How to get ahead of a recession

It was 1983, and the timing couldn’t have been worse for first-generation Indiana farmer Randy Kron to start his career. Commodity prices were dismal, interest rates had soared into double digits, and the US economy was emerging from a three-year recession.

However, the deck was not totally stacked against Kron. A frugal attitude and a bit of good fortune with an unconventional vintage helped him even the odds. By growing white corn, a mainstay used for tortilla chips and other popular foods, Kron was able to earn a premium and slowly grow its operation from 66 acres nearly 40 years ago to around 2,100 acres today.

“White corn got us through the 1980s,” says Kron. “It also made us pay attention to every penny and made us better managers. We are still trying to find out what the new ‘white corn’ is.”

Kron and his son, Ben, are also trying to figure out how to build a bridge from the last two profitable seasons to a more uncertain 2023. They have been asking the same question that has been on most farmers’ minds: What should we do? do to prepare for a possible price drop?

Tom J BechmanThree farmers smiling in front of the implement

THE NEXT BIG THING: Ben (left), Joyce and Randy Kron are always looking for ways to diversify their operation in southern Indiana.

look at the leverage

Farmers who survived the 1980s remain cautious. Will history repeat itself soon with another severe down cycle? But Jackson Takach, chief economist at Farmer Mac, is optimistic that current circumstances are not conducive to producing a sequel. In part, that’s because historically low interest rates led to a wave of refinancing in 2020 and 2021.

“More farmers have record, long-term fixed interest rates; there are record low defaults; and the banks are very liquid right now,” she says. “We are in a much better position to bridge the future.”

For those who haven’t recently refinanced and are still interested in doing so, contact your lender. Just proceed with caution, according to Zachary Carpenter, Farmer Mac’s chief commercial officer.

“You should always read the fine print and be sure to ask if there are any prepayment penalties,” he says. “Optionality is fundamental”.

What is optionality, exactly? As the word implies, it has to do with the number of options that a particular loan offers. In other words, what are the “different permitted courses of action” available? At a minimum, you should know if your loan has prepayment penalties. If it’s a variable rate loan, it’s also worth learning the details about how and when those rates can be adjusted.

“Just know the details,” advises Carpenter. “Details can sometimes be expensive. And because we see uncertainty and volatility, lenders like to see producers focus on interest rate risk and overall leverage.”

Is this a good time to invest current profits in farm expansion? It’s hard to take the emotion out of these decisions, Takach notes, especially for so-called “once-in-a-generation” farmland sales. But try to list the pros and cons, such as price, proximity, and productivity potential.

“You still have to do the math to make a logical decision because you will live with that decision for a long time,” he says. “But I understand it. It’s hard to turn your back if a rare opportunity presents itself.”

Plot of Farmer Returns in Dollars per Acre for Central Illinois on High Productivity Farmland

alternative income

Just as white corn brought Kron’s farm during the 1980s, farmers must always be on the lookout for possible alternative sources of income.

Hemp had the most publicity a few years ago, but that has largely died down. Carbon markets seem to be the next big thing, and green energy companies continue to do the rounds, trying to entice landowners to turn farmland into rows of solar panels or wind turbines.

“There are a lot more opportunities coming up that will look more attractive when corn is $4,” says Takach.

When it comes to carbon capture revenue, Kron has been content to wait in the wings for now.

“We need to figure out what is the correct value and if it is a net value for our bottom line,” he says. “It also has to be sustainable for the pocket.”

Large-scale solar projects have become a sore spot for some rural communities. Although the profits can be lucrative, they can also tie up a piece of land for 20 or 30 years. In grasslands, it’s more obvious: cattle can graze between the panels and even enjoy the new shade they provide. But converting farmland is a much more controversial proposal. The Great Plains Institute recognizes that the top three concerns for solar development are:

  • The impact on agricultural production.
  • The effect on local and regional natural resources (soil, groundwater, habitat, etc.).
  • Change in the character of the community (possibility of being an eyesore).

But with a lot of potential alternative revenue at stake, these projects can’t be written off without at least a little thought. You can also pay the mine for potential dollars from various government grants and programs. Look for alternative ways to increase income or reduce costs – sourcing manure for fertilizer is one example.

“The good news is that you still have some time to think about some of these options,” says Takach. “Planning ahead cannot be underestimated.”

run the numbers

Volatility has been a mainstay of the 2022 season. Both input costs and raw material prices have fluctuated dramatically throughout the year. That has farmers like JD Burns keeping their heads in a spin.

Burns, who farms about 1,100 acres of corn and soybeans with his father in western Kentucky, says he often reviews his crop budget every two weeks.

“I always like to know where I am,” he says. “I try to budget accordingly and run worst case scenarios because I know how each field performs in good years and bad years. I don’t want to spend what I don’t have.”

ben potterFarmer crossing his arms in a soybean field

STAY OPTIMISM: Confidence is key for Kentucky farmer JD Burns:

Burns adds that it’s too early to tell if he’ll make rotating changes by 2023. Input prices are historically high, but he says it doesn’t make sense to skimp on anything that could negatively affect yields.

“Inputs are expensive, but the prices are there to remain very profitable,” he says.

Steve Isaacs, University of Kentucky Extension farm management specialist, recommends breaking down farm finances to the field level, something he refers to as a business budget.

“What is each company doing for me?” he says. “How well is each component working?”

Isaacs also suggests that farmers remember what is in and out of their control. And then he responds accordingly.

“Farmers are notoriously interested in circles of concern, but not circles of influence,” he says. “You can’t influence the weather, for example, but you can influence your budget.”

Capital investments

Both Burns and Kron say they will take a conservative approach to making team upgrades in the near future. Supply chain issues can make those decisions even more difficult.

“We’ve been talking about a seeder upgrade, but I’m not even sure if we’ll be able to find it,” says Kron. “Some of that is on hold because it’s not an option.”

Still, Kron tries to do regular equipment upgrades to stagger operational needs.

“It can get away from you to where everything is old and everything needs to be updated [at once],” he says. “We’ve always had a philosophy of trying to improve bit by bit. But it looks like 2023 could be a pretty lean year, so we’re on the conservative side in terms of capex.”

Burns predicts that 2023 will bring its own unique set of trials to conquer. But he says his time in the US Marine Corps gave him the attitude and discipline to face them head-on.

“What I love about farming is that there is always a new goal, a new challenge, a new day,” he says. “There is always something to work for.”

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