IS IT TIME TO START A FARM?

Originally published on January 24, 2008

 

There is a considerable optimism in the prairie grain sector.

Grain prices have reached historic highs due to growing international demand, tight stocks and new demand from biofuel manufacturers.

As I wrote this article, December 2008 Minneapolis wheat futures, subtracting our local freight and transportation costs of about $1.60 per bu. yielded a forecasted wheat price of $8.08 per bu.

The November 2008 Winnipeg canola futures contract indicated a prices of $12.18 per bu. on our farm.

With these prices, who wouldn't want to be a farmer?

Let me introduce you to Farmer Joe.  He and his family have lived in Calgary, where Joe worked as a heavy equipment mechanic.  Joe grew up on the family farm in Saskatchewan, but five years ago he didn't see enough money in it to stay.  The family agreed to sell his mom and dad's equipment and cash rent the land to a local farmer to supplement their retirement.

Joe is now presented with the following opportunity: his father's neighbour wants to sell two quarter sections of farmland to Joe for $150,000 and rent him two more quarters for three years at a rental of $30 per acre.

The farmer who rents Joe's parents' farmland has agreed to direct seed and spray Joe's land at local custom farming rates.

After much deliberation and with the added security of an employment offer from a farm agriculture dealership, Joe and his family sell their home in Calgary and move back to Saskatchewan.  After buying a house in Saskatchewan, Joe has committed $200,000 to his farming venture.

To buy his two quarter sections, in April of 2008 Joe will put down $30,000 in cash and finance the remaining $120,000 over 15 years at a financing cost of 7.5 percent. 

 

Joe is wrench savvy and is committed to harvesting his own crop.  Through the local dealership and farm auctions, he buys without financing, a $30,000 self-propelled combine, a $15,000 self-propelled combine, a $15,000 self-propelled swather and a $10,000 truck.

His parents still live in the farmyard, so Joe can use the fuel tanks and Quonset for his machinery.

This is where our hypothetical what-if gets interesting.  Is Joe crazy to follow his heart back to Saskatchewan and start farming with $200,000?  Is Joe's farming venture sustainable on only four quarter sections?  To answer these questions, I have completed three financial forecasts, with differing what-ifs.  In the first forecast, which we'll review in this column, I've assumed three years of good crop with good prices.

In the table, I've extracted from Farmer Joe's optimum forecast his farm's profitability, assuming that three good years are ahead of him.

Joe harvests 28 bu. an acre of canola and 35 bu. of wheat in his first year.  In his second year he harvests the same and in his third year he harvests 35 bu. an acre of wheat and 40 bu. of peas.

Joe's cash position is strong and his return on assets is calculated to be 20.79 percent in Year 1, 11.29 percent in Year 2 and 13.2 percent in Year 3.  By the end of Year 3, Joe could expand either his equipment or farmland.  The financial forecast reaffirms that it was a good decision for him to return to Saskatchewan.

In my next column, I'll throw drought Farmer Joe's way and see how he manages.

 

Allyn Tastad, certified general accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at allyn@hth-accountants.ca or website www.hth-accountants.ca. He is also involved in the family farm near Loreburn, Saskatchewan.  The opinions expressed in this column are for information only.