Ron Settler's prediction earns a "gold star"

John Morriss, editorial director for Farm Business Communications, emailed me yesterday to say Ron Settler "gets a gold star" for his opinion article on page 1 of the April 7 Grainews. Ron farms near Lucky Lake, Sask., and he's been writing for Grainews for years. In April, he looked back on his experiences with high prices and wrote an article to warn farmers that the good times won't last.

Here is the whole article again. You can see for yourself just how right he was.

Plan for the coming cash shortage

Grain and oilseed prices are good right now, but margins will get tight again so think long term.

By Ron Settler

If you're old like me you remember the boom in grain prices in the late 1970s and then the sudden drop in prices along with the 18 to 24 per cent mortgage rates. Some of you may not remember this but at that time we never thought you'd see a mortgage below 10 per cent ever again. Then there were the land prices. With the boom in grain prices, land values shot up. Gas was about $1 a gallon (that's about 23 cents a litre) and a new Chevy pickup was $10,000.

Cash flows to buy land were based on $5 per bushel wheat. If it didn't work out at $5, you just put in $6 and the bankers were happy. Lots of land was sold for high prices based on these projections. Many were saying to buy now because they're not making any more land. The banks took back lots of this same land in the ‘80s. Lots of farmers folded up their tents and moved on to other professions. Grainews had articles like "How to survive on $2 per bushel wheat." Times were tough but most of the farmers hung on and many are still farming today.

How can we make sure we're still tilling the soil in 2015? How would I know anything about it? Well, I'm just a small grain farmer but we did make it through the ‘70s and we're still farming today. Here are a few thoughts and observations that you might want to keep in mind when that big grain cheque hits your palm and your eyes start wandering to the stores and showrooms. 

1. Remember the tax man

Every dollar you make, he wants his share. If the past few years were tight for you financially, you likely haven't paid much tax. But with a big increase in income and no large increase in deductible expenses, the taxman will want 25 to 40 per cent of that extra profit you have in your pocket. Do the math. How much will your tax bill be this year? Don't spend all your cash on purchases that aren't deductible such as vehicles, equipment and personal items. Save some for the taxman. He doesn't like to wait for his money. If it looks like you've got a big tax bill coming see someone smarter than yourself for some advice. There's no point in giving any more to the taxman than is absolutely necessary.

2. Pay down your bills

Make sure you get all your bills paid off before you buy that new truck. Your creditors will like you better and you'll sleep better.                        

3. Plan for crop failures

Remember that sometimes it doesn't rain. Crop failures happen all the time. Make sure you are covered with crop and hail insurance at a rate that is livable if you have a complete failure. If you don't carry full crop or hail insurance, then make sure you can make it through the year if you have no crop income.

I remember 1988. I think it was June 3. We had seeded some wheat and I was harrowing it with the John Deere R. It was 40 C with a hot wind. (The R had a cab but air conditioning wasn't available on the 1953 model.) We started the year as dry as we are now or drier and we got very little rain. Dust was blowing and the hoppers were thriving. We might have got an inch or two of rain all year. The summerfallow wheat crop on good land went about 10 bushels per acre, or less. Wheat on stubble was about three or four bushels, if you bothered to combine it.  It can happen again.

4. Don't buy too many things

Just because you've got a lot of money sitting in your bank account, you don’t have to spend it all. I know we've been getting along with this old machinery and stuff for years and it would be nice to have newer things, but make sure you stop and do a cash flow analysis. Plan for higher prices next year for inputs, plan for your income tax bill, remember it might not rain (or rain too much), then see if you are comfortable buying a few things. Look at the items you are planning to buy. Should you buy a new truck or a new vacation trailer? How about that holiday you've been putting off? Does the house need some renovations? New or newer machinery is always nice to have on the farm.

Some of the above items can be deducted from income. Others cannot. Make sure you take that into account when you buy. Most machinery repairs are 100 per cent deductible in the year you pay them. Buying a piece of machinery must be deducted over a number of years. That vacation to the south will be nice but you likely can't deduct it from your income. Think before you buy.

5. Borrow to buy large items

Spread purchases out over a number of years by borrowing money to buy large items. Maybe you have the cash to buy it now so why get a loan? It makes sense not to get a loan as long as you've got your cash flow planned and have taken into consideration all the bumps in the financial road that can come along in the next few years. But it's a lot easier to get a loan for a machine when you're buying it now than to go with your hat in your hand to the banker and try and get a loan after you've bought it and you've run out of cash. You can always pay a loan off early if things go well.

6. Buy land based on average grain prices

Want to buy more land? It might be a good time if the price is right. Just don't do all the projections on $10 durum wheat and $15 lentils. Perhaps a person should use a 10-year average crop price and if it makes sense at those prices maybe it's a good buy. Don't bite off more than you can chew. It might be better to buy a quarter or two that you can afford rather than take a chance on a couple of sections and have to give it back to the bank in five years.

7. Watch where you get your advice

Sure the truck and machinery salesmen may tell you that good times are here forever but they don't have to make the payments when it doesn't rain. Think things over carefully before you put your name on the line. Your farm is at stake.

About the same time we had the boom in the ‘70s Alberta had a boom in the oil industry. They also had a crash and I heard of a bumper sticker that was floating around Alberta in the ‘90s. It said, "Please give us another oil boom and this time we promise not to p*** it away."  The same could probably be said about grain farming. Hopefully we don't spend all our new found income on fancy baubles and expensive equipment and we're here to enjoy the farm life for a number of years yet.

—Ron Settler farms and runs a salvage and used parts yard at Lucky Lake, Sask.