Farmer, financial advisor share insights on organic grain transition
By Chuck Anderas
Back in January, when we could still gather in close quarters, MOSES hosted a meeting with an advisory committee of agricultural professionals and farmers from Wisconsin and Minnesota to set training priorities for our summer field days. Our discussion centered on the three pillars of sustainability: economic, environmental, and social. One of the priorities identified in that meeting was the need to train more farmers on how to transition to organic grain production and to emphasize the benefits from a holistic approach, covering production, financial, and social perspectives. Our original plan was to have a field day in July on Jon and Ruth Jovaag’s farm near Austin, Minnesota. Due to COVID-19, we pivoted to doing an episode for the MOSES Organic Farming Podcast and a virtual field day. Paul Dietmann from Compeer Financial and the Jovaags shared their expertise and experience with the “hows” and “whys” of transitioning to organic. Here are some highlights of what they shared.
Why Transition to Organic?
The most obvious financial reason to transition to organic is that the price of organic grains is significantly more. Organic corn can be two to three times the conventional price, and organic soybeans are usually double conventional soybeans. Jon and Ruth started their organic journey with a 12-acre field that had been in hay. Since they hadn’t applied any conventional inputs in the past 36 months, they didn’t have to transition it. They grew organic corn that first year, and had a steep learning curve with cultivation, in particular, Jon said. “The yield wasn’t great but we made a better profit off that little field than in our conventional fields,” he added. At that point, Jon was sold on transitioning all their acreage to organic, thinking that “if I can turn a little bit of a profit by making many, many mistakes, imagine if I only made half as many mistakes!”
Both Jon and Paul warned, however, that price alone won’t be enough motivation for transition.
“If price is the main reason, they’re probably not going to be successful,” Paul said. “They have to be interested in all aspects of organic production and willing to learn. Price gets their attention, but they have to really want to do it.”
Jon echoed that sentiment. “People who want to transition have to like to solve problems, and really understand and buy into organic. You have to think of it as bigger than ‘hey I want to make some more money.’ You really have to think about it like that you want to have a whole regenerative organic system to produce food in a really sound way, and have a whole system.” Understanding the systems approach to organic production and believing in its value will help “when you run into little glitches and hurdles so you can solve those problems rather than saying ‘we’ll just spray it,’” he explained.
Paul said that sometimes farmers are initially attracted to organic because of the price, but the process of transitioning “opens a farmer’s eyes to some things they didn’t really like about conventional farming” like not being able to hug your kids until you change and shower after spraying. Often, people will see the benefits of organic production after starting the transition, and the transition time helps them to look at farming as managing a system.
Economics of Transition
When thinking through the economics of transitioning to organic, you should start with a balance sheet and get a good understanding of your working capital, or your current assets minus current liabilities, Paul advised. You want to have a “2:1 or 3:1 ratio of current assets to current liabilities,” he added. That will give you the idea of how much cash you have to work with as a starting point.
Next, you should build enterprise budgets for both the transition years and once you are certified, and build that into a multiyear cash flow projection, Paul explained. That will help you think through “what months will we have cash coming into the operation, what months going out, how will we cover family living costs during the transition, how are we going to make loan payments during the transition, where will there be deficits during that time and what are your plans to make it through those times when cash is short?”
Paul recommended using the OGRAIN Compass tool to help you develop your balance sheet, enterprise budgets, and multiyear cash flow projection. OGRAIN Compass is a free Excel-based tool to help you run out your financial plan for 10 years; it can also build in capital purchases.
Jon recommended looking at finances in the long term. “This 40-acre field might not cash flow that well, but you’re looking at it in a five- to seven-year timeframe. The reason you’re doing that is to get to everything being certified so you have that value added.” Rather than focusing on how each field in transition will cash flow, Jon thinks in terms of the whole farm.
So, for your whole operation, how should you think through cash flow and profitability during the transition years? First of all, Paul said that “profit is a return on assets and a return on equity” that includes non-cash expenses like depreciation while “cash flow is cash that goes in and cash that goes out and excludes things like depreciation that isn’t a cash expense.”
If you look at profitability during the transition years, you might get scared off, he cautioned. However, you might find the cash flow isn’t as bad as profitability during the three-year transition time. Overall, it is important to think long-term as you transition to organic production both in terms of production and economics, he said.
Paul and Jon are featured on episode 12 of the MOSES Organic Farming Podcast.
Both Paul and Jon agreed that it takes a lot of knowledge to farm organically.
“If someone is thinking of transitioning, start the plan a year before you stop farming conventionally and start your transition,” Paul said. “Go to the MOSES Conference, go to the OGRAIN Conference, go to field days, talk to other organic farmers, talk to transitioning farmers, talk to suppliers, gather information before you make the first practical effort towards transitioning.”
Jon did exactly that, attending the MOSES Conference and the Minnesota Organic Conference a couple of years before they started their transition. Jon also sought experienced organic farmers to ask questions.
“Find somebody who knows more about it than you do—it’s easy to do that when you don’t know much,” Jon said. “The key to success is to get a good mentor and learn as much as you can.” The MOSES Farmer-to-Farmer Mentoring Program offers one-on-one support for beginning and transitioning farmers from seasoned organic farmers in their region. Applications for the 2021 program are due Oct. 31. See mosesorganic.org/mentor-program.
Another important piece of advice from Paul was that you shouldn’t transition too many acres at one time. “If it’s 1,000 acres, do maybe 200 acres the first year at most,” he advised. “You need to rebuild knowledge of things like cultivation. Do maybe a fifth of your acres, but don’t bite off more than you can chew.”
Jon added, “Sometimes we wished we had transitioned faster, but looking back there’s a lot you have to learn. You don’t have the band-aids you do in conventional.” While the Jovaags started with a 12-acre hayfield, they haven’t transitioned all of their hayfields. Some of their fields are more difficult to access or can’t be grazed so are less ideal for forage-based transitions. For those fields, they have started the first-year transition with field peas/oats that they grind for feed.
After harvest, Jon plants a winter rye cover crop. In the spring, they roller crimp the rye and no-till non-GMO soybeans for their second year of transition. “The non-GMO beans gets you a little premium,” Jon said. “Yields are comparable to conventional soybeans.” Then they grow organic corn the first year of organic certification.
“The easiest way [to transition] is hay, but we have other ways, too,” Jon said. He also emphasized a transition plan that helps keep weeds down for the first year when you start organic. Paul added that “if there is a market, hay is a great transition crop. From a cash flow perspective, it provides more cash and takes less cash out than if you’re trying to transition non-GMO soybeans, for example.”
How do you decide which fields to start your transition? Some farmers start with their best fields. “If the acres produce good conventional corn and beans, they’ll produce good organic corn and beans,” Paul said about that strategy.
Others start with their worst fields, thinking that if it doesn’t work out the risk is buffered by strong conventional yields in other fields. Paul has seen people do it either way and it has worked. Jon didn’t think about it in terms of field quality but started the transition “by whichever field happened to be in hay. But then after that, I looked at it in what fit rotations best. It was more of which way could I most quickly convert everything to organic in terms of rotations rather than thinking through best or worst fields.”
It is important to talk with your lender, Paul said, to make sure you are on the same page and that they truly understand organic. A lot of lenders now understand organic transition and will work with you. At Compeer, they have developed a loan program specifically for transitioning to organic called the Organic Transition Loan Program. It is a declining balance operating loan designed around the way cash flow typically works.
“We know that cash will be short by X number of dollars, so we take that cash shortage and set that up as an operating loan,” Paul explained. During transition, farmers only need to pay interest on the operating loan where typically the principal and interest would be paid to zero each year because it should be paid out of operating income. “It’s basically an 8-year loan; the first three years, it is an interest-only operating loan. The last five years, it’s a term loan with regular principal and interest payments.”
In many cases, farmers don’t need specific loan programs to help them transition to organic, Paul added. “Once farmers get into the transition, they realize cash isn’t going to be as short as they thought it was going to be,” he said.
Organic farmers often talk about what it’s like being the only organic farmer in the neighborhood and how that can be isolating. There is cultural pressure to have “clean” fields, and your neighbors and family might have assumptions about organic farming based on little experience. Fortunately, there is a growing community of organic farmers and this community is one that freely shares knowledge and experience.
Transitioning to organic is a way to step off the twin treadmills of getting bigger all the time and herbicide resistance. As Paul pointed out, organic farming can allow you to work at a more manageable family scale. “You don’t have to run 3,000 acres this year, and 3,500 acres, and 4,000 the year after, and outcompete all the neighbors for land.”
Jon farms with his dad, who has a lot of experience farming and “has always been in the mindset of doing conservation farming.” After seeing the success of the initial 12 acres they transitioned, Jon said his father was on board with transitioning all their acreage to organic.
For some farmers, navigating the family dynamics of transitioning to organic can be a challenge. Sometimes it helps to point out the environmental benefits of organic production if the family values environmental stewardship and conservation. For others, they might just have to do the numbers to see that organic grain production can financially benefit their farm.
Chuck Anderas, MOSES Organic Specialist, is at firstname.lastname@example.org or 888-90-MOSES.
The “Do the Numbers” field day and podcast were funded by a grant from NCR-SARE.
From the September | October 2020 Issue