Saturday, August 7, 2010

Second Commandment Of a Sustainable Farm

Thine farm shalt be profitable. Or if thine won't, mine better be ! :)

In commodity agriculture of every type I ever participated in, I (and everyone else) lived for the "good" years, where high prices and excellent yields magically came together and there was considerable money left over after all the bills were accounted for. For any given commodity, really good years happen somewhere between one year in five (if you are real astute at using futures markets) and one year in ten (if you are average at using and predicting futures markets). If you are running your farm in a very astute way, the rest of the years vary between making a little money and losing a little money.

When good years hit, commodity agriculture can look really, really lucrative, and I promise you never forget when things hit. I still get a funny feeling in the pit of my stomach remembering my first real try at growing navy beans. I had the perfect season....bin buster yields combined with record prices to NET me nearly $ 700 per acre on a $ 300 per acre investment. I felt like I couldn't do anything wrong, which was nice because I gave a good chunk of that money back over the next several years until it hit again. The whole experience of commodity grain growing and marketing is much like rolling dice in Las Vegas and requires about the same level of nerve, with the exception that unlike Las Vegas you had better have a real good handle on what it cost you to grow the commodity you are trying to price PLUS a real good idea about how the futures market operates or you are going to get your head handed to you on a plate.

The difference between large scale commodity agriculture and selling services and products direct to consumers is the difference between the illusion of profitability and real profitability in my opinion. Using my grain farm as an example, year over year I'd expect to generate $ 150 per acre in "gross margin" dollars and be able to put maybe $ 50 per acre in my pocket.
Thus in order to take a very modest family living of $ 50,000 per year I would need to farm 1000 acres of grain at a minimum, (and I would almost certainly have tied up millions of dollars to do so). This example is real and I hope it helps you understand why farms practicing commodity agriculture have to be so large in order to support the people who run them. Scarce financial resources and low profitability may also help explain some of the issues that plague various types of commodity agriculture. There just aren't enough resources available to the farmer to do an adequate job on a lot of fronts. In some cases, our government has decided that the nation needs to help these farmers comply with various mandates, and thus the self perpetuating USDA government program is born. When viewed this way, it kind of gives one pause to thiink about all the costs actually associated with America's "cheap food" policy, doesn't it ?

Since I had the opportunity to start over afresh and since I knew I wanted to make my living farming (and NOT in commodity agriculture), I was drawn toward "out of the box" thinkers who were marketing products and services directly to consumers. In addition to a good set of agricultural and business skills, I had a lot of experience selling things to people and I found I kind of enjoyed the process most of the time.

Over a couple of years, I studied a lot of of direct to consumer ag businesses. I found that these can be quite profitable, although this was/is still very much dependent on the business acumen of the owner(s). Established, well run agricultural businesses of this sort can yield their owners consistent profits of $ 1000 per acre or more. In today's dot com world, this still isn't a get rich quick scheme by any means, but it is a much more viable business model than commodity agriculture in the sense that it can support a farm family comfortably on an acreage and at a scale that a competent farmer should be able to take good care of. Once these sorts of businesses get to a certain size, astute farmers ought to be able to grow from savings and cash flow without the need to borrow capital, except possibly to acquire more land. In my opinion, this is a true measure of profitability and I found myself wanting to give this sort of thing a try. Although nobody is ever going to write a book about how successful the Webb's were, I'm proud to say that in five years we've gone from no land and two off farm jobs to having the farm comfortably support us, which to me is what it's all about.


Kate said...

Cheap food is a myth - we pay for the cheapness through the externalities of government subsidies, heavy use of petrochemicals and adverse impacts on the environment and the social structures of farming communities.

Nice post - we have a couple of CSAs here (we're members of one) that do direct to consumer, and I think they're all making do, although you're right about the need for some business sense and skill to make it work.

Jason said...

The part that riles me most about the way our current system of subsidies is set up is that the subsidies often reward bad farming practices and are too often designed to favour those that service farmers rather than farmers themselves. I'll cite an example.

Right now, the TN Department of Agriculture is using some of it's tobacco diversification money to subsidize beef and dairy farms that wish to purchase some items through a cost share program. Two thoughts.

1. If the goal of this program was/is diversification, why on earth is the state subsidizing the production of beef cattle, which is already by far the largest agricultural entity in this state ?

2. Most of the items on the subsidized list might be nice to have but are kind of incidental (and don't add much value) to a well run farm operation. I'm wondering out loud who had influence over which items got added to the list and who really benefitted by this program in the end ? Frankly, I don't think farmers had much to do with it.

This whole system makes me shake my head.