July 19, 2024
Use business plan to map out where farm is going

My wife and I are in our early 40s. We both grew up on Wisconsin dairy farms and graduated from college before we started working in our careers, met, got married, bought a house, and started raising our three sons, who are 8 to 12 years old. After 18 months of the pandemic, we have decided we want to farm. We realize we don’t have the money to buy a farm, but we have found someone to partner with on a 250-cow dairy nearby. He is farming with his son, but his son has decided to quit farming and get a job in town.

I have been a dairy nutritionist for 20 years, and I plan to shift gears and practice some of the things I’ve preached to my clients. But we have a couple of concerns. My wife plans to continue working full time off the farm and we plan to stay in our house at least for a year or two until we decide if it makes sense to sell our house and move 5 miles to the farm. We would like to buy half of the dairy cows, youngstock and half of the machinery. We have $150,000 that we can invest in cattle and machinery. The bank will loan us the rest.

Our goal is to finish paying for the cattle and machinery in five to seven years and then purchase the other half of the herd and machinery and lease the 300-acre farm from our partner. We’re not sure if we should buy the house, buildings and 10 acres so we can make improvements, or if it makes more sense to lease those. If we owned the house and buildings, we could make improvements as needed. Our parents, who are all retired, think we are crazy. What do you think?

Tom Kestell: I’m very pleased to see you use the word “we” in the questions you ask. In the long-term commitment to see this venture through, the two most important people will be you and your wife. The next most affected people will be your three sons. This can be both a blessing and, of course, something less than that, but it will affect their near future, and possibly their long-term future. What are your sons’ thoughts and feelings about this lifestyle change? If you and your future partners think this is a good and viable pathway into dairy farming careers … it doesn’t matter a lick who thinks it’s crazy.

I would have a serious talk with the son who is leaving the operation to see and understand why he has decided to do so. You need to have realistic expectations about your investment of time, money and effort. You must realize that much of your return will be in increased equity and not cash in pocket.

Every contract to enter a business should also have an exit strategy, in case things change and you must exit the arrangement because of various reasons such as health, injury or a change of plans.

I think your plan to acquire non-real estate assets first is a solid and valid approach, but realize that the assets you are buying have to be protected so they do not depreciate over the next seven years. How will machinery be kept current or improved? How will the dairy herd genetics be improved? Your investment will continue to increase every year. Find a way to protect your investment.

Try to set up a practical way that you can acquire ownership in the real estate over time, so it is affordable and protects both your partner and your family. There are many details to consider, so take the advice of old carpenters: Measure twice and cut once. I would seek the advice of others who have done similar transition deals and, of course, involve an attorney to get sound legal advice. Talk and communicate with your potential partner, and if all systems spell “go,” finally make a wholehearted commitment and enjoy the journey with your family.

Sam Miller: Sounds like you have given this a great deal of thought. Using your initial equity to purchase the faster-amortizing assets of livestock and machinery makes a lot of sense. Real estate — land, buildings and the residence — typically need a longer amortization period and, with limited capital, should be addressed down the road. Now is the time to put your plans on paper to map out how the initial and subsequent acquisitions will work. Work with a dairy business consultant on forecasting income, expenses and capital investment plans to aid in developing a timeline to eventually own the business.

With this in hand, negotiate a plan with your potential partner. This plan may include date-specific milestones to make purchases. You may also consider outlining purchase prices or options to purchase certain assets — machinery, facilities, tillable land, etc. When you have worked out a plan with your partner, meet with an attorney to put the document in writing. Having a written agreement will likely reduce disputes, should they arise in the future. While you have a great deal of homework ahead of you, this is a great start. Good luck on working out the details.

Katie Wantoch: Congratulations on making the decision to quit your job and start your own business! It’s never too late to explore becoming an entrepreneur. You have gained some valuable life experiences and industry knowledge that will transition well into operating a farm. It sounds like you and your wife have explored options investing in a farm and assessed your personal financial situation. I would encourage you to take a step back and consider a few things.

Every business owner should have a business plan. Most people have thought about and have details of a plan, but few have those written out. Think about these questions, discuss them with your wife and family, and jot them down on paper. Have you clearly defined your “why”? Ask yourself these questions: Why do you want to farm? Why is this the best option for you and your family? Why is now the right time? Others to consider include: What are you passionate about? What are your core values? What goals do you have? Having these questions answered will help as you approach a business partner. You will want to be able to clearly define why your proposal is the right fit for them and that you both are on the same page with values, goals and the future of the farm operation. Take the time now to develop your business plan so you have a road map for how to structure, run and grow your new farm business.

Pooling forage resources

My wife and I milk 200 cows and farm 350 acres in central Wisconsin. We are 55 years old, and we have $120,000 in debt. Our neighbor a mile down the road milks the same number of cows and farms 310 acres. He is 57 years old and owes $145,000 on his farm. We both have our haylage and corn silage harvested by a custom harvester. He does a pretty good job, but he doesn’t always get to us in a timely manner, and that affects our forage quality. My neighbor and I think we could buy the equipment together and do it ourselves for less than what we pay the custom harvester. We think we can hire friends and family members to help. What are your thoughts?

Tom Kestell: You pose an interesting set of questions. I have always tried to fix a current problem rather than to abandon my way of doing things and try a whole new venture. What would it take to get your current custom operator to make you and your neighbor a priority? Does it take better communication? A premium for timely harvest? Early payment for early harvest? Is it possible to get where you want to be with this custom operator or not? Forage quality must always be at the forefront because this sets up the dairy for success or failure. Are there other custom operators that could give you first priority?

If it is not possible to fix the problem, only then would I look into the huge investment in your own equipment for forage harvest. First, look into the total investment required. You will need hay-cutting equipment, merging equipment, hauling equipment, packing equipment and, of course, a forage harvester. Next, look into the people to handle these tasks. Are these people trained, and can they handle the commitment in the time that is required for a timely harvest? It is one thing to commit to helping out in one’s spare time, but another to be on call when the weather and timing are optimal. Look at all the options and try to arrive at the ultimate goal, which is the best forage at the best price.

Sam Miller: I commend you for looking for improvements in how you each operate your dairy business. Your question can best be addressed by completing a partial budget exercise. Start by comparing the existing custom harvest option expenses with the costs to own and operate joint harvesting equipment. These expenses include: depreciation, interest, repairs, insurance and labor. Also complete a comparison of the intangible differences of owning vs. custom work, such as quality of feed, timeliness, labor availability, etc. If it makes economic and peace-of-mind sense to jointly own the equipment, work with your neighbor on an agreement to purchase, maintain, operate and manage the equipment. Laying out rules of the road for joint ownership will reduce misunderstandings. At a minimum, this agreement should be in writing. You may want to consult with an attorney for an opinion about setting up a separate entity to own and/or operate the equipment for tax or liability purposes. Good luck with the planning process.

Katie Wantoch: This may be a great idea to pool your resources and work together with your neighbor. I’m a little concerned that you both “think” things will work out, but I would suggest you make sure the i’s are dotted and the t’s are crossed before entering into this joint venture. A partial budget will assist you in comparing your custom-harvesting costs to the capital and operating expenses needed for this investment. Partial budgets estimate the impact of minor adjustments to your farm business and are based on the principle that a small change in the business will eliminate or reduce some costs and returns, add costs, and/or add revenues. The net effect of this change will determine if this is the right decision for your idea.

A word of caution, the results of the partial budget are only as good as the data that you have gathered to complete it. Be sure to research costs for fixed and variable items, such as fuel, repairs and labor (variable costs) and depreciation, interest and insurance (fixed costs). More details can be found in this article from Oklahoma State University Extension. Once you have determined your costs and returns, you can weigh them against your current custom-harvesting expenses. You and your neighbor will need to decide if this comparison will offset the quality of forage for your operations.

Agrivision panel: Tom Kestell, dairy farmer, Sheboygan County, Wis.; Sam Miller, managing director, group head of agricultural banking, BMO Harris Bank; and Katie Wantoch, Extension agricultural agent specializing in economic development, Dunn County, Wis. If you have questions you would like the panel to answer, send them to: Wisconsin Agriculturist, P.O. Box 236, Brandon, WI 53919; or email [email protected].