Oh the things I would buy! The farm will absorb all the money and labor I can throw at it and it will never be enough. There is always more work to do. More I could spend money on. More I could throw resources at.

Some things are better than others. Some things are higher priority. Sometimes priority is somewhat ambiguous. It’s hard to know. But there are several things we own that we don’t need but enjoy owning…places we have tucked a little spare cash and feel we have been rewarded for it.

The wood burning cookstove is totally a want.

Well, mostly anyway. We have an electric range. We have a furnace. They both work well when the power is on. But the wood stove is so nice all winter long. Just park your tookus next to it and you’ll thaw out in no time. Wet, ice-covered gloves will thaw and dry while bacon fries and bread cooks. It’s amazing. The whole skillet heats evenly, not focused at the center! You will also lose weight, gain strength and stay warm cutting wood to feed the thing. 5 months of wood is a lot. No. A lot. No. You are still thinking too small. A Lot lot.

So we sharpen the chain, mix the fuel, put on safety glasses and hearing protection and heavy gloves and spend dry days in winter cutting hedge trees, cleaning fences and managing the woodlot for the future. Multiple shoots come up from a coppiced stool. We pick the one that looks the strongest and cut the rest…year after year. We build fires. We build brush piles for wildlife. Then we remember we forgot to stoke the fire in the stove so somebody goes home to put a big log on. Nothing worse than a cold stove on a winter evening.

It certainly isn’t something we need but it really is nice. This old, drafty house is hard to heat so we don’t. We just set the thermostat at 57 and keep that fire roaring. We recognized a need, had a little extra cash and are now reaping the benefits.

There are any number of places I would spend extra cash on the farm but we don’t seem to be burdened by unspent money these days. It would be nice to have a second car, more and better cows, a round baler, a loader tractor, 1,000 chestnut trees, 3,000 hazelnuts, sheep, a new machine shed, more and larger greenhouses…on and on. Long lists of things I don’t really need but would REALLY like to have. Things that would make our life here a little better. Trenched water lines, pond, a floor in the loft of the cattle barn…heck, a new cattle barn.

But it all costs money.

Well, Mr. Jordan, don’t you have a bona-fide city computer job? Well, yes. So where does the money all go?

A few years ago I could tell you to the penny. To the penny! I kept a little notebook outlining my goals and stating my finances clearly. But that fell to the wayside. Some people only pray when they are cornered and look to God as their last chance. That, I guess, is how I feel about budgeting. And it shows.

But, again, no matter how much money I spend I could always find a need for more. That’s unfortunate but it’s the truth. It doesn’t matter how well I budget. It matters how I prioritize.

I’m glad we bought the wood stove. However, I am careful to distinguish needs from wants. There are wants that are worth having. But maybe not right now. I think the pond falls into that category. It would be nice but there are other priorities. That was a hard thing to say though.

Be a net producer. Leave more than you take.

That’s really all I have to say today but I guess I should spell it out a little.

I have several options available. I could just sell everything on the farm. In some circumstances it could make sense to do that. I could sell all of the iron both from the iron piles and from the buildings themselves. I could sell the equipment I own. I could sell the livestock, the cattle mineral feeder, the fencing, the fence chargers, the hog waterer, the hog feeder, the pasture feeder for the chickens. I could tear down both houses and claim the salvage value of certain components of each. I could sell the trees either as lumber or as firewood. I could sell hay until my soil is depleted then scrape up the remaining topsoil and sell that to a housing developer. Then sell the remains of the farm to the next guy. What would be left over? Hopefully I would have covered my debt on the farm and put a little in my pockets. But then what? I have just sold my productive resources bit by bit. What would I do with my money? Go buy another productive resource to liquidate? Like a hunter stalking and consuming prey, one at a time?

How about this instead? What if I increased my cattle herd in an effort to increase forage mass and diversity? What if I planted more trees but harvested trees that are mature, sick, showing poor conformity or are just in the wrong place? What if I built brush piles to house wildlife? What if I focused, over time, on building new topsoil?

Money is nice. It really, really helps. Really. But money is just a tool. Products are purchased with production. The money is the common exchangable item between producers. For example, I don’t eat money, I eat apples…which cost money. But I am not the US Treasury so I can’t just go create my own money. Unlike the Fed, I have to do something to get money. I have to sell something I have in surplus. In my case, time. I use a portion of my time to produce healthy databases for a company. The company produces software to record information from heart monitors. Those heart monitors work to save people’s lives. So hospitals or patients give the company money in exchange for the service. And I get money from the company in exchange for my service (because I really don’t need a heart monitor). And I use the money to buy apples…and other things. I wanted apples so I helped make a heart monitor. The world is a better place because it has heart monitors it didn’t have before, along with other innumerable but often unseen benefits (I encourage you to read Bastiat to explore this idea further).

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But heck with my city job example. I have acres and acres of grass. Grass is worthless. It grows anywhere there is rain and sunshine. Nobody wants it…or if they do, they want it to be 2″ tall with tees and greens spaced throughout. My grass grows several feet tall and it is the “wrong” kind of grass. It is essentially worthless so we have cows. We use the cows to add value to the grass. I am taking something of little to no value, adding my time to it (also of little value) and making beef. This is not a zero sum equation. It’s net production. I’m using my management ability to capture free sunlight and rain, growing grass, converting that captured solar energy into beef and using the beef by-products (footprints, saliva, manure and urine) to make the grass stand even more healthy. All while making the cows happy. It’s a win all the way around…capturing sunlight, holding and absorbing rainfall, sequestering carbon, keeping the cows fat and happy, feeding people and bringing home the bacon.

I am hauling some portion of nutrients off of the farm with each egg, pig or calf that we sell. No doubt. But I more than compensate for that by the addition of organic material happening with each grazing and rest cycle and through the nutrients mined, captured, transported and released by trees and deep-rooted forages. Our farm will continue getting better as my management skills increase. As our herd numbers increase. As time passes. The end product of my labor will be left to the next generation. They will have the option of continuing to producing organic material from captured sunlight and rain. They could continue improving our farm through their productive efforts.

Or they could sell it all and go to Vegas. It’s up to them.

This is the last in a series of thoughts I had concerning our farm’s history and future as I read a paper released by the Kansas City Fed. You can read part 1 here and part 2 here.

Our friends at the K.C. Fed wind up their paper saying we’re in good shape as long as interest rates stay low, China keeps importing grain and we keep producing ethanol. Well, that’s reassuring. The Fed paper admits that, as before, interest rates are low so land prices are on the rise and cash rents are not keeping pace. So borrowing costs are low and returns are diminishing. Rising interest rates could be a real issue. From their paper:

Higher interest rates could have two distinct impacts on U.S. agriculture (Henderson and Briggeman). Rising interest rates may place upward pressure on the dollar, which could indirectly trim U.S. agricultural exports, farm profits, and farmland prices. In addition, higher interest rates also boost the capitalization rate, which weighs further on farmland prices. The impacts are compounded in highly leveraged environments when higher interest rates raise debt service burdens, as the 1920s and 1980s demonstrated.

However, they believe farmers are borrowing more responsibly now than they did in the ’70’s.

Unlike the 1970s, farmers today have been more restrained in their capital investments. To be sure, capital expenditures have risen sharply, but they have increased at roughly the same rate as farm profits.

But that level of profitability may have something to do with the fact that land rents aren’t keeping pace, not to mention all-time high prices for crops. When rents catch up or prices fall…who knows.

A little later in the fed paper (emphasis mine):

For more than a century, farm prosperity has shifted with U.S. agricultural exports. Surging exports spurred rising farm incomes, while plummeting export activity weighed heavily on farm incomes. In addition, leverage shaped fluctuations in agricultural land values. Low interest rates contributed to booming farmland prices and the accumulation of debt as farmers expanded investments in land, machinery, and equipment. Rising leverage, however, contributed to the farm busts of the 1920s and 1980s as farmers were unable to service their mounting debt. In short, if exports remain strong and leverage remains low, this cycle could be different.

Oh. It could be. This could be the cycle that never ends. Glory be! But what if this cycle is different…in that it is worse? From Corn and Bean Digest:

The current great super cycle is a triple whammy, impacting oil, metals and agriculture. It has now lasted for a decade, which is 2.5 times longer than any previous super cycle. Technology, innovation, large farms and agricultural audiences are the matters of the day. Land values have skyrocketed, particularly since 2007 and 2008, and while 260 million Americans in suburban and urban households have seen a decline of their income from $54,000 to $47,000, 60 million people in rural America have experienced profits and wealth accumulation.

And to counter the Fed’s notion that farmers have learned from the lessons of the 1970’s I offer this counterpoint from Deltafarmpress.com. Though the author thinks farmers will be bailed out by the government, hard times are going to come…sooner or later and he dares to include a timeline (emphasis mine).

Farming, whether we want to accept it or not, moves in cycles. Big periods of high income are almost always followed by some big periods of low incomes or losses. I think that’s where we’re headed. Incomewise, I think we should all buckle our seatbelts for some rough times financially over the next three to five years. Grain prices are deflating – not inflating. High prices choke off world demand and it takes years to build it back.

My prediction is that more than half of the farms in the U.S. will have negative income in 2014 and 2015. Farmland prices will soften – but not drop sharply. A 10 percent to 15 percent correction could easily occur as farmers quit buying and outside investor money steps in to help support the market. The majority of farmers have upgraded all of their equipment lines in the last five years. Many have enough equipment to farm two to three times what they are already farming.

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I work in the world of software development. One philosophical issue developers face (yes, philosophical) is not just how to solve the problem but determining if the problem should be solved at all. We often simply write applications that make it easy for people to do things they shouldn’t be doing in the first place. Imagine a developer or project manager stepping into the SDLC to laugh and say, “Sure, boss. We could do that. Buy it’s a stupid thing to do.” (The developer would be asked to leave. The company would continue spinning its wheels.)

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The problem, for example, is not the lack of software to schedule meetings. The problem is the meeting itself! It wastes an hour or two of everyone’s time when no decisions are made and a memo would have done the job. Farmers do the same thing. We buy bigger and bigger equipment so we can more efficiently do whatever we are doing without stopping to ask why we are doing it! The time will come when the man behind the curtain has a heart attack and the illusion fades. Cows can just eat grass. Corn is not an efficient source of ethanol. Chicken is the most expensive meat source. What happens to John Deere when farmers realize their equipment needs are more than covered and realized profits are better than write-offs?

Farm Credit Services of America weighs into this issue by saying farmers should know their land costs per acre. And that’s an important point. A farmer who bought land in 1988 for $500/acre is sitting on a lot of equity right now compared to a farmer who bought in 2005 for $4,000/acre. The deck is stacked against new farmers carrying a lot of debt and a high per-acre land cost. I am particularly amused by the Farm Credit Services of America article because it seems so optomistic.

Here is a northern Iowa example to illustrate how the caps are derived:

• Assume a 200-bushel-per-acre corn yield and a $4.50 per-bushel price. That’s $900 per acre in gross revenue.
• Estimate operating costs based on the benchmark Iowa State University variable and fixed-cost budgets.
• Assume a 3.5% capitalization rate, or return on investment in land.

With these assumptions, we see a return to real estate of $320-$350 per acre. Applying the 3.5% capitalization rate, the sustainable market value of the land would be $9,000 per acre. We would lend up to 65% of that, or $5,900 per acre.

Go ahead and question that $4.50 per-bushel price and see what happens to the numbers above. BTW, the annual average price for corn has only gone above $3.83 four times…all in the last 6 years. Also as you read the above remember what Hughes said earlier about land in trusts not being well cared for. No user owns it. Nobody cares. That government agency (Farm Credit Services) is not loaning out its own money. It is loaning out your money. What do they stand to lose if farmers go broke? Farmers have gone broke over at least two cycles since they were created and it hasn’t mattered a bit to the agency. There are no consequences for advising financial ruin. They are in business to loan money without worrying about the human costs. Here’s a quote on the creation of that agency:

The Federal Farm Loan Act enacted on July 17, 1916, answered agricultural producers’ demand for credit to finance land and farm machinery purchases which had increased in the late 19th and early 20th centuries as America’s agriculture became more commercialized to meet growing domestic and foreign food demand. Private lenders at the turn of the century proved increasingly inadequate to meet these needs for financing. Slowly, a consensus emerged in Congress that the Federal Government should develop facilities for providing farm mortgage credit to assist farmers and ranchers in purchasing land on affordable terms.

Private lenders were afraid to risk their money so farmers asked the government to do something about it. Again, this was still at the peak of agricultural prosperity in our nation – the lauded Golden Age of Agriculture – and somehow farmers still needed more credit! So they asked the government to give them affordable terms and they got affordable terms…and got them good and hard (apologies to Mencken). You know, the kind of terms that displaced farmers in the depression. And again in the 1980’s. But it’s not that simple, it also led to copious amounts of additional legislation and the ridiculous notion of price parity!

But I digress.

I don’t think we have reached a point of permanent agricultural prosperity. Interest rates are low. They have been low before. China is buying a lot of beans…but Russia used to buy a lot of wheat. Farmland prices are at an all-time high. Grain profits are near an all-time high. But we have seen highs before. We export a lot of soybeans but Brazil, in a normal year, exports more soy than we do. And what happens if John Deere equipment sales fall by 70%? Are farms at the 1999 price point of NASDAQ? I don’t know. I am looking to minimize my own farm’s debt load and am working to minimize the debt required by the next generation. Whatever price the government sets on money, I have to repay it. However attractive I think the land across the fence looks, I am liable. It’s on me.

Not only do I need to keep my day job, I need to focus on lowering production costs and maximizing the utility of my farm as we work off our loans. At the very least I want to hold on to the farm for the next generation. Better yet, I should store up a war chest should I have the opportunity to accumulate resources at a discount. As should my neighbors. As should you! Sometimes things happen. Isn’t it better to survive the hard times (or even expand) than to be crushed? And hard times always come.

A longtime reader, SailorsSmallFarm, has often suggested that I read “The Farming Ladder” and I am finally getting around to it today. I am sorry it took me so long. Early in the book Henderson was discussing the deplorable condition of the farm he was preparing to purchase,

…in view of the unparalleled prosperity agriculture had enjoyed during the Great War and two years after it, which left the farms and farmers poor in everything except money. It was very certain that on this farm far more had been taken out than had been put in.

Chew on that for a minute before I finish up. We are at a point where prices for everything involved are higher than they have ever been. Farmers face a strong incentive to capitalize on the current opportunity by exporting everything from nutrients to livestock to scrap iron. I think it’s a good idea to build up a war chest of cash for later deployment. Also a war chest of soil organic matter. And a war chest of soil fertility. And a war chest of high-quality genetics. Plow those profits back into farm assets, not cool, new tractors! Cash for cash’s sake is not worth having. If you don’t have a plan for your resources you won’t hold on to them. And believe me, if you become comfortable with a high income ($4 corn) you will find a lower income to be incredibly uncomfortable ($2 corn).

I think the Fed paper is far too optimistic. The government will certainly provide assistance to farmers but if profits have been at record highs for the last decade why should they need my money? Will they squander that prosperity buying new trucks, 4WD tractors or land at ridiculous prices? I don’t know. But maybe we should anticipate their coming failure. Maybe we should start planning auctions and to put those assets in the hands of capable entrepreneurs at reasonable prices. Pick up the broken pieces and move on. That sounds better than taking taxpayer money to pay for the mistakes of the once high-income few who didn’t plan for a rainy day.

Maybe this advice is more for me than it is for you. But maybe you will appreciate it too. Don’t worry about land prices and don’t worry what the other guy is or isn’t doing. Get your own house in order. Be productive. Focus on keeping costs low and improving fertility. Minimize debt. Realize profits and take that money off the table cause hard times are coming. You’ll regret it if you don’t have a plan. Maybe not today. Maybe not tomorrow. But soon and for the rest of your life.