DROUGHT FINDS FARMER JOE
Originally published on February 28, 2008
I introduced Farmer Joe in my last column. Joe quit his job as a heavy-equipment mechanic in Calgary to follow his heart back to Saskatchewan to try his luck farming. Joe bought two quarter sections of farmland from his father's neighbour for $150,000 and agreed to rent two additional quarters for three years at a cash rental price of $30 per acre. The farmer who rents Joe's parents' land had agreed to direct seed and spray Joe's farm at local custom farming rates.
Because Joe is wrench-savvy, he was committed to harvesting his own crop.
Through his local implement dealer and farm auctions, he bought without financing a $30,000 self-propelled combine, a $15,000 self-propelled swather and a $10,000 grain truck.
His parents continue to live in the original farmyard, so Joe uses their fuel tanks and Quonset for his machinery and equipment needs.
The proceeds from the sale of Joe's Calgary home has allowed him to relocate his family to small town Saskatchewan and commit $200,000 to his farming venture. In my last column, Farmer Joe was all smiles following the harvest of three decent crops at decent prices. Our three-year financial forecast reaffirms to Joe that given these better-than-average results it made good financial sense to him to return to Saskatchewan.
A truly seasoned farmer knows that it doesn't always rain at the right time, so I thought in this column it would be fitting to throw drought Farmer Joe's way. In the first scenario, one good year with good prices is followed by two years of drought.
In scenario 1, I've shown Joe's farm's profitability when only one out of three years is decent. Planting 305 acres of canola and 305 acres of wheat in the first year, Farmer Joe harvests 28 bushels an acre of canola and 35 bu. of wheat. Using the prices mentioned earlier, this would result in $190,271 of grain and oilseed revenue in the first year.
Drought arrives in his second year and Joe receives a crop insurance payout on his 610 seeded acres equating to a harvest of 14 bu. an acre of canola and 16 bu. of wheat. In his third year, the dry spell continues and on the same 610 seeded acres he receives crop insurance proceeds equating to a harvest of 16 bu. an acre of wheat and 18 bu. of peas.
His accrued profits were $95,362 in the first year of operations and accrued losses of $27,083 in the second year and $16,254 in the third. Joe's cash position isn't terrible because his first harvest gave him a considerable leg up. His return on assets is calculated to be 20.79 percent in Year 1 with negative returns in Year 2 of 6.27 percent and 4.02 percent in Year 3. While he now sees the inherent risk of farming, Joe still considers himself to be ahead overall.
But what would happen if Joe experiences three years of drought.
In scenario 2, I've set out Joe's farm profitability assuming that all three years are bad.
Planting 305 acres of canola and 305 acres of wheat in the first year, Joe settles for crop insurance, which equates to a harvest of 14 bu. an acre of canola and 16 bu. an acre of wheat. In his second year of drought, he again receives crop insurance, equating to a harvest of 14 bu. an acre of canola and 16 bu. an acre of wheat.
In his third year, the dry spell continues and Joe is left with similar crop insurance proceeds of 16 bu. an acre of wheat and 18 bu. an acre of peas.
His accrued losses are $5,391 in the first year, $21,115 in the second and $16,254 in the third.
His return on assets are all negative: 1.51 percent in Year 1, 6.38 percent in Year 2 and 5.25 percent in Year 3.
In this scenario, Joe is glad to be working as a mechanic at the local ag dealership and is hoping for better times. He isn't overly discouraged because his buddy in Calgary suffered the same negative returns in his stock portfolio over the past three years.
I believe commodity prices will remain strong for the next few years. I also believe there will be real-life Farmer Joes who will re-examine their dreams of farming and pursue them. They will relive that old prairie axiom of "rise early, work late and all the while hope for rain."
Allyn Tastad, chartered professional accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at firstname.lastname@example.org or website www.hth-accountants.ca. All data and information provided is for informational purposes only. Readers are cautioned that laws and regulations are subject to change. Consult your accountant for current professional advice tailored to your situation.