This should be a banner year for grain farmers, but many are spending their profits even before they’re made, driving up land prices and backing up orders for new tractors and combines into 2009.
“Many of us have been through this before, and every single time we go out and buy a bunch of stuff,” says Darren Watson.
“I’ve sure done it. I had a big year in 2000 and by 2002, I was asking, ‘what happened to all my money?’ “
Watson is a fifth-generation grain farmer from Avonlea, Sask., whose entrepreneurship and innovative thinking earned him plenty of media attention and a provincial Outstanding Young Farmer award. He did so well from farming, even during the lean years, that last fall he was able to buy Hesterman Technical Services Inc., a coating and urethane spray foam business in Regina that he first got to know as an investor.
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Watson doesn’t claim any special expertise – “After all, I’m the guy who’s quitting when durum is 12 bucks a bushel,” he jokes – but he’s a rare breed, a guy with an MBA and dirt under his fingernails. He’s also been around the block when it comes to investing: in the stock market, a farmer-owned value-added start-up and a venture capital pool.
He has three pieces of advice for farmers who find themselves harvesting that rarest of farm commodities, big profits.
The first piece is a bit unexpected: go ahead and plow money back into the farm. But there’s a caveat. Any investment has to make the farm more profitable. That means achieving the economy of scale that allows you to spread your costs over an optimum number of acres.
“If you go out and buy a bunch of stuff, you’ll dramatically increase your cost structure and we all know what happens then – prices go down but your costs stay up and then you’re really in a pickle,” Watson says.
In other words, if the scuffed-up, used $150,000 combine can get the job done, forget about the $280,000 shiny new one.
And never buy equipment to save taxes, Watson says. Instead, do what businesses in every other sector do – incorporate.
“Sure, it’ll cost you an extra $2,000 or $3,000 a year to file taxes as a corporation, but the corporate tax rate is just 20 percent and falling,” he says.
“In a high-income year you can save tens of thousands of dollars.”
The second piece of advice is even more unexpected: don’t shy away from buying land, even though prices have shot up recently.
Watson is considered a land hater. His biggest asset when he started farming a decade ago was a $1,000 pick-up truck and, except for his parents’ land, he rented all of the 5,000 acres he farmed.
“I could just never make a business case for buying instead of renting,” he says.
“But now that I’m out of farming, land’s looking like a pretty good investment. It’s renting for five or six percent of its value, which is better than a bond yield, and unlike a bond, you’ve got capital appreciation.”
But again, there’s a caveat.
“I always looked at the farm as part of my investment portfolio,” he says. “Having all your eggs in one basket is not a good idea.”
Which leads to Watson’s last piece of advice: when it comes to investing outside the farm, be careful but not intimidated.
“Don’t try to outsmart the guys on Wall Street,” he says. “(But) if you stay away from the weird and exotic, and go with blue-chip stocks, history shows you’ll do pretty well.”
Watson isn’t claiming to know it all. He’s just a guy who did pretty well by sticking to the basics: know your cost-of-production, only spend money if it improves your profit margins and hang onto profits when they come along.
Those are things worth remembering when you’re at the farm show or thinking about that lovely bit of land the neighbour has put up for sale.
Glenn Cheater is editor of the Canadian Farm Manager, the newsletter of the Canadian Farm Business Management Council. The newsletter as well as archived columns from this series can be found at www.farmcentre.com.
