Saturday, November 10, 2018

Land Buyer's Logic

November 1996

Farm magazines can always count on the subject of buying land for several pages of print every year. This eternal agricultural question reminds me of the old joke about economics tests in college. Professors can use the same exam every year - they just change the answers.

To help readers decide whether to buy or not, most advice articles include rigorous mathematics and sobering statistics. I personally pore over these examples and then ignore them to make what seem to be exceptionally irrational decisions. Am I simply foolish (very possible) or are there other ways of analyzing this decision? In consideration, I would offer some usually ignored, but significant reasons in support of our desire to own the land we farm.

The Critical Ingredient: Of all the requirements needed to farm, nothing is more crucial than land. Moreover, nothing is more difficult to get and maintain control of. Machinery, labor, crop inputs - even money - are readily available from multiple sources at any time and location. Price is a major consideration, but not supply. Land, however, is both strongly held and thinly traded, especially rental land. The timing and location of land opportunities are seldom coordinated with your personal farm plans. This obstacle has impeded more farm careers than any other. To put it plainly, sometimes you buy land “against the numbers”, just so you can farm.

The Phantom Average: Unless the figures in the buying example are specific for one actual case, averages of some sort are substituted. As more and more averages are added, the usefulness of the analysis is diluted until, like the legendary American Family with 1.7 Children, it no longer represents reality. In reading the columns, I tend to note those figures that disagree with mine (yields are too low, seed cost too high, etc.), and then view the resulting totals as irrelevant to me. In addition, the number of hidden assumptions is very large. For instance, I have no knowledge of anyone actually confronted with a rent-or-buy decision. The assumption that land is always available to rent, or that a piece of desirable ground will be available to buy when you are good and ready is highly unlikely. The idea that land stays rented (or under the same terms) as long as land stays owned is questionable. Actual statistics for my area indicate an average tenure of about 12 years.

A corollary to this principle is the Precept of Compounded Probabilities. A one year cash flow statement strains my prognostication powers to the limits. A twenty-year projection is a shot in the dark by about year 3. Piling assumptions on probabilities yields at best, hand-grenade accuracy. History often provides a better perspective, and history does not show farm ownership in a bad light.

The Law of Highest and Best Use: The underlying motivation for many economic analyses is that I want to maximize my return, or generate more wealth, measured as MONEY. However, comparing a land purchase with high-yield corporate bonds doesn't mean much if I don't want to own bonds. If I choose to invest in land, perhaps it's because I know something about and like land, (plus it gives me some way to make a living), while I have much to learn about annuities or bonds. Maximizing satisfaction or happiness may lie in a slightly different direction than maximum dollars, and perhaps should be given at least equal weight. It is just as foolish to ignore your personal preferences when making investment decisions, as it is to slavishly follow your heart.

The Principle of Enforced Savings: Few things are more difficult for the self-employed than regular saving. The logic that the land payment that I would not be making if I did not buy ground would flow to some form of savings is doubtful at best - at least the full amount. I am old enough now to realize that it would largely sift through the economic cracks, leaving me wondering where it went. The land payment, however, gets bugeted, worried over, and somehow paid. Indeed, the bank has personnel specifically tasked to remind and urge me to make this payment. They will even call (repeatedly) and drive out to my farm (how thoughtful!) to see that the check gets written. Moreover, an increasing part of that check is written to “us”, in the form of equity, and now, after several years, a small light is glowing faintly at the end of a 20-year tunnel. For those like me, this Discipline of the Uniform Commercial Code, and simple honor, holds us to the fire better than our best intentions. While it may not be the absolutely most efficient method of accumulating wealth, it works modestly well for a semi-profligate such as myself.

The Problem with Predictions: Predicting land prices is not easy. There are currently several national advisers desperately looking for a price collapse they called to occur in the early 1990s. Look in the old copies of farm magazines under your couch at what the self-appointed doomsayers were predicting then. In my opinion, land should be viewed as a 100 year investment, as a minimum. Given that perspective, the long term investment is not too sensitive to when you buy, but if you buy. This is no different than any other sound investment, such as stocks. Expecting to pick the highs and lows of the land market will yield the same results as a similar grain marketing plan for most of us. Over the long haul, it really won’t matter. Perhaps my great-great-great-grandfather paid a ridiculous price for our home farm. Who cares? All I know is that his efforts gave me a chance to farm, and I honor his memory for it.

The Bias Problem: Much has been said about the single-minded focus of farmers for land. Interestingly enough, we are not the only profession with such prejudices. I have noticed accountants and financial advisors, for instance, tend to favor money, especially cash or easily convertible assets. The reason is analogous - they “farm” these assets like we do land. If you make your living by moving others’ money from one form to another, seeing it tied up for centuries in land, which ends their involvement (and commissions) is not attractive.

The Rule of Price: When is the price of land too high? Simple. When you want it and can't pay for it. Any price below this is OK, in my book. It has nothing to do with the price of corn or T-bills or inflation. The words “high” and “low” are subjective measurements, with personal meaning only. They measure the things you hold dear or meaningful, and have nothing to do with national averages or rates of return. A story was told by a farm business analyst of an 80+ year-old farmer paying a seemingly exorbitant price for a field. When asked, the old gentleman explained that it was the first farm he ever worked as a young man, and he had always promised himself that he would own it someday, somehow. The speaker's point was how irrational some are when it comes to land, but I think many of us can find more logic in the fulfillment of a half-century-old dream than the single-minded accumulation of cash. Whether we want to admit it or not, there is a Pearl of Great Price in all our lives. What a pity if it is only money.

The Cashflow Criteria Subaxiom: Land should always cash-flow. What this means is not universally agreed upon, but you won't be taken seriously if you don't use this phrase several times during any discussion of land. It is important to remember, however, that land prices only have to drop to the cash-flow point of the economically strongest farmer, not the average farmer (or farther below, me). Further, it seems always the case that these economically sound farmers are interested in the same piece of dirt you are. The result is that land prices seldom seem reasonable to a majority of farmers. Once land is paid for, however, the price of land doesn’t mean much, because farmers usually don’t intend to sell it.

The Pursuit of Freedom: You choose "rent" in the rent/buy decision. Now you want to try no-till (or tofu beans, or post-emergence chemicals). But what will the landlord think of you, even if he/she agrees? Perhaps you better play it safe and do it The Way We've Always Done It. What will happen to the innovators who need perhaps 10-15 years of mixed results to hone the farming solutions for the future? We need the freedom of some ground where we can exercise our own ideas, or at the least relax a little when we farm it. What number can you put in the analysis for the privilege to farm without having a cranky ex-farmer second-guess your efforts or pressure your decision-making? Or more difficult, what is it worth not having to worry about your widowed landlady making ends meet because you picked the wrong herbicide? I personally consider the rights of a landlord to choose the farmer to be the single biggest asset included in the land purchase. As talk of sky-high cash rents, privilege rents, and 60/40 shares becomes fact, this right, acquired only with ownership, adds even more value to a land purchase.

Widened Horizons: Farmers who buy farmland get other things hidden in the deal that they don't expect, such as (a) a new appreciation for land assessment methods, (b) a eye-opening lesson how much bins, sheds, and tile cost in comparison to the return, and (c) a strange sense of isolation when distributing blame. This in turn, frequently makes him a better tenant, and more likely to think before (a) voting for a new school swimming pool, (b) whining about how bad the old barn is, and why we need a grain leg, or (c) blaming the landlord (he won't let me use enough fertilizer) for disappointing performances. At the least, it may help the farmer appreciate the point of view of his landlords.

The Cure for Myopia: Next to marriage, a mortgage is the longest obligation many of us will ever incur. Given the current marriage statistics, it may be number one. In order for a farmer, or it is to be hoped, a farm family, to decide to buy land, they must first reach an assessment of what they can do in the future. This act of evaluation can force them out of a ME- NOW world, into an US-THEN world sometime in the future. They make a commitment and publicly declare it, enacting traditional ideas of honor and faithfulness. This process is one of the most necessary activities of a meaningful existence. It sets a definite goal in the future and provides a way to measure the progress. Buying land is a statement about your belief in yourself and your basic optimism about our industry. It does not say that conditions will always be easy, but that you believe you can find a way to succeed. The most surprising part is that this attitude can buoy the spirits of those around you. Many successful landowners were encouraged to action by the example of one of their friends - i.e., “Crimony! If John Phipps can do it, I certainly can.”

The American Tradition: As best I can discover, early American settlers did not leave the serfdom of Europe to come and be tenants here. Neither was the Homestead Act devised to enable farmers to rent more ground. An abiding principle in the development of US agriculture has been farmer- ownership, so it is hardly surprising that many of us feel an almost inborn compulsion to own ground. Maybe there is a “farmer gene”. This desire is at least as reasonable as other drives, such as the desire to explore, or the desire to build. It is an expression of the spirit of our nation and defies quantification. We may yet exchange this heritage for salaries and full health care benefits, rushing eagerly into economic serfdom to a landed gentry, but it will be at the cost of a key element of the American character.

The Last Refuge of the Mildly Competent: I am not a great farmer. In our business, this is not a secret that can be long hidden. For me to expect to be selected to rent ground over the jaw-droppingly accomplished and driven competition I face is specious logic. I mean, I don't even have an entire- shop-in-a-truck or a fax in my combine and (this is difficult to admit in public) I DON'T USE OPTIONS! I suspect there may be one or two other farmers out there that are not in the SUPER 100 MOST EXCELLENT MANAGED FARMS IN THE KNOWN UNIVERSE. Sooner or later it dawns on you that the only person likely to rent ground to you is you.

The point of all these arguments is not that economic analysis is of little use. I read and use many of the ideas of ag economists and financial advisers to aid decisions to buy or not buy land, as well as reams of paper and hours of computer time. But non-numerical reasons cannot be dismissed as trivial and, knowingly or not, advisers flavor their analyses with their own personal spin. Our lives cannot be totally reduced to financial terms. What the numbers can do is provide a path for us to follow once we have identified what our goal is - and the goal IS NOT the accumulation of money. The goal is the accumulation of happiness. 

Furthermore, the obvious risk of buying land may mean more anxiety than you want. This too, is a valid recognition of what is important in your life. What is seldom mentioned in the arguments over buying or not, is that most people are successful at it. Payments get made, mortgages get lifted, difficult times are endured. For example, the default rate for commercial farm mortgages at the height of the farm “crisis” (1987) was about 7%, or as I like to describe it, a success rate of 93%.

In the end, buying land was best described to me by my father, who summed it up as “biting off more than you can chew, and then chewing it”.

Wednesday, February 21, 2018

This Is a Worst-Case Scenario?

April 2002

One way to understand how much trouble you may be in is to “bracket” the problem with best and worst-possible outcomes. These results can be too unlikely to warrant much attention, but at least you know that the probable answer is somewhere in between.

I wonder why we have not done this with farm policy. We have neither described what the ideal solution would look like, nor examined the end-of- the-world circumstances. Best case ideas are usually starkly impossible (high prices, low costs, low risks, light competition). Worst-cases are usually overwrought and hysterical.

One problem is the vague horror associated with the unthinkable possibility of deregulating agriculture. No government programs? At all? It could never work. But no evidence is given to buttress this conclusion.

For good reason, it turns out. Of all the possible choices for farm policy, applying the American system of free enterprise is the last considered. I recently asked an economist at FAPRI – world class ag forecasters – whether they had ever modeled a future with no programs. The answer: Nope, nobody has ever asked.

How odd. The same system that seems to work for the rest of our national economy and – with the exception of 8 subsidized and protected commodities – most of agriculture, has never been contemplated as a rational solution for the farm problem.

We just assume we know what would happen if there was no farm program, subsidies, tariffs, quotas, etc. Farmers would all go out of business, food would be scarce, rural economies would vanish, the country would plunge into depression, yadda, yadda.

Hardly. In the first place, ending the farm program would affect producers only in the proportion to which it currently enriches them. The large number of small farms who derive little income from the government would be unfazed. Many other commercial operations with deep pockets and owned land would have one brutal, but not fatal year.

As for those whose budgets would not come close to balancing, an interesting economic flux would develop, I believe. Assume half (100,000) of subsidized producers are instantly and enormously unprofitable. (I think this number is high, but stay with me). Landowners everywhere would be looking for new tenants, acres and machinery would be for sale. Survivors would need to expand by 100% simply to cover the acres.

Likely some acres would not get planted. Acres where crop insurance and subsidies comprise the highest proportion of income would be idled first. Bluntly put, artificial farm economies on marginal land would be devastated.

Farmers would suddenly have some leverage with owners. Cash rents would decline, share rents might even rebound. Land values would be all over the board, but likely lower everywhere. Bottom line: fixed costs would plummet.

And let’s not forget prices. If the market price for beans is $4.00 for example, how many acres will be planted in the US? Not as many with our supported price of $5.25, I’ll bet Prices would necessarily rise to ensure production to satisfy demand. Our customers will be placing their own bets. My guess is they will opt for covering their needs as soon and as cheaply as possible. If we really need corn and beans and sugar, customers will have to pay what farmers can grow them for. Uncle Sam won’t be sharing the tab. If growing these commodities has simply been make-work, we will discover that too.

How many farmers would disappear? Your guess is as good as mine. But certainly not all, and likely not most. As uncomfortable as this thought is, watching the same thing happen in slow motion isn’t much better. How many farmers should America have anyway? Are we all on tenure?

Would America go hungry? Absolutely not. America needs agricultural output and can easily afford it. Where it comes from doesn’t make much difference. Besides most all food crops – meat, vegetables, and fruits – are already deregulated.

Would rural America perish? It would be harsh in some areas, but not many. As noted in a recent Kellogg Foundation report ( the largest source of income in rural areas is the service sector and only 1/6 of rural residents are farmers.

Would any of the apocalyptic prophesies come to pass? I don’t know, and neither does any one else. We haven’t even bothered to ask. I think we all suspect the answer. Economic freedom – like democracy – looks horrifying until you compare it to the other choices.

Our worst-case scenario may be to keep doing what we are doing now.

Saturday, February 17, 2018

The new value of signing your work

January 2002

Recently the pork industry has followed a predictable pattern established in poultry (and somewhat in cattle) of consolidation and contract production. Pork, it seems, is a protein of a different color, though. Contract pork production has suddenly been revealed as a major threat to our way of life.

Hogs have always been the great chance for the hardworking individual farmer to pull himself up. Perhaps, it is the loss of this virtually guaranteed opportunity many now mourn. With ambition and effort, thousands of farmers have farrowed their way to better incomes, all the while oblivious to the market conditions that made this possible: consumer acceptance of variable meat quality and a fragmented distribution system.

Both factors are largely gone. I doubt if Wal-Mart and Albertson’s will be giving way to butcher shops soon. Moreover, I believe franchises will dominate the restaurant sector, which now claims most food dollars. The implication is that meat demand will be determined by fewer decisions, and center on large volumes of uniform products. 
The production response has been to deploy huge facilities with identical, specific genetics. Farmers have been able to participate in the trend via contractual agreements that supply them with the inputs they needed (genetics, expertise) and utilized their assets (labor, land, capital).

However, many see such alliances as usurpations of the Jeffersonian agrarian ideal – a concept as outdated as it is misinterpreted. Perversely, even while despising the change in markets, producers have seen pork demand climb as a result of attention to consumer preference.

Now it seems the same concerns have spilled over to grain production. “Indentured servitude”, is how one Minnesota professor put it. Farmers will “lose their freedom to manage”. Poor analogy, I suggest, since indentured servants were invariably drawn from the bottom of society, while contracting entities typically recruit from the top. Besides, if a producer can be duped into one-sided arrangement, how good of a manager is he in the first place?

Give me a break. I have been producing corn under contract for several years – entire crops, in fact. Jan and I have found the premiums make a big difference. Changing how we plant, cultivate, harvest, and document our crop is one way that we can compete. While we have given up the freedom to plant whatever bag was handy, spray whatever had a cute commercial, harvest any field with the combine set how we like it, and keep all our records in our heads, these are hardly liberties worth manning the barricades for.

Such loaded language makes lively magazine text, but little sense. Agriculture has, in my opinion bred a producer population with real “commitment issues”, and this is a prime example. Yielding modest autonomy in exchange for equivalent constraints on the buyer’s part can benefit both parties. Yet critics sound like confirmed bachelors contemplating marriage.

It is easy to imagine we are Masters of our Domains, given our isolation. But in fact, we are more connected than ever before. Sending anonymous products to the marketplace is a strategy of minimum effort. A better hope for producers is to capitalize on personal strengths. Put more simply, advantages now accrue to those who will identify and stand behind their production – signing your work, as it were. By contracting, this is what I agree to do. Those who consider it boot-licking are largely those who fear to be judged by any precise standard, preferring anonymity and bulk to cover their mistakes. Contracting means the end of blending off poor quality products, for example.

Contracts also hide economic details from public scrutiny. This is good news, I believe. Keeping my business private gives me some small advantage by adding an element of surprise for my competition. Such discretion is one small step toward emphasizing personal responsibility instead of relying on herd treatment. It also means that negotiating skills and market judgment take on immense importance in addition to production skills. My business in the grain buyer’s office is the same as my business in my lawyer’s office: my business. This willingness to negotiate alone is often seen as a betrayal of solidarity by those who depend on inclusion as a substitute for initiative.

Above all, it is important to remember that virtually all grain producers now operate under a contract with the USDA. If contracts are the root of evil shouldn’t we start by attacking the most pervasive threat first?

Thursday, February 1, 2018

Stuff is cheap; people are expensive

March 2000

For me, few emotions can match harvesting a large crop. Big production numbers generate a deep satisfaction. I think this is because I am “stuff-biased”. My value system places physical materials at the very top. Moreover, all my life I have been taught that the most honorable way to wealth was to create tangible goods.

Most people trade labor for wealth. Whether by the hour or year, compensation depends on the quality and quantity of your effort. For such workers, America’s transition to a service-driven economy has been less disruptive. But it is confounding agriculture.

Adding to the difficulty is the surprising output boost that has occurred in most areas of production. From gold to sunflowers, predicted demand growth has not only been met, but exceeded by technology-driven productivity gains.

Stuff is pouring out of farms and factories around the world at unimaginable rates and low costs. Last Christmas I bought tree lights made in China at a cost of $1.99 for a string of 100. How is this possible? That’s what I tip a parking attendant! Computers that cost $2000 last January now can be had for $999.

Meanwhile, my tractor labor bill at the dealer features a rate of $45/hour. Tuition, movie tickets, and health insurance climb relentlessly. This is not simple deflation we are experiencing.

Employment has become the vehicle of choice for fulfilling our social contracts. From day-care to counseling; from pensions to out-placement, a job is more than trading labor for pay. It is an obligation of support by the employer that is increasing pervasive and expensive. Selling a product carries no such extra burden. One transaction type is growing in value (the job) and one is shrinking (the sale)

So we sit in agriculture, outraged that the piles of our production don’t bring us wealth. More worrisome, many of us are betting the farm on a return to a “stuff-based” wealth standard. Unfortunately, convincing the world that stuff is what is important will be a tough sell.

Maybe it is time for our accounting system to change. Human effort now adds much more than just muscle output. The technological level needed for our lives means that those who provide those benefits can command compensation – and get it. How badly do you want your TV to work, or the MRI scan to diagnose accurately, or the plane to land safely? Obviously, enough to pay well.

Consider too, the “throwaway” mentality of modern existence. Fixing appliances has become a questionable effort. The most important and costly input for cornflakes is not corn, but figuring out how to get the consumer to pick your flakes instead of your competitors’. Our indignation at these violations of our value system is sharply at odds with the rest of the world.

The astonishing wealth of the US allows lifestyles filled with what would have been deemed waste fifty years before. Those years were when my parents were forming my value system. Consequently, all the rules I was taught about what is valuable need some scrutiny. Saving broken machinery because “it’s a good piece of steel” doesn’t add much to my bottom line unless steel is relatively expensive. Spending time recovering and storing all manner of seemingly useful stuff makes sense only if your time is relatively valueless. I think unexploited time, not our inventory, could be our most valuable asset.

These facts have forced me to adopt a new principle that I use as a background for my business decisions: Stuff is cheap, people are expensive. I chant that to myself several times a week, like I used to mumble “don’t let them take the baseline” during basketball practice. My goal is to stop being surprised by the world’s new value system.

The hard part is overriding my longstanding economic prejudices. For instance, if I want to grow stuff for a living, I plan on doing it as cheaply as possible – instead of wishfully hoping for increasing prices. Secondly, any time I can decrease the amount of services I buy – fix my own computer, calculate my own taxes, do my own wiring – I can save serious bucks. Third, I am developing services I can sell or incorporate into my output.

Consequently, my life is changing. Marketing often takes precedence over production. Mastering new skills can be more important than saving inputs. In fact, several enjoyable jobs that used to yield big returns no longer do so – like tillage. At the same time, wading through information streams, grappling with confusing crop insurance programs, or tracking down dollar flows can yield “bankable” results.

This economic philosophy means education and the ability to keep learning may be our most necessary tool in the future. I look at time as well as acres as a predictor of income generation. Most difficult, I am changing my pack-rat lifestyle. Throwing away much of my hoard keeps me from seeing wealth where none actually exists.

My new goal: Become an expensive person who can prosper selling cheap “stuff”.

Friday, January 5, 2018

Am I Sustainable Yet?

January 2007
©John Phipps 2007

The best I can discover, my mother’s family began their connection with our farm in 1854. So, we’re talking 150+ years and counting. Another way of putting this is: Abraham Smith, Shepherd B. Smith, William Monroe Smith, Hallie Smith Jennings, Mary Louise Jennings Phipps, and ta-dah – John Phipps. I tend to favor this dating method.

Now add in the fact, that according to every objective measure I can afford, the soil – the physical dirt on which I stand – is in better shape than when I began my career. Phosphorus and potassium levels are higher, organic matter has almost doubled, and the few erosion problems I had (water drains toward our farm, not away) are at least partially mitigated. Yield charts are pointed in the right direction, our wells test clean, and the tilth of the soil (admittedly hard to measure) is better with the drainage we continually add.

I think I’m sustainable. Really.  I think we can keep this act going for a few more decades at a minimum. But since I have already freely confessed to being an industrial farmer, it turns out I am disqualified from claiming sustainability.

So what are the criteria?  Funny you should ask, because like “natural” and “organic” this definition is illusive. One source offers this standard: “Sustainability rests on the principle that we must meet the needs of the present without compromising the ability of future generations to meet their own needs.” Note the use of the words “rests on” rather than “is”.  One way to insure that sustainability is reserved for the right people is to embed as many subjective qualities as possible in the definition. “Sustainable agriculture integrates three main goals--environmental health, economic profitability, and social and economic equity.” Guess who will judge the “social equity” part of the competition.

Factoring in external costs (pollution, erosion, etc.) should be the function of the market, and if adopted, would further many goals for sustainable ag proponents. An oil tax would be an example. However, my prediction is even with such constraints, industrial agriculture would find a solution, since change is what we do best.

Sustainability often is code for “self-contained”. Sustainable ag proponents are drawn to the idea of minimal non-local inputs. Using fertilizer from vast deposits in Morocco, for example violates this concept of the closed circle of production, even though employing such assets when they otherwise would yield zero return seems to be a win-win decision.

Sustainable agriculture relies upon animals to complete many of the “closed-circuits” of nutrient cycles. Strangely, this is not seen as technology, even though it is arguably unnatural: man alters animal lives to his purpose, i.e. domestication. Similarly the use of lime for pH control is countenanced likely because it is ubiquitous and hence “local”. I wonder if a farm with a potash deposit could apply it and still be sustainable.

In fact, sustainability is another maxim by which agrarian thought closes itself to the world. However, if I define my community as the globe, I am not using any “outside” inputs. Given the increased linkage of the global economy, is this an unreasonable enlargement of “community”? Perhaps, but when viewed from this perspective, industrial agriculture not only is sustainable, it is expandable.

Local sustainability also requires a stable economy and political structure to allow it to flourish. The infrastructure built in part by industrial agriculture allows pockets of sustainable agriculture to thrive undisturbed. You don’t see many Amish communities in Afghanistan, for instance. In fairness, a world of only sustainable agriculture would likely have less need for courts and roads and banks.

Sustainable agriculture also seems content, even obsessed with limiting production.  The underlying theme is of land being fragile and easily overburdened by modern technological methods, again with little data to verify this assertion. As yields climb, it is fair to ask, “Where are the signs of exhaustion?”

Sustainable agriculture also employs much more labor. Farmers who see a future of computers and machines are drawn to the job security of this alternative. Sustainability refers then to their lifestyle, not their farm.

Sustainable agriculture is not, in my view, about sustainability or agriculture. It is about trying to recover some perceived lost status for people who think lives are devalued by participating in an enormous economy. By drawing a tight circle around me and mine, and adopting pharisaical rules of correct practice, sustainable agriculture proponents try to ensure the moral spotlight shines only on them.