmer’s Tax Guide” from the IRS.

• 📊 Keep Good Records: This ‘must read’ saga of an Indiana farm family is a real life example of how detailed record keeping and perseverance won an $810,000 victory against the state.

• 👨‍👩‍👧‍👦 Farm Succession: These survey results of 403 US producers explores key factors associated with farms that have written succession plans. The bottom line (quoted from the summary): Farms with succession plans tend to use financial ratios and standard operating procedures, evaluate crop pricing performance, operate larger farms, are more resilient to strategic risk, and their operators are more highly educated. 

Become a member today for lifetime access to everything. It’s a small one-time cost with NO recurring subscription.

2024 OUTLOOK

Ag lender Grant Wiese, of Farm640, summarized his recent meetings with farmer-customers regarding the 2024 outlook in this way:

Interest Rates 

While there have been expectations in Wall Street that we see 3 rate decreases in 2024, I’m not buying it. Wall Street was calling for decreases in 2023 and doesn’t seem to be on the same page as the Fed. Inflation was higher in December and again here in January. Typically, it takes 8 months for a rate change to have an impact on the economy (which would be April). I don’t expect the Fed to decrease rates in March and best cash scenario might be two .25 decreases in the second half of the year. The bond market (which impacts home mortgage and land note pricing) has been moving lower since October. Long term interest rates have been more reasonable which is helping (slightly) the housing market get homes moved. This is good if you are in the market for ag real estate this year.

Land Prices 

I feel we have peaked over the past 18 months and are on our way down. 2022 was arguably the most profitable farming year ever and it left a lot of cash burning holes in farmer’s pockets. We have used up a lot of that cash (more on that later) and the interest in new listings seems to be down. I haven’t seen a new high land price in a county nearby for a while and expect to be steady to lower (0-10%) through 2024.

Yields 

We were in a heavy drought in south central Nebraska. Irrigated crops seemed to do as expected but were not record breaking and took a ton of water. Irrigated soybeans had white mold issues. Irrigated corners were often zeroed out while dryland fields were well below APH. There weren’t nearly as many bushels to sell and we are missing a few crop piles in the state.

Equipment Prices 

I don’t expect new equipment prices to move lower, even in an ag recession. Equipment companies continue to invest and implement new technologies which will result in prices continuing to move higher on new items. One area I have seen producers save significantly is building their own high speed precision planters. If you can do this, it could save you $100k+ and make it way easier to handle repairs since you now know your planter like the back of your hand.

Operation Improvements 

Any desire for updating equipment was addressed in 2023. Any plans for updating equipment are <$25k and there are no expectations for land purchases.

Commodity Price Direction 

If you overlay an ending stocks to use ratio with corn prices, it doesn’t paint a pretty picture. Our current figure is around 14%, which historically would imply corn prices below $4/bu. In fact, by overlaying the ending stocks to use ratio with overall farm profitability, you see most figures 10% or higher are almost breakeven at best. Profitability is found with a single-digit stocks to use ratio.

Marketing and Weather 

Some reports show the possibility of a wet spring which would be beneficial for a spring rally. Weather changes daily and I don’t like making marketing decisions off weather percentages. That said, spring rally’s (between March and mid-June) are the rally I personally try to sell on. I am not a marketer and refer any marketing discussions to the professionals.

Working Capital Trend 

It was not uncommon for 1,000-3,000 acre operations to lose between $250k-$600k in Working Capital this year. $200k from poor yields/prices. $250k+ from equipment purchases paid with cash to avoid high interest rates. In some cases, it would be wise to term out those equipment purchases now to put the Working Capital back into your operation or lessen the losses. Term notes are currently cheaper than borrowing money on your Line of Credit. You can term the equipment out to replenish Working Capital, save on interest for 2024, and pay off the note if you have a really strong year.

Overall Financial Picture 

It is very possible to lose Working Capital while still maintaining or growing your overall Net Worth position through debt paydown and increased value in long-term assets. That situation is playing out for some operations who mostly limited capital purchases in 2023. If there was significant equipment bought with cash, it is likely there are losses in Working Capital and Net Worth. Every operation, regardless of their Working Capital or Net Worth movement in 2023, will need to be very careful with all expenses, decision making, and marketing in 2024 to be profitable. Farm made projections are very tight even with some overly optimistic commodity prices.

Final Summary 

Every operation is different and needs alternative advice compared to their neighbor. Nothing mentioned above is a one size fits all approach. While I hope this is helpful, what is better for your operation’s well-being is to update your own financials, run them by a trusted financial advisor, make your own plan for the upcoming year, and adjust that plan when necessary.

Find more of Grant’s insights at Farm640.

FEATURE HIGHLIGHT

Many members are not aware there is an app you can download for the Braintrust Ag community. And, it’s available for either Android or Apple users (I don’t understand iPhones, but we embrace all members equally!)

It’s called “Circle” and here are the links to download it:

Here’s a screenshot of the app on my phone:

It gets you easy access to all the community has to offer.

If those links didn’t work, from the desktop, click the link to download in the bottom left-hand corner of the webpage:

FLEX LEASES

Flexible cash farm leases are a twist on both traditional cash rent leases and traditional crop-share leases. In a flex lease, the landowner receives a pre-determined cash fee, adjusted for changes in yield and/or price.

Advantages:

• Landowner shares in the good years

• Tenant has less risk

Disadvantages:

• Less benefit to excellent farm managers

• More challenging to forecast breakevens

The parties could set the lease up to flex for 1) price changes, 2) yield changes, or 3) both price & yield changes.

Some formulas can get very detailed and location specific, which we won’t get into here.

The following are two very simple variations:

Example #1: Base Rent plus Bonus

Base Rent is calculated at 2% of the value of the land. (i.e. $6,000/acre land = $120/acre)

Bonus Rent is determined as follows:

→ Average Corn Yield X 30% X Average Corn Price = Total Rent Per Crop Acre

→ Average Soybean Yield X 40% X Average Soybean Price = Total Rent Per Crop Acre

The actual corn and soybean yield comes from the combine monitor, weigh tickets, or federal crop insurance report.

The average corn and soybean price is determined by recording the

• March 15th

• June 15th, and

• September 15th 

December corn & November soybean prices from the local co-op.

A simple average is calculated.

--> If the Bonus Rent exceeds the Base Rent, the difference is due December 1st.

For example:

Corn yield - 160 bu/acre

Simple average = $4.50

Bonus Rent is (160 x 30% x $4.5) = $216/acre

So, since Bonus Rent ($216) exceeds Base Rent ($120) the difference ($92) is due Dec 1.

Example #2: Share of Gross Revenue

There is no Base Rent (floor) in this scenario.

→ The landowner receives cash rent equal to a specified percentage (~25-40%) of the gross crop revenue.

*Likely a higher % than Example #1 since there's no price floor.

Rent = 32% of gross crop revenue

• Actual yield: 160 bu

• Actual price: $4.50

• Gross value: (160 x $4.50) = $720

• Other crop income: $5/acre

→ Total rent payment: ($725 x 32%) = $232

Notes:

• These differ from traditional crop-share leases because landowner does not pay for any inputs

• Farmer makes all production & marketing decisions

• Base Rent % and Price/Yield % are negotiated between tenant & landlord

• Please document your deal w/ the landlord in a written, signed flex lease agreement

So, maybe consider a flex rent agreement next time you’re negotiating with either your tenant or your landlord.

POLL

MEME OF THE WEEK

That’s a wrap, folks.

Until next week, thank you to everyone involved in ag. Come engage on the community platform & let’s grow profitable ag businesses together.

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DISCLAIMER: All content, communications, and resources provided by Braintrust Ag, its principals, operators, or members is intended to merely be educational and entertaining. Nothing published by Braintrust Ag should be relied on as legal, financial, investment, or other professional advice. Investments and legal matters involve substantial risk and are not suitable for all individuals. It is recommended to enter into a client relationship with an ESP for obtaining professional advice.