I always note with interest those farmer surveys, because I’m interested in knowing their thought process on topics such as marketing or the costs of inputs. And typically you find farmers spend much of their time thinking about just those areas. We do a fantastic job of raising food for a burgeoning world population; unfortunately, we can’t set prices for the commodities we sell. So being creative in how to allocate financial resources and manage risk is very important.
An afternoon spent at the World Pork Expo in June opened my eyes to what’s possible. Many row crop producers who want to grow their operations are looking for ways to add more land to their portfolio. Often, the reason is to support an adult child who wants to come back and farm. But the numbers might actually look better to add a swine facility if you’re open to raising hogs.
Rod Leman, Vice President of Business Operations with Cactus Family Farms, a major Iowa swine producer, says he believes a swine facility can build equity faster than buying the same dollar amount of land. “Our producer contracts pay about $109,000 a year on a 12-year contract for a wean-to-finish facility holding 2,480 head. The producer takes care of the utilities, insurance, property taxes and maintenance, and provides the labor for caring for the hogs.”
Jeb Gent, sales manager for Hansen Ag Solutions, says such a wean-to-finish facility typically costs in the range of $800,000. As steel prices and interest rates rise, this amount could be increasing in the future but the numbers currently work pretty well for the building owner.
Doug Dickinson, Creston area representative of Farm Credit Services of America, agrees and says today’s 15-year-old facilities are still appraised at values very close to their initial cost. And after the initial integrator contract is complete and the building is paid off, much more of the cash flow goes into the farmer’s pocket. Dickinson said leasing the new facilities from FCS might also be a possibility, allowing no down payment as a possibility.
Consider this example: The gross cash return on an $800,000 facility (assuming you put 25 percent down on the facility and financed at 5 percent for 20 years), provides you with about $52,000 of gross cash flow each year to be used to pay property taxes, utilities, insurance and a return for labor (or to pay down the note earlier).⁰ In contrast, 240 acres of medium quality south central Iowa farmland (2018 ISU Land Value survey) valued at $4,079/acre ($978,960) would generate around $42,000 GROSS cash rent (if you rented out the land at $174/acre) before debt service or property taxes using ISU’s 2018 average south central Iowa cash rental rates. For those who actually farm the land, with today’s prices, most farmers would be lucky to have one third to one half of that amount for paying taxes and servicing debt. This, of course, does not help cash flow nor does it provide any return for your labor. With the swine facility, you also receive the manure, which Leman of Cactus Farms says should have a value of $10,000-$15,000 annually.
In either scenario – building a swine facility or buying land – you have the risk of debt, but the source of risk is different. With land, the main risks are probably a large drop in land values, poor cash flow due to low commodity prices and/or a poor crop not fully protected by crop insurance. With a swine facility, the main risk is company risk – the risk that the swine integrator defaults on contract payments to you. This is why it is important to understand the strength of the other party to your contract. According to Dickinson, while this is important, most integrators are in pretty good shape financially.
Even if a facility makes sense financially, there’s always the issue of properly handling the manure. Iowa State University’s Daniel Andersen writes a regular blog on the science of manure, including its management and handling, options for treatment, use as fertilizer, the impact it can have on the environment, and new technologies being developed to improve its use. In a recent April 2018 blog post, Andersen discusses water quality and the differences between commercial fertilizer and manure.
He says there are differences between manures and commercial fertilizers that may make their nutrient losses (and effect on water quality) a bit different. While the nutrient ratios in manure are different than commercial fertilizers, the Manure Management Plans (based on an Iowa bill passed in 2002 and implemented in 2008) uses information about how much phosphorus is currently present in the soil, how much will be added, and its risk of transport to an Iowa water body to determine if manure application should be limited by supplying nitrogen or phosphorus. This is a risk-based approach that focuses on water quality in making a manure management decision.
Andersen’s December 2017 blog also concluded that manure, when managed correctly, can be a beneficial fertilizer that not only supplies nutrients needed to support crop production, but also can be part of a system to improve soil tilth, health, and hydraulic properties.
Changes in farming and feeding practices in the swine industry have also reduced the amount of phosphorus in swine manures relative to its nitrogen content making its nutrient content approximately balanced for corn-soybean rotations and reducing the risk of phosphorus or nitrogen build-up in soils. Anderson concludes the April blog by saying, “Though it may seem like Iowa is livestock rich, it’s important to remember that adequate land to utilize our manure resources exist. Livestock operations play a vital role in Iowa’s agriculture economy and continue to strive to do so in ways that decrease environmental impact, that are more sustainable, and more importantly these farms continue to strive to do better.”
And swine facilities might be one of the better options for helping bring the next generation of farmers back to the land.
⁰ $600,000 financed at 5% over 15 years results in a $4745 monthly payment
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques and strategies discussed are suitable for all individuals or will yield positive outcomes. Examples are hypothetical for illustration only, specific results will vary.
Investment advice offered through Advantage Investment Management, a registered investment advisor.