TERRY KASTENS, Darrell Mark and Bob Craven all teach the economics of farming. But skip the ivory tower analogy. These professors also work on their own family farms and apply the theories they teach in class.
They plant. They harvest. They hire and fire. They buy inputs and sell grain. They do the books. And at the end of every crop season, they are graded according to the numbers they see on their profit-and-loss sheets.
Farm Industry News asked these instructors-slash-practitioners to share with us the lessons gleaned on the farm.
DARRELL MARK, assistant professor of agricultural economics and extension livestock marketing specialist, University of Nebraska — Lincoln
Darrell Mark specializes in marketing and risk management at the University of Nebraska — Lincoln. He also grows corn and soybeans and raises cattle in partnership with his parents, Charles and Martha Mark, Irene, SD. “I'm involved in everything from management to labor,” he says.
What is one thing you teach that you apply on the farm?
I always stress knowing what your break-even cost of production is and using that for your market-entry price. A marketing goal of “the top price of the year” isn't realistic and generally is hard to identify until after it has happened. Making sales is easier when you know whether you're going to net a profit. Focusing on consistently making a profit, even a small one, will ensure you're in business for the next year.
What do you teach that you don't you apply?
We spend a lot of time in our extension programs emphasizing the importance of long-run strategic planning and goal setting. That's something that most farm families, including ours, could benefit from doing more.
What is the most common question in your classroom?
My agricultural marketing students often ask, “Is this really something people do in real life?” They are often surprised that I focus on current issues to explain the economic underpinnings of the market and the design of various risk management tools. We take that a step further by integrating that knowledge with production sciences and what is happening on their farming operations. My students must keep up with markets and agricultural supply and demand conditions in the course and then use that information to make decisions and complete projects. So, my response generally is, “Yeah, this is real life.”
How are farming students today different from farming students a decade or two ago?
Farm students have become very technologically savvy and conscious of the world events that can impact farming. They also are looking ahead at what they need to learn to improve their operation. Students often take my marketing class because they view marketing as a weakness in their own operations and are trying to improve. Although a significant number of college students plan to return to their family farms, more are postponing those plans 5 to 15 years to work in other sectors of agribusiness. They are doing this to generate capital needed to start farming and to gain experience in management and marketing, which can benefit their future farming operations.
What is your best advice for corn and soybean farmers this year?
Take advantage of forward-pricing opportunities when available. For example, over the past eight years, a producer in east-central Nebraska could have netted an average of $0.40/bu. extra for corn and $0.50/bu. more for soybeans by forward-contracting in spring, delivering on the contracts at harvesttime and collecting LDPs compared to making cash sales at harvesttime. With revenue-based insurance, this generally is not an overly complicated or risky strategy either. It doesn't work every year, but in general, it is a good marketing alternative.
Can farmers get by today without some type of higher education?
For young people anticipating farming as a career, a good education is critical for future success. The margin of error is incredibly small when managing farms with significant capital investments and low profit margins. The information gained from higher education will be useful in staying competitive with new technologies and production practices that can minimize costs and generate ideas for innovative revenue streams.
BOB CRAVEN, director of the Center for Farm Financial Management, University of Minnesota
Bob Craven holds a master's degree in agriculture and applied economics. He also farms 1,600 acres near Jackson, MN. Seed trait technology and the Internet are two technologies that have had a major impact on his farm in recent years. “I plant 100% Roundup Ready soybeans and Bt corn to the maximum limit allowed,” Craven says.
What is one topic you teach in class that is most helpful on your farm?
I teach financial planning and analysis using Finpack, a financial planning and analysis software package. Each year I do cost accrual analysis of my business on an enterprise level to see how each enterprise is performing. Then I take that information to sketch out plans for the future. In the last five years, Ed Usset and Wynn Richardson, fellow staff members, and I developed a series of educational programs called Winning the Game that help growers develop and implement preharvest and postharvest marketing plans. Those programs have helped me improve my grain marketing.
What type of record-keeping and computer system do you use?
I have a notebook computer that I take everywhere. I use it at the farm and at work. In terms of record keeping, I use a popular off-the-shelf accounting package. For planning and analysis I use Finpack, which is developed and supported by the University of Minnesota.
Do you practice site-specific farming?
I am experimenting with it. In the last four years, I have done grid sample soil testing on one parcel of land and have applied fertilizer using the grid sample. This year, that parcel happened to have the highest-yielding soybeans. It doesn't mean I am 100% sold on the economics of site-specific farming, but it is something I am continuing to watch. I also have used a GPS yield monitor for the past four years, and the information from the maps is starting to have some payback.
What is the biggest change you've made to increase your on-farm income?
One of the biggest changes was a recent conversion to no-till soybeans. I'm continuing to look at my machinery and equipment lineups, and I have made an effort to get rid of equipment I don't use much. Other than that, I can't single out one major change that has increased income. As I look at some of the research at the university, I have discovered that there are no home runs to be hit. It's a lot of little base hits that tend to differentiate the top producers from the below-average producers. I attribute that to higher levels of management.
What was the driving force behind your conversion to no-till?
I had been using no-till on an 80-acre parcel for 10 years and had good luck with it. Last September, we had 12 in. of rain, and I didn't think tillage in muddy conditions would be good for the soil. So I took the leap to no-till. This year it has worked out well, both from a yield perspective and cost standpoint. I certainly didn't have a crystal ball to see the high fuel prices coming, but no-till worked out well to combat them.
How else are you combating high fuel prices?
This past year I prepurchased all my fuel. I keep in close contact with my fuel supplier. Prices are still higher than last year, but I decided to go ahead and purchase next year's fertilizer early in September. There were some reasonable deals.
What do you see as farming's biggest challenge?
When I look at the big picture, I continue to see the consolidation of agriculture and growth in farm sizes. So my biggest challenge is to figure out if I can grow my business. Where am I going to be in 10 years? Farmers need to carve out time to spend on strategic planning. A long-term strategic plan is an important guiding document as we move through time.
What is your best advice for corn and soybean farmers?
If there are two operations today that have exactly the same land base, exactly the same government payments, and identical scenarios, chances are only one of those farms will be around in 10 or 15 years. What will make the one farm successful? I believe it is management. Farmers need to get a handle on their costs of production and to keep costs down without hurting yield. They also need to continue working on marketing their production. The other thing that makes a big difference is attitude. A positive attitude goes a long way in this business of agriculture.
What is the biggest challenge for you on your farm?
One of my bigger challenges is that I am 175 miles away from my farming operation. Communication is key. I always need to work hard to keep the lines of communication open over a distance.
What made you decide on a career in agriculture?
I grew up on a farm and I always liked the farming life. While in college I stayed involved with my dad in the farming operation and continued after I started working here at the university.
I really like the kinds of things we do at the university. It is a great place to work. I have the opportunity to do a better job at both because of the things I bring from one to the other. As an educator, when I speak to a group of farmers or professionals I know what it is like out in the field. I know some of the tough decisions producers are faced with and I get to face the emotions in those decisions. It's always easy for educators to say you should do this or that. Sometimes there are emotions at play, and it's not all hard facts and science. Hopefully the fact that I spend time on the management and marketing makes me better in my farming operation.
TERRY KASTENS, professor of agricultural economics, Kansas State University
Terry Kastens partners in a farm near Herndon, KS, that raises 7,000 acres of corn, wheat, grain sorghum and alfalfa and has about 3,000 acres of native pasture. He also teaches Ph.D.-level classes in neural networks, genetic algorithms and spatial statistics and is a routine guest lecturer in undergraduate classes on agricultural economics and agronomy. His lecture topics include “Using what you've learned in managing a farm” and “Why tomorrow's farms will be different than students perceive.”
What is your most common question in the classroom?
“How can I most effectively become involved in our family's two- or three-generation farm?” The answer is to treat it like a business. You're not going home to start a farm. You're going home to contribute your skill set to the existing business. If you can't get your folks to think like business people, then don't bother to go back home to farm. Operating as a business means that all folks involved, including owner-operators, are paid a wage or salary to separate personal finances from business. In short, returns to labor and human capital are segregated from returns to investment.
What do you teach in your classroom that you apply on your farm?
My extension teaching can be used on the farm, since that's its purpose. Even the sophisticated analytical techniques I teach in a Ph.D. course can be used directly on larger farms and indirectly through consultants on smaller farms. Likely, my most important teaching is the time value of money. When farmers understand such concepts, or at least are able to use the related computer spreadsheets, they can make more profitable decisions regarding buying or renting land or machinery decisions related to “new vs. used,” “optimal trading,” “lease vs. purchase,” or “rent vs. custom hire.”
Can you expand on the time value of money?
The time value of money acknowledges that a dollar received today is worth more than a dollar next year because it can earn interest. For example, one dollar today earning 10% interest annually is worth 1 × (1.10) (1.10) (1.10) = $1.33 three years in the future. Put another way, receiving one dollar three years from now is equivalent to receiving 1/1.33 = $0.75 today. So, if someone said I'll give you $0.80 today or $1.00 three years from now, I'll take the $0.80 today.
Investment decisions are about cash flows — that is, purchase, repairs, tax savings, sale or capital gains taxes — that play out over multiple years. It is the timing and amount of these cash flows that determine which finance method — for example, purchasing or leasing — is most profitable. So any investment we make is based on the time value of money, comparing that purchase decision with other possibilities of interest, such as buying a new combine versus an old one.
What is the most important feature that determines profitability on farms?
By far, it is machinery management. Getting good yields and marketing pale in comparison.
Have you reached any conclusions regarding machinery management?
Two generalizations arise from my work on leasing versus purchasing. The first is that most promoters of leasing extol its benefits to folks in high tax brackets, stating that “100% of the lease payment is tax deductible.” The truth is that depreciation and interest — both tax-deductible items — can be much greater than lease payments. Hence, folks in high tax brackets rarely benefit from leasing. Folks in low brackets might benefit.
The second generalization is that the vast majority of farmers will find ownership more profitable than leasing. This has been especially true in recent years when the tax policy, including Section 179, has allowed faster depreciation or larger-expensing deductions. This doesn't mean that astute managers should not consider leasing. But in most cases, ownership will be more profitable.
What is the biggest change you've made to increase your on-farm income?
In the last 20 years our most important change was to do accrual accounting on a monthly basis. This has allowed us to make timely economics-based decisions. Agronomically, the most important decision we've made was no-till. We are constantly devoted to improvements in no-till and know that it has improved our bottom line.