How Generation X Farmers Succeed
By Don Lipper
Kevin McEnnis may not look like it, but according to
conventional wisdom, he’s an endangered species: the successful Gen-X
vegetable farmer.
At 31, McEnnis has four years under his growing money belt.
While his contemporary aspiring farmers are driving trucks and dreaming, McEnnis
has founded his five acre Quetzal Farms of Santa Rosa without ever getting money
from a lender.
If you believe some economists, your odds of becoming
such a beginning vegetable farmer are about the same as extraterrestrials
installing you as the new president of Bolivia. Well it’s not true, which is
good news for both young farmers and the residents of Bolivia. We’ve found
several ways for young (and not so young) beginning farmers to plow their field
of dreams.
First the disclaimer, everyone knows that with a
decreasing percentage of the population entering production agriculture and
tight profit margins that this isn’t your father’s farm business. But are
today’s unforgiving financial realities a deal-breaker?
Rod Carter doesn’t believe that these are the worst of
times. As Vice President of Consulting Services for a division of Northern
California Farm Credit, he helps beginning farmers develop business plans.
“I’ve been doing this job for 30 years. The challenges young farmers face
now aren't much different than what they were facing 30 years ago. It is amazing
to me how much this situation stays the same.”
“My pet peeve is that there's this myth that farming is
going the way of corporate farming and the statistics and my experience do not
support that,” said Carter. “The change in corporate farming is a change in
paperwork, not people. It is a change in how the property is held maybe, but not
in who manages it. The size and the sophistication of the business has to
increase, because these are multimillion dollar businesses in many cases, and
you can't run them like you'd run a proprietorship.”
Striking a contrarian pose Carter is all smiles. “I
don't know why other people are pessimistic about it. The opportunity is there.
Young people can make a very good career and lifestyle in farming. It is a
wonderful industry with a lot of potential, but they have to be strong business
people,” said Cater.
McEnnis agrees that a strong business sense is essential
for survival. “The growing side is the fun part, the business side is
definitely the work,” said McEnnis. This year, wanting to expand his business,
McEnnis is looking at the lending landscape.
While this is his first time running the money maze, for
most Gen-Xers making the leap from employee to equity owner means a trip down
lending lane.
As many aspiring farmers learn too late, you may be the
best grower on the planet but if your paperwork isn’t in full bloom, you’re
looking at a debt-ridden dustbowl. Here are some steps to maximize your chances.
Get your credit house in order
“Having too much debt is the major stumbling
block. A farmer may have the nice truck, the boat, a number of 3 or 4-wheelers,
a mortgage, a credit card bill and all this other debt that he has to
service,” says Shelley Macdonald , Senior Account Executive, Assistant
Marketing Director for Northern California Farm Credit.
Lenders look at the extra debt load your new loan would
make and frequently, on paper, it doesn't flow. Saying "I’ve always paid
all my bills on time” doesn’t work because that was then, this is now. So
instead of buying the boat and the extra four-wheeler, put that money into
savings. You’ll be that much closer to a down payment.
Save
“You have to save. There's gotta be a cushion. As a
farmer you're not guaranteed a paycheck and you could have a complete disaster.
Whereas a secretary can have 10 sick days and she's still getting paid,” says
Macdonald.
While it may not seem fair, the bar is a lot higher for
the beginning farmer than the secretary. The secretary can go to town and get a
nice home in a cul-de-sac for just 5% down. Officially the best deal we found
for a beginning farmer was 20% down.
To save the farm, get off it
“According to the latest USDA reports, even in the
largest categories of ‘Large Family Farms’ that have sales of a $250K to
$500K or more, over half the farms that they surveyed last year still
report that at least one of the spouses works off the farm to supplement the
income.” says Steve Blank, Extension Economist at the Department of
Agricultural and Resource Economics at University of California, Davis.
In this regard McEnnis followed the trend, he works for a
nonprofit and as a teacher at Santa Rosa Junior College. “If I want to save
money to build the business and eventually be a full time farmer with not a huge
amount of debt, I need to work off the farm. Last year farming was my primary
source of income. This year I'm working a little more off the farm so that I can
buy a tractor and invest in some of the capital investments for the next ten
years” said McEnnis.
Get a job.
So what kind of job gets you on the farm-owning fast
track? If you didn’t grow up (and don’t now work) on a farm, try to find a
situation where you could become an employee that’s more than being a tractor
driver. You want to get experience with the management of the business and an
understanding why management decisions are made. Most lenders would like to see
at least one year and preferably three years in such a job. Five is ideal.
“I would also encourage them to get involved with
leasing or doing a small amount of custom farming, owning a tractor and sprayer
for example and using that in conjunction with this employment arrangement so
that they can file a Schedule F (the Farm schedule for IRS tax filing) that
provides the documentation that they are a farmer,” said Farm Credit’s
Carter. A Schedule F is a requirement for most farm loans. McEnnis filed his
first Schedule F when he started the farm at 28, so he’s right on the money.
Before he started his farm, McEnnis used every job to build
his skill set. He worked on a soil conservation and composting project in
Guatemala. Then he studied at the UC Santa Cruz farm and garden programs. He
worked as an intern at an organic farm then he worked for about a year at a UC
extension crop doing a recycled wastewater demonstration project.
Carter counsels aspiring vegetable growers to leverage
their money to acquire more work instead of more land. “Around 75-80% of the
capital involved with farming is tied up in land. Young farmers using their
capital to buy land is usually not as prudent as using the same amount of
capital to buy equipment or other things that would allow them to conserve their
capital and have a larger scope of operation. Try custom farming or custom
managing somebody else's land and conserve your capital for other kinds of
inputs where you have a much better chance of being successful,” said Carter.
McEnnis is looking for a loan to buy a tractor. Depending
on your situation, leasing your equipment might be better than buying. Sometimes
you'll find retiring farmers who have a good line of functional equipment that
might not be very valuable to sell. You may be able to lease that equipment from
the retiring farmer and take over his operation.
Keep good books and they’ll keep you
While you’ll probably never get a loan without
practical vegetable growing experience, some young and beginning farmer programs
are very forgiving on the lack of management experience. But these days farmers
are doing more managing than labor.
“Record keeping and management husbandry practices are
the two areas where most operators are not too well versed,” according to
Donna Gordy, Farm Loan Manager for the Farm ServiceAgency.
Creating increasing profits each year, McEnnis knows
firsthand the value of good record keeping. “Accurate harvest data was the
best tool that I had to triple my business. I kept meticulous records of my
planting and harvesting. I could predict when the crop could be harvested with a
fair amount of certainty. So I was able to extend my season to have the widest
selection of product possible throughout the whole season. I didn't know that
before, how often to plant and how much. It was a major step up, increasing my
marketing and growing skills and also understanding what my capabilities
were.”
For McEnnis a lot of the uncertainty has vanished. “I've
attended so many workshops and read so many books about business and crop
planning, that I've come up with an extremely developed crop plan based on every
year’s data. After the second year, I realized that I had to work more on
planning. I'm growing about 20 different crops. I really needed more of a sense
what each week of the season would look like. Now I have projected cash flow
from my markets. I have planting dates. I have a lot more data that I can work
with. Now all that goes right into the business plan. I can say if I plant this
much broccoli I will probably make this much money,” McEnnis said.
Start spreading the news
Whatever you’re looking for a job, land, cheap equipment
or a custom-farming situation, leave no stone unturned. Network with lenders,
farm advisors, ag teachers and friends of friends. “Aspiring farmers have to
be just as aggressive finding those opportunities as their city cousins are
about finding the best job and marketing their skills,” Carter said.
Finding a niche you can scratch
Growing produce is the least important part of farming.
Having a product people will pay top dollar for is. McEnnis objects to the term
niche marketing. “It isn't niche marketing as much as marketing that's
appropriate to my scale,” said McEnnis.”
“I'm growing mixed organic vegetables. I do a lot of more
European market style varieties that are much higher quality than the commercial
varieties here. They keep just as well but they don't ship as well. They've got
much better taste and I can sell them in farmers markets and locally pretty
easily,” said McEnnis.
“Vegetables that are directly consumed may be in a
better position because there is more potential for some direct marketing.
Having the ability to do some direct retail either to markets or to institutions
like schools is one potential way of capturing more of the consumer dollar,”
said Katherine Ozer, Executive Director of the National Family Farm Coalition.
“Try to sell things before you plant them. Make sure that
there is a willing market that will buy it at a price that will work for you
before you decide to plant something in any major way. Small test plantings are
great, once you commit to even half an acre you better be sure that you know you
can sell that,” said McEnnis.
Diversity
The days of betting the farm on one crop are over. You
can do that with your own money but lenders like to spread the risk. “Crop
diversity isn't necessarily a strong criterion, but if the person does have some
diversity, that's a plus,” said Donna Gordy of the Farm Service Agency.
“[Depending on your crops, you should try to] diversify
by covering the entire season, you begin harvesting in May and may end
harvesting in September. It used to be that growers tried to pick the winners
and the losers and stick with the winners. Now, increasingly farmers and growers
will try to make sure that they have a crop in almost all time slots, so that if
there is a bump in the market they can take advantage of it,” says Ted DeJong,
a professor at UC Davis.
“The best vegetable producers grow 10, 15, 20 crops.
They’re all portfolio managers and always have been. Maybe because those
markets are so risky about hitting the good price, those growers have learned to
try to hit consistent singles rather than trying for home runs,” said Steve
Blank.
McEnnis sells his crops in spring, summer and fall. He
farms 18 crops including beets, broccoli, carrots, chilies, eggplant, garlic,
green onions, hot peppers, leeks, lettuce, onions, radish, sweet peppers,
tomatoes, fresh herbs, fresh flowers, pumpkins and winter squash.
Diversity has its hazards. Every new crop may mean news
skills, new equipment and new markets. “Many farmers are saying that if they
don’t have a certain quantity of a product, they can’t sell it.
Diversification means you have less of everything unless you expand and
diversify,” says Karen Klonsky, an agricultural economist for UC Davis.
The Lending Institutions
You have your choice of lenders:
·
A commercial bank: “Do you feel lucky, punk?” Their
rates are usually the highest and may have loan officers whose knowledge of
agriculture ends at Crunch Berries.
·
Local agricultural lenders: They understand farming and
their rates are lower than commercial banks.
·
Farm Credit System: Farm credit system is a farmer’s
cooperative that's regulated by the federal government. Farmers buy stock in
their association and loan it to other farmers. “In our normal loan program
we'll finance 70% of the value. In our young and beginning farmer program we
only require that they put down 20%,” says Shelley Macdonald.
·
Farm Service Agency: An extension of the USDA, this is a
government program that provides financing to farmers and ranchers that are not
able to get credit anywhere else. The agency is more lenient about an aspiring
farmer’s biggest challenge, a lack of profitability history and/or lack of
adequate margins for their collateral.
·
Get a loan from the Bank of Mom & Dad.
·
Propose to the prosperous farmer’s daughter or son of your
choice.
The Paperwork
While the exact paperwork you’ll need will vary with each
lender, here are the five things most will be looking for:
1.
A minimum of one, preferably three-plus years in a management position of
an operation whether as the owner/operator or tenant operator, managing foreman,
managing operator of somebody else's farm operation. You need at least one crop
year experience in a management position in the type of enterprise that you want
to consider.
2.
A Schedule F from your income tax returns. You should only have a
Schedule F if you have income and expenses from operating a farm enterprise.
Hired labor generally doesn’t file a Schedule F.
3.
A narrative about your farm management experience. That narrative has to
show an understanding of what functions you’ve undertaken in the day-to-day
operations of the farm, from scheduling to planting, to harvest. Keep detailed
records on what the expenses have been and demonstrate an understanding of costs
on a per acre basis for all aspects of cultivation and bringing in the crop.
4.
The business plan which is a farm operating budget that's put out on a
month to month cash flow basis. This is where applicants usually need the most
help. Lenders have an eagle eye when it comes to spotting gaps in your
knowledge.
·
Do you cover the practices that would be involved in your type of
operation? For example, if your crop needs pollination have you put in the cost
of the bees?
·
Are you underestimating certain costs? For example insect, weed
and disease control?
- Do you plan for a worst-case scenario or down time?
·
Are you overly optimistic about the projections of the production
yields, prices or good weather? Do you use the last five-year average?
5.
They'll ask for references and they will interview them thoroughly to
verify your story.
If you don’t have a track record in a new crop,
agricultural economists publish costs studies (such as the ones found at http://coststudies.ucdavis.edu)
that detail each major vegetable crop’s labor costs, equipment costs, land,
taxes, monthly cash flow by item and expected return on investment.
“Getting data from government and university sources is
good, but what we look most closely at is their own actual records because that
is the best indicator about what they're capable of doing and what their
expenses would run,” said Gordy.
All these questions make the lenders seem like the Spanish
Inquisition but actually they are on your side. “We analyze what they are
trying to tell us and then we sit down and talk with them. The budget is a
working document. If we're not able to finance their needs at this time, we will
go over their weak areas and help them where they need to shore up their
proposal.” Gordy said.
While nothing is certain, McEnnis looks like he’ll
survive the loan process in good shape. This year marks a change for him.
Instead of a year-to-year lease, he now has a 10-year lease and he wants to
expand. “I'm looking at selling to local grocery stores and local schools. I
will probably expand from four to five acres next year.” McEnnis said.
He’s hopeful but still playing it safe. “I didn't
get a loan for the lease. It is better to build more slowly. Vegetable farming
is risky with a high turnover rate. It is a job that consumes your life and you
have to like that. It is long hours and the pay is low for those hours and yet
I'm optimistic that I'm going to make a pretty comfortable living off of
farming.” McEnnis said.
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