Wednesday, April 02, 2008

Passive Income on the Farm

There was a short article in the March, 2008 issue of "The Stockman Grassfarmer" on passive income for the farm or the ranch. The article relates some of the experience of Gregg Simonds who has gained a reputation for turning around ranches that were losing money. The main reason for the passive income according to Mr. Simonds is because, "Passive income combats commodity volatility." Of course the main implications of the article are for ranches or larger farms and I small diverse farms are really planning to be part of the commodity market, but there is something that can be taken away from this.

Some of the passive income sources that Mr. Simonds used were gravel mining royalties (not going to happen on a 40 acre parcel) and cell phone towers (don't really want to look at that, and I doubt anyone wants to build one in the boonies). But, the main point of the article is about leased hunting. According to the article in areas like, "Texas, deer hunting leases can bring as much as $7 to $17 an acre and quail $12 to $20 an acre." In my part of Iowa some of those deer prices may even be higher because we are the home to a few world record bucks.

Mr. Simonds also goes on to say, "On many ranches, wildlife should actually be the centerpiece enterprise and cattle should be seen as a way to enhance the range for wildlife." Pretty interesting statement there, but again not very applicable to a 40 to 200 acre farm in Iowa. I the flip side there are a few hunting "ranches" in Iowa that are around 200 acres and up that focus on deer and pheasant with farming on the side.

Even though hunting, cell phone towers, or mineral rights aren't really opportunities I will be able to pursue on our farm I do like the idea of passive income, or more specifically non-animal/crop related income that is year round. I think one path towards having a successful sustainable small scale farm is finding ways to have income all year long, not just in the growing months or when you send animals to the butcher.

Some people obtain this year-round income stream by selling animals by the cut and finishing at different times of the year so they can have a supply of meat on hand. Others have added agri-tourism components to the farm that while they are somewhat seasonal do add year-round cash flow. On thing that I have considered if we did go the route of agri-tourism or something along the lines of a bed and breakfast is to work out lease deals with surrounding land owners. That would allow more land for things like hunting or wildlife watching. It would also help provide passive income for those farmers/land owners.

I believe some sort of year-round or passive income is an important part of a diversified farm. Joel Salatin may be a perfect example of this. While I do know that he could "make it" without any of his book writing or public speaking, I also know that it provides some year-round income and more diversification on the farm. Hmmm... maybe I need to write a book also ... Let's see, I could write about ... Oh, nevermind! I think I'll stick with something else. I have to many grammatical errors and to short of an attention span to write a book!

12 comments:

Yeoman said...

On passive income, one thing that you should keep in mind, in regard to it, is that it can cause tax difficulties to some operations. I don't fully understand that, but the ranch accountant is always worried that the ranch will have too much passive income.

Anyhow, the ranch does have a cell phone tower. It's a minor source of passive income, but it is a source. There's also a lease to a hunting outfitter, but I'd note that those are always very controversial here, where a majority of the male population hunts, as it is viewed as a species of favoritism, and it can make you none too popular. That probably isn't the case elsewhere.

In the West, people with oil or mining rights are coming on no matter what, as a rule, and whether you like it or not is irrelevant. Generally, if you don't own the mineral rights, oil and mining companies are, in my view, generally not worth it economically, although more recently they do endeavor to make surface use payments that are fair. But you loose ground, and their use is quite inconsistent, as a rule, with the farmers.

On that, one thing to keep in mind is that there are very invasive passive uses, and non invasive ones. A cell phone tower is pretty non invasive, as they put it up, and you tend not to notice it thereafter. Mining, of course, is the polar opposite. Some uses are temporary, but a bit aggravating. Others are not. It depends a lot on the individual. I don't mind hunters at all (as I am one), and a lot of other sight see-ers to not bother me. I wouldn't want a renter, however.

Mellifera said...

Wind turbines could be promising, and they're not quite as ugly as cell-phone towers.

Our apartment complex is making some good passive income out of a phone tower. When we first moved in we noticed the *big, huge* gob of Spanish moss at the top- everything in Gainesville has Spanish moss hanging off of it (trees, fences, powerlines, but this was a big wad), wondered what kind of hurricane got it there, and why nobody had bothered to take it down.

Then the ospreys came back from winter vacation and started raising chicks in the "weed wad." Oh. It was a raptor nest. Gotcha. I guess since we cut down all the dead trees, it's only fair they get to borrow the phone tower. : )

Yeoman said...

Wind turbines would be cool.

Dave_Flora said...

Passive income is one of those things that sound tempting, but rarely work out to be as profitable as it first appears, I believe. Instead of concentrating on year-round income, accept that there are "harvest" times and "slack" times, and plan to use your money accordingly.
Instead of passive income, diversify in as many ways that seem natural to you..which is going to vary for every farmer and every farm. You have some timber acreage that could produce an income..but since it's a small acreage, you need to be very niche-oriented. Make sure you harvest trees keeping the "bad" parts aside for custom wood-workers. Maybe you could use oak trees to grow mushrooms, or set aside a portion to try to cultivate an endangered plant that could get attention of preservation-minded tourists. I guess what I'm getting at is that you'd be better off doing a creative evaluaton of your particular skills and pairing that up with what the land offers for a "best fit". Since you are a pastor, it may be a good idea to offer up a garden-patch of land that you could (1) have stewardship workshops in planting and tending it and (2) use the vegetables to give to people who are in need.
Not all farm activities have to be directly profitable...remember, if you have something to sell, the more people you have walk by it, the more potential customers you will have!

Dave_Flora said...

Watch out for those turbines, by the way..I've read that they can be quite noisy...

tbarrett said...

I am very skeptical of the cell tower or wind turbine idea. It seems easy for small farmers to get trapped by terms and conditions that weren't well understood. Before you know it your into a 99 year lease and half your farm is off limits due to easements defined in the lease, or the "we reserve the right to add additional fixtures if such and such conditions arise" clause.

I was going to say more about turbines specifically, but I already sound like a big naysayer - which wasn't the intent. I agree with the main point of the post; passive income sources should certainly be considered. Every little bit helps, even if its just enough to pay the property taxes, pay off some debt (or buy more Dexters).

- Tony

Yeoman said...

"I am very skeptical of the cell tower or wind turbine idea. It seems easy for small farmers to get trapped by terms and conditions that weren't well understood. Before you know it your into a 99 year lease and half your farm is off limits due to easements defined in the lease, or the "we reserve the right to add additional fixtures if such and such conditions arise" clause."

Well, at the risk of sounding like an advertisement, that's no problem at all. All it means is that you need to have any prospective contract run past your lawyer, and tell your lawyer what you want. Maybe you'll get the lease, maybe not, but you won't get something you don't want.

Now, I know what the reactions to this will be. I hear them all the time. Lawyers are: too expensive, untrustworthy, I don't like them, I don't need them, etc.

That's why farmers and ranchers get get in to some of the most complicated, and least favorable, contracts in the nation. For a big industry, they're so lawyer resistant, that they don't go to their lawyers until its a crisis, at which time you're only fixing stuff, not preventing an accident.

Because I am a stockman and a lawyer, I have a lot of ranching clients who never ever would go to lawyers before. I'm continually amazed by the bad deals they've entered into figuring that it was as good as they could get, or that they didn't trust anyone to look at it.

By the way, a review of a contract like this isn't pricey. And you can always find out what the cost would be beforehand.

Better safe than sorry, to be sure. But better to be informed than not as well.

Yeoman said...

By the way, as an example of the last item, I know of a farmer with decades of experience who sold his place to a huge neighboring agribusiness outfit, with the oral understanding that he could keep on farming as long as he wanted.

Go to a lawyer? No need.

Well, he did, after they told him to get off a year later. No way out then. He lives in an apartment in town. It sure all could have been avoided.

rob said...

It's true... there are so many potential legal issues with farming anyway (land-use agreements? What if somebody comes to help pull weeds as part of their CSA agreement, gets a splinter, and sues? What if your farm smells like a farm and a bunch of yuppies move in who have a problem with that? And the big one, what if you want your state to change food safety laws to allow on-farm slaughter? etc etc), I can't really imagine doing without a good lawyer in your cell phone.

We have a friend from church who's in law school at the moment. We keep joking about how we should get together and form a commune. I wonder if he realizes we're not really joking...

Mellifera said...

Whoops, sorry, I just posted that under my husband's account. Now you all know his name. ; )

Yeoman said...

The irony of it, in a way, is that at one time there were a lot of farmer/rancher lawyers. Not any more.

I'm not sure what happened, but one thing is that being a lawyer has changed a lot in the past 60 years. The emphasis is lot more on money than it once was, which I think caused the farmer/rancher lawyers to have to decide to do one, or the other. Having said that, I do both, and I know a few others who do. More frequently, you'll find kids who came from ag families in the profession working full time as lawyers, although they usually wish they weren't. It still seems somewhat common to pack a kid off to law school because he's down on the family food chain, and some senior sibling is going to get to farm or ranch. Has to make for some bitter feelings.

rob said...

Yeoman-

That's how most monks in the Middle Ages ended up being monks. How many people would take lifelong celibacy as a first choice? ; )

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