The second of a two-part series about land management
In the last article I discussed the high cost of buying farmland. But many flower growers already own the land they are farming, and even if it’s already paid for, there are costs in owning land that are oftentimes not considered. David Pratt of Ranch Management Consultants uses the expression “Most farms and ranches are structured for failure.” to describe the problems associated with these hidden costs.
Now, let me set up the problem, explain why it is a problem, and offer some possible solutions. First, separate the land from the farm business (this separation will also protect some assets from farm business liability). There is a land business and a farming business. The farm (cut flower) business produces income from the sale of the crops, and pays for expenses directly associated with producing those crops. Some examples are seed, transplants, fertilizer, cultivation costs, harvest costs, labor, marketing, etc. The amount of income that exceeds the costs is the farm business profit.
The land business holds ownership of the land and the permanent assets on the land. These assets will include buildings, roads, lanes, fences, water sources, water systems, and any other permanent infrastructure. Many costs are associated with the land and its other assets. These costs include taxes, insurance and the costs of acquisition, maintenance and repairs on all assets plus depreciation, labor, etc. There could also be interest costs if the farmer is still making payments on the land or other assets. Mr. Pratt also includes opportunity cost. As an example, if the farmer sold the land and other assets that on the land he would have a large sum of money, primarily because of the high value of the land, which could then be invested.
Let’s say the amount is $500,000, and the return on this investment averaged 6% per year. The farmer would then have an income of $30,000 per year with no work involved. Mr. Pratt actually makes this amount a cost in his accounting scheme. Even if the farmer does not want to use such aggressive accounting she should still agree that the land business should return at least the same 6%.
The problem is that the land business produces no direct income to pay the costs of the land business and still return at least the 6% from the above example. There are only two ways a land business can produce direct income. One is to sell the land, which is not an option if the farm business is to continue using that land base. The second is to rent it to the farm business or to someone else. Since the farm business cannot exist without the use of land, it is only fair that it pays rent to the land business.
This leads us to the heart of the problem that Mr. Pratt’s comment in the first paragraph refers to. Is the farm business capable of producing enough profit to pay the land business enough rent to pay the expenses of the land business, and provide at least the amount of the opportunity cost or 6%? For most farms and ranches the answer is no. There are many reasons, including too many non-income producing assets and high maintenance costs of these assets. But the largest item in terms of dollars is high-value land.
What can be done to alleviate this problem? Obviously the farmer can eliminate some of the non-income producing assets and reduce the costs of others. These assets can include more than land-related ones such as equipment. A discussion of these problem areas would probably be an overload for this article and can be addressed in the future. I will also eliminate the options of selling the land or renting it to someone else because I assume all farmers who own land will want to run their farm business on that land.
Get Creative with Your Assets
This leaves us with the option of finding alternative income streams. The land has many resources that could be the source of those income streams, such as wind, the sun, minerals, water, wildlife, grass, woodlands, beauty of the farm, and scenic views. Some income streams can be found in using the waste that a business produces, such as making and selling compost, and drying unused flowers for an off-season market. Some suggestions of alternative income streams for cut flower farmers are classes, workshops, farm tours, bird watching, event destination, photography activities, art activities, solar energy, wind energy, various agricultural recreation events, selling easements, and selling mineral rights. For creative minds the list can go on and on.
Farmers will want to find income streams that match their personal values, and of course the streams can help only if they produce profits. Profitable options that require little time and expense from the farmer are usually good because the income streams should not take away from or harm the core farm business. If time becomes an issue, the farmer can partner with someone who will take on most of the responsibility, or offer the responsibility to an employee, and set up an incentive pay scale for bringing more business.
Good examples to learn from are the many ASCFG members who are already incorporating alternative income streams into their cut flower businesses. Some of these flower farmers have advanced to the point of making major adjustments to and changes in the incomes streams to meet the demands of a changing marketplace. And for some, the flower business is an alternative income stream.
In summary, the reason so many farm businesses “are structured for failure” is that they have too much money invested in high value non-income assets with high costs, and not enough profitable income-producing products. There are many ways to look at farm income, and many expenses that need to be carefully evaluated.
Cherry Hill Pastures
Roy Doan is co-owner of Cherry Hill Pastures, a beef cattle farm, and Aunt Willie’s Wildflowers, a cut flower farm, in Blountville, Tennessee. Contact him at [email protected]