We recently interviewed Ollie King who raises sheep and beef on his farm in Doylesburg, PA. During the interview, Ollie shared about his operation and strategies for raising sheep and marketing their products.

Our listeners can probably tell from your accent that you aren’t a Franklin County native. Share with us about your story and how you ended up being a farmer here in south-central Pennsylvania.

I'm clearly not from Pennsylvania nor America. I served 22 years in the in the British army, which now I'm retired. During my time in the army, I was serving in Afghanistan and I was in a U.S. army base when I met my soon to be wife, Megan. She was in the U.S. army. We met there and then we continued to see each other.

I'm from a farming community in the UK. I always kind of wanted to be a farmer or wanted to have some land because all my friends growing up were from farming families.

We really wanted to have some property at least, but we couldn't afford to buy any land in the UK. We started our search more in America, and Megan is from Pennsylvania. Megan's parents had a farm in Franklin County, so we looked around there and found our farm, which is a 90-acre farm. We bought it with me being in the UK and Megan being in Afghanistan. So that was quite a challenge. We did see the farm before we bought it, but we basically bought it via an online contract. And so that's what brings us to Franklin County.

We have a mixed farm. We have beef, sheep and as I said, Megan has horses. We did have some arable crops to begin with before we got the livestock. As the livestock population has grown, we've reduced down any cash crops. Now the whole farm is in pasture or hay land, which is basically the same thing because we use rotational grazing.

Let’s talk a bit more about your sheep operation. Tell us about the sheep you raise, how you’ve grown your flock and what you’ve learned over the years about raising sheep.

As I said, we are a mixed farm. We have sheep and cows, but I'm completely new to agriculture as an owner. I thought we should start with something not as big as a cow. And so I thought sheep would be a good way to start.

We started with five ewes and three ram lambs. That was in the spring. Two of the ram lambs went to butcher that autumn and the third was kept to be a stud ram. We had lambs in the springtime that following spring, and we had some lamb in the freezer and that was the beginning.

We have a bank barn on the property and so I just used the base of the bank barn. It's quite an old bank barn and it is in relatively good shape, but it's not like a new construction. It was somewhat damp and it was somewhat cramped and there wasn't any lighting in there. That first year was quite a challenge. I learned quite a lot.

Thankfully, in that first year I didn't lose any of the five ewes but because they were yearling ewes, only three of them had lambs.

I thought we needed to look at some different breeds. What we got originally was just a white, fluffy sheep. It’s a Cheviot cross. It’s not a pure bred, and it's got a mixture of bits and bobs in it. So I thought it was probably wise to go with one or two purebred breeds. On the farm now we have Shropshire, Clun Forest, and the Cheviot crosses.

I emailed a couple of people on the Clun Forest registry and one really nice chap got back to me from Maryland. I bought two ewes and the ram from him.

From that relationship, I bought a couple of more sheep from him, but also became involved with the Maryland Sheep and Wool Festival for which now I'm a board member. I really enjoyed the contacts and the friendships I've made as a result of that first meeting with the chap that sold me the Clun Forest.

So we bought five Cheviot crosses, two Clun Forest ewes and then over the next three years bought six, six and six of Shropshires, each of the groups coming with their own ram. We run three breeds. So they've got five groups with five rams come autumn time, because they're running those separate groups to keep the purebred and registered ones in their own line. Now we're now up to 60 odd sheep on the farm.

So we have 54 using the barn now for lambing. We choose springtime lambing so that when the grass comes in, which is almost now, the mothers can go out on the fresh pasture, almost straight out of the barn.

They sheared the end of February and then they stay in the barn until the beginning or middle of April. So we have basically four weeks, just with new shorn coats and then they start lambing and they go through the general population in the lambing barn.

Then they go into mothering pens for a couple of days, and get sorted to a maternity wing where all the ewes and the lambs are together. Now the grass is coming in, they will start dashing out onto the fields and enjoying the grass.

Importantly, on our farm, we practice rotational grazing. The whole principle of how we run our beef and sheep is on rotational grazing because we only have a relatively small farm at 90 acres. Grass pasture is at a premium. I use electric netting for the sheep and hot movable electric wire for the cows.

We rotationally graze them, moving them every few days. In Pennsylvania, the stocking rate is one animal unit per acre. One animal unit being a 1,000 lb. animal, and a 1,000 lb. animal in beef terms is equal to five sheep. So if you do the math on that, we will very quickly run out of space on 90 acres.

The rotational grazing makes it much more efficient because you can put more hooves on the ground. Because you moved them frequently, the grass grows and so therefore soil quality and regeneration is enhanced and it allows for a better stocking rate and being a better custodian of the pastures, I feel.

The ewes and the rams stay with their mothers. We do what we would call a soft wean. At four months, the ram lambs do get taken away from their mothers, but they can still see them. The ewe lambs stay a little bit longer with their mothers. The ram lamb continues to graze in rotational grazing until they go off to the butchers in the autumn.

Now, let’s talk about the marketing of products from your sheep. How do you approach the marketing side of your business and what strategies do you use?
One of our biggest marketing tools is me being British because I've noticed that most Americans don't eat lamb. Where I live, all the producers around me are beef producers.

Those that do have sheep, and there are a few up the Valley here that do have sheep, none of them eat their own product. If I ask them why they don't eat lamb, nine times out of 10, they'll say they don't know how to cook it. For me lamb is a staple that we've always grown up with being from Britain in Shropshire.

I encourage people to start trying it. So that's helping.

Megan, my wife has a full-time job and she works for Highmark, the health insurance provider. She’s not in the office now because of the pandemic, but her office is in Camp Hill and it's a relatively big office. Many people there have become customers. She's managed to make a lot more contacts that way.

We have begun to serve ourselves in that way through Megan. I'm at a bit of a disadvantage because I have no social network in America because I'm new to the country. Most Americans have a network of friends. Of course I don't. That made it quite difficult.

The marketing from our perspective has been very slow because we've been A - learning and B - growing the business.

We started selling to friends and family and for the first four or five years. We had more people wanting to buy lamb than we could produce lambs. 2020 was the first time we people wanted and we had lambs. We sold three separately this last year, direct to a meat producer.

This next year coming up, we will be positively marketing. We've been kind of passively marketing in the past, but obviously our network of friends and our network of people that have bought and passed it on to other people is increasing.

Two springs ago, we started a Facebook page and we have a Facebook farm page, which is every week growing more followers. It’s not perfect marketing but it kind of is surprising how fast word of mouth spreads. In fact, we took a photograph of one of our steers in a feeder just a few months ago and it went all around the world. The power of Facebook marketing is extraordinary. Last year we did sell two half lambs as a result of Facebook. So this year we will be putting more on Facebook. At some point, we would like to get a webpage put together to orders represent ourselves with a web presence.

We sell the wool and the pelts also through the Facebook marketing strategy, because we try and use as much of the animal as we can. The wool and the pelts is a whole network of other people. The people that use the wool might not necessarily even eat lamb. A person might buy some wool of ours and then come and visit and then think it might be nice to have a half of lamb.

Selling to cities is somewhat more challenging because people don't have such big freezers, but that's something we will be looking forward to looking into in the future -  the selling and the marketing of individual cuts of lamb.

As we wrap up today, if any of our listeners have an interest in starting their own sheep operation, what advice would you give them?

I think the most important piece of advice I can give, which we have adhered to purely by luck rather than any calculated judgment on our part, is start with good stock. Now I'm kind of addicted to YouTube channels because I'm trying to learn as much as I can, how to be a farmer. If any farmers are listening to this, they'll just roll their eyes and think, "Oh my goodness, how is he learning to be a farmer from just watching videos." But I've obviously had to start somewhere being in the infantry for 22 years.

A lot of YouTube channels will often do ‘Top 10 Things I Wish Someone Had Told Me’ or ‘Top Five Things I Wish Someone Had Said to Me.’ In all of those different YouTube videos, in the top 10 of that their list will be ‘starting with good quality stock.’

And so having fallen into that by accident, we started with registered Shropshires. We started with a good stock from the Cluns, and it just happens that we were lucky that the Cheviot crosses were a good standing. It makes such a difference in what you do, because if you buy from the sale barn, you don't know what you're getting, where they're coming from, what they're bringing with them. The good stock means that they will be more hardy. It means that they don't bring problems onto your farm. And it means that they take less of your time with the husbandry.

I've learned so much from different visits to different farms, and hand in glove with that, do get some YouTube videos under your belt. I know it sounds silly, but no matter how many times I watch new and old videos on YouTube, I always spot something I didn't see first time or I’ll always learn something on each episode.

Make sure your handling systems are safe and that works, I think, two ways. It keeps the handlers safe and it keeps the animals safe. Low stress handling and low stress animal movement is hugely beneficial to the animals but also for the farmers or the others working with you on your farm, and oftentimes that's family. The less stress the animal is up against, the better they will feel and the better they will work with you.

Dr. David Kohl, Professor Emeritus Agricultural and Applied Economics, Virginia Tech University

Welcome to the new decade with all of its challenges, but also some bright opportunities. This decade will be characterized by both social and global competitive shifts and could be defined as the “fork in the road” for many businesses, industries and economies. The following are just a few of the questions, perspectives and observations to consider when conducting short- and long-run planning and strategy sessions.

Will consumer trends, driven by the millennials, Generation Z and Generation A, continue to shift rapidly? Plant-based and cultured meat have established a place in the market. Will these alternative products cut into the demand for more traditional products? Will individual producers and industry leadership groups develop a game plan to align with consumer desires? Or, will they be satisfied to be the low-cost commodity producer for the U.S. and global markets?

Will trade disputes be resolved in 2020 with our trading partners? If so, will the loss of demand to our competitors around the world impact prices for commodities that are exported? The major question for cash flows and profits will be whether government support payments will continue making up a larger share of producer profits. The fork in the road concerning global economics is whether there will be a return to globalization or a shift to “decoupling” and populism as the mode of operations internationally.

Will farmland values maintain their resilience in 2020? If interest rates stay low and skepticism about alternative investments such as stocks and equity remain, expect farmland values in most regions of the country to stay strong. Baby boomer farmers and investors with new money have enough equity and cash to continue investing in hard assets, such as land, that come with other attributes including mineral and development rights, energy and water.

Political volatility and uncertainty will be key words for 2020 in the U.S. and abroad. The unpredictability of election outcomes will put a cautious, conservative stance on the stock market as well as capital investment strategies for businesses.

The year 2020 and beyond will be dominated by consolidation. Will consolidation continue to accelerate or will political, consumer and social forces result in a black swan for big business? The power struggle between big and small businesses may be in its early innings for business owners and strategic thinkers. Will non-governmental organizations (NGOs) continue to place pressure on business and institutions to regulate in favor of their desires?

The next decade will continue to bring extreme weather in both the U.S. and abroad. Will improved management practices and genetics be enough to overcome these weather aberrations without impacting worldwide supplies?

A major question for 2020 concerns the health of the economy and interest rates. The U.S. economy has set a record for economic expansion with 126 consecutive months of growth. Interest rates in the U.S. and abroad have been at record low levels for nearly a decade.

Will the U.S. energy sector still remain number one in world output followed by high rankings posted by our northern and southern neighbors? If the output of the North American energy sector continues, the resulting stability and cheaper energy will be beneficial to producers, businesses and consumers. Any disruption could lead to volatility and be advantageous to possible enemy forces.

With all these questions, one variable remains constant: good, solid planning with alternatives will be critical. A focus on execution and monitoring results will be even more important going forward. Manage to your strengths and complement your weaknesses or areas of improvement. With the best talent and a strategic plan, you can increase the probability of traveling the high road to profit, overall success and fulfillment. Best wishes for the upcoming year and the next decade!

I am from Dillsburg, PA. I’m going to be a junior this fall at Duquesne University in Pittsburgh, PA. I am public relations major with minors in French and business. I expect to graduate in May of 2022.

1. Why were you interested in Horizon?
I was interested in Horizon because it was a great opportunity to get experience in the marketing field. I had also worked at Paulus Orchards for 6 years in middle and high school, so my knowledge of the agriculture industry could be used in this position as well.

2. What are you looking forward to this summer?
While COVID-19 has canceled the majority of my plans this summer, I am looking forward to taking a boat cruise along the Susquehanna with two of my best friends from high school. 

3. Your goals for the future
In the future, I am hoping to change my French minor to a French major so that I can intern next summer in France and become fluent in the language. I hope to one day become a wedding planner in France planning destination weddings or in North or South Carolina planning beach weddings.

We recently interviewed Marlene Kaltenbach with PA Farm Link. PA Farm Link is a non-profit organization with a mission to link farmers to the future. During the interview, Marlene discussed the organization and its land-linking database.

First, could you tell our listeners about PA Farm Link, including what resources and services you provide to Pennsylvania agriculture?

PA Farm Link is a nonprofit organization that was started in 1996. This year we're celebrating our 25th anniversary of supporting and assisting Pennsylvania farmers.

So what do we have to offer? We basically have two main areas that we predominantly work in. One is farm succession and transition, where we work with a farm family to help them through the process of transitioning farm business to the next generation of farmers. All of our staff have completed farm facilitation training, and we all have an agriculture background.

The second focus is what we're going to be talking about today - linking farm owners and aspiring farmers together through our online database. We like to say we ‘link farmers to the future.’

We also have a resource page on our website at www.pafarmlink.org. Through that resource page, we offer a variety of links for people to access to help them research as they go along in their farming journey. Topics include business planning, veterans' resources, organic production, mental wellness, farm succession, beginner farming resources, etc.

Maintaining the online database is the area that I primarily work with.

Let’s talk a bit more about PA Farm Link’s land-linking database. Who uses the database and how does it work?

What we offer is an online database for landowners/farm owners and for entering or aspiring farmers. So two separate databases online through our webpage. The database is searchable 24/7 to the public. There is no fee to search our database, or if you want to be put in contact with one of our database members, there's no fee to have that done. It's one tool folks can use to either find land to lease or buy, or to find an aspiring farmer to lease or sell to.

I'll talk first about landowners. Our landowners are typically farm owners looking to find the next generation to come onto their farm and really hit the ground running to keep that land in agricultural production into the future. I’ll emphasize though that they often have specific parameters, specific details of people who they are looking for to come on and to farm their land. We do occasionally have listings from conservancies and agricultural education centers, but most of our landowners are farm owners looking to lease or sell their land for agriculture use.

We have a privacy policy that states that staff cannot give out contact information of our database members, including names, address, email, etc. Because our landowners are typically looking for someone specific, this helps to protect the landowners' privacy and help them get matched to the right couple or person that would really fit their farm situation.

When someone is interested in a PA Farm Link landowner listing, we ask for a resume, cover letter or some form of introductory information to be sent to us. This information is passed onto the farm owner to review, and it provides a snapshot of the inquiring party and their goals experience. Information sent allows the farmer to get a feel for that inquiring party and if they would be potentially a match for their farm operation. Once the farmer reviews that information, and if he or she feels there's a potential match to be made, the farm owner would then contact the inquiring party directly to discuss the farm opportunity. A key to gaining a discussion with a farm owner in our landowner database is really giving enough information to paint a detailed picture of your agricultural experience and your goals and your visions of how you want to farm.

For our entering farmer database and how that works, our entering farmers may be new farmers or existing farmers who are looking to relocate or expand their operation. It could include anyone who is looking to lease or buy farm land for agricultural use.

When a farm owner sees an entering farmer, they're scrolling through our database and they say, "Hey, this person might meet my farming operation goals." Then they contact PA Farm Link, and we often ask farm owners for some additional details. How many acres do they have? Is it currently being farmed? Are there barns and buildings to utilize?

We share that information with our entering farmer database member, and then it would be up to that member to reach out to the farmer to discuss the farming opportunity.

For either database, landowner or entering farmer, listings are available to search 24/7 from our website.

Since you work closely with the farmers and landowners in the database, would you be willing to share any “success story” matches made from the database from recent years?

Last year we worked with a farmer in the west-central part of Pennsylvania. The farm had a larger number of acres, but this farmer was looking to move on to other adventures in life. The farm had not been aggressively farmed in several years. It was an older dairy. The owner was looking for someone to come on, but still had specific goals and parameters that they were looking at for someone to buy their land and to keep it in a farm business.

We fielded several inquiries about this database listing, and finally, the owner did find a match with a couple who, when she talked to them, were able to come to an agreement. It was a perfect fit for them. They were able to secure financing, and then, the agreement went from there and they were able to come up with a sale agreement.

I will say that once we put a landowner and an entering farmer or an aspiring farmer together, try to link them together, then we really are out of that loop. Any agreements made between the two parties would be the responsibility of the landowner and that couple looking at the land.

Let me give you an example of an entering farmer success story. We had a former PA Farm Link landowner reach out to us. He was now looking for a new lease on his farm and knew the system was comfortable and familiar with our system, and searched our database, found an entering farmer that he felt might be a match. He reached out to us again, shared all the details of his farm, we shared that with the entering farmer and they were, again, able to come to a lease agreement.

This time it was a lease agreement, and that our entering farmer did move into the house on the farm this past fall to get a jumpstart on the spring planting for her business that she was looking to expand.

Again, no two situations are really ever going to be the same, and that is one thing that's very unique about our database, as opposed to, say, a real estate agent. Our landowners are looking for someone very specific. It does take time and patience and the ability to share information or the willingness to share information so that landowners can get an insight for what you want to do coming onto their farm.

Is there anything else you would like to share with our listeners today?

I do want to mention that PA Farm Link is currently running a 2021 kickoff promotion, and we're offering a complimentary database listing to either land owners or entering farmers, whichever you may be. This is $100 value and will continue through April 1. Take advantage of that offer to be listed on our database.

You can apply online through our website at www.pafarmlink.org or you can email farmland@pafarmlink.org for more information, and I would be the one corresponding with you.

Dr. David Kohl, Professor Emeritus Agricultural and Applied Economics, Virginia Tech University

Much discussion about the attributes that lead to success in business is occurring in the agriculture industry. With increased uncertainty surrounding weather, markets and trade issues that lead to volatility, these attributes will become exponentially more important. The FINPACK team from the University of Minnesota’s Center for Farm Financial Management recently held their lender's conference in the cold, snowy confines of Minneapolis-St. Paul. For audience engagement, a series of questions was asked using clicker technology for anonymous responses. One question centered on the top attributes of the most profitable operations. Participants could select up to three attributes. Let’s examine what characteristics these lenders thought were most important.

What was the top attribute? Thirty percent indicated that producers who develop and use financial statements for decision-making, such as the balance sheet, income statement and cash flow statement, rise to the top of the pack like cream on milk. I often cringe when I hear producers saying they have to fill out financial statements to request credit or because the lender requested information. Another eyebrow raiser is when the lender fills out these financial statements to complete the loan package. Financial statements are often a requirement to obtain credit, but should also be used to manage the business. Given the economic outlook, the proactive use of financial statements will be imperative over the next few years.

The planning and execution of a marketing and risk management plan was second on the list of desirable attributes. Whether it is commodities or value-added markets, more producers in the profitable segment are getting the message about the importance of marketing and risk management.

The next attribute listed is becoming much more prevalent in the down cycle. Many profitable producers are generating off-farm income and diversifying their revenue sources. 

The lenders also indicated that modest family living expenses often lead to success. Many times it is not the actual cost of one family that strains a business, but the number of families living out of the farm from a global or overall standpoint.

Another trait popping up on the radar screen was that many profitable producers are good negotiators of leases, rents, fixed and variable costs, and overall asset management. I overheard several discussions at the conference that producers who collaborate with others and create win-win situations are more successful.

One trait that surprisingly made the list was producers who are in the top 20% of production managers are more likely to be profitable. While producing one’s way to profits is important, it was seen as a top attribute by only 7% of the participants engaging in the surveys. 

On these cold winter days, step back and ponder some of these results and compare your business and your management philosophy to these attributes.

We recently interviewed Kenny Nearhoof, accounting officer with Horizon Farm Credit. Kenny explained why tax planning in 2020 is a bit unique and how farmers can avoid any surprise tax bills.

Tax planning is important for farmers every year, but it is especially important this year. Can you help us understand why that is?

Tax planning should be a normal part of managing your farm business. Hopefully your accountant or tax advisor is on your team of professionals helping your farm business, but if not, at least make sure you have a tax planning visit scheduled with your accountant each year around this time.

The expectation to never pay taxes isn’t realistic, and isn’t the best approach for any business, but a good tax advisor can help you level out the year-to-year peaks and valleys. With planning, you can make informed personal and business decisions and better understand your overall tax position.

2020 has been unique in a lot of ways. For farmers, access to COVID-relief programs including the Paycheck Protection Program (PPP), Economic Injury Disaster Loan (EIDL) and Coronavirus Food Assistance Programs (CFAP and CFAP-2) may have tax implications.

One of the big challenges is that details on how all of these programs will be treated are still unclear. Even as we record this podcast, there is proposed legislation that may pass (or not pass) and have implications on how programs are handled. Therefore, I’ll talk about them as we know information today.

Let’s talk more about these COVID-relief programs. Could you walk us through each program and what farmers should know from a tax planning stand point?

Sure, let’s start with CFAP, which is likely the easiest to understand. CFAP is technically a disaster payment, similar to crop insurance. For that reason, we question whether it can be deferred for one year like crop insurance. One clear detail points to a “no” answer: only proceeds that are related to damage can be deferred, not proceeds related to price (CFAP is price-based). Since there is no final IRS ruling, the deferment door might remain open for specialty crops that go straight to market at harvest. To be safe, don’t count on deferring CFAP or CFAP-2 payments. CFAP payments are treated like Ag Program Payments that are taxable in the year received, and look out for a 1099 from the USDA/FSA.

Next, let’s tackle the Economic Injury disaster loan. EIDL will have a relationship with PPP if your PPP loan is forgiven – we will come back to this shortly. There are two different pieces to EIDL to understand – the “advance” money that people received very quickly, and the actual loan they signed for with the Small Business Administration. The Advance piece is treated like a grant – this will not need to be repaid - but this is taxable income. The actual loan portion is just like any other loan you get – the proceeds are not taxable, and the principal you repay is not deductible.

Now to PPP. If you got a PPP loan, and also got the “advance” portion of the EIDL program – the EIDL advance will count against your loan forgiveness amount (think of it as not being able to double dip on free money). As a simple example. If you got a PPP loan for $100,000, and an EIDL advance for $10,000 – the maximum loan forgiveness you can receive is $90,000. The remaining $10,000 is your PPP loan to repay.

Congress passed the CARES Act with clear intent that PPP loan forgiveness would be excluded from gross income for the recipient. What was not addressed in the CARES Act was whether payroll and other expenses covered by PPP funds would follow Internal Revenue Code or not. To summarize Code as plainly as possible, if you are not going to claim the income (forgiven debt), you can’t claim the associated deductions. At this writing, without action from Congress, you can’t claim your payroll expenses up to the amount that your PPP loan is forgiven.

This is a challenge for accountants because we want to make sure your gross wages expense on your tax return matches your W3 Wage Transmittal (the form that summarizes all your W2s for the Social Security Administration). With a longer period allowed (up to 24 weeks) to use the PPP funds, it makes sense to wait until early 2021 to apply for PPP forgiveness and use those 2020 payroll forms to further document the forgiveness application. The big question is whether we can use this inconsistency between Code and the intent of the CARES Act to benefit us in tax savings by (1) maintaining/carrying the PPP loan into 2021, (2) claiming all the payroll/other eligible expenses for 2020 and (3) applying for debt forgiveness in 2021 and showing that income in 2021.

Potentially, there is room for interpretation. It is similar to the strategy many farmers use of prepaying next year’s crop inputs in December, but not selling last year’s crop until March. There are many pieces to consider around the timing of PPP loan forgiveness, and everyone’s situation is unique. You should seek guidance from a tax professional on when to file your PPP loan forgiveness application and stay tuned for any post-election changes from Congress before year-end. 

Is there anything else you’d like to share with farmers on this topic?

Yes, I think it’s important for farmers not to get overwhelmed, which is easy to do just with the information I shared today. That’s why it is so important to schedule an appointment with your tax advisor. He/she will be able to walk through all of these programs, along with the normal factors that have tax implications on your farm business.

We’ve had plenty of surprises here in 2020, and we don’t want your tax situation to be another. Be proactive and call your accountant.

If you are looking for an accountant who may better serve your needs, consider our Accounting, Records and Tax team at Horizon. In addition to doing taxes and tax planning, we offer a suite of services including accounting services such as software installation and support, management reports, in-house records services and payroll.

Land, as an investment, has physical characteristics that distinguishes it from all other assets. Those characteristics include the following:

1. Land is unique in location.

You may have heard it said the three things that affect real estate values are location, location and location. Value based on location is affected by physical characteristics of the property and on the socioeconomic characteristics of the surrounding area. 

The following is an example of a physical characteristic. Fifty years ago, a farm with a stream was desirable. Quite often there was a stream going through the barnyard. Due to current environmental policies that same stream is a liability because it increases costs in everything you want to do and limits the use of the property. However, for a lifestyle property that same stream may have an aesthetic or recreational appeal that would enhance the subject’s value. 

Several examples of socioeconomic characteristics include the distance a property is located from a thriving population center (such as a college town), religious communities or expanding farm operations. These all provide strength of community and support strong land values.

2. Land is unique in composition.

There are no two identical properties when it comes to soils. Soil types are the foundation for the valuing of land. This is why Horizon appraisers determine soil qualities for the subject property (the property being valued) and the comparable sales we are using to compute the subject’s land value.  

However, soil and fertility management can either enhance or diminish overall value. A farm with soils that are maintained in the optimum range of fertility lowers the out of pocket costs to a potential buyer. Properties that control excess surface and subsurface water should have more market appeal. This is due in part to actual physical costs and permitting required by current regulations.

3. Land is durable.

Provided adequate conservation practices are employed, land is a long lasting asset. Land as an investment lacks liquidity; however, long-term trends indicate land is an appreciating asset. 

4. Land is in finite supply.

They don’t make any more land. This is why you see concentrated animal farm operations willing to pay above market prices to purchase and/or lease near-by acreage. Once a property is developed for residential or commercial purposes, it is almost impossible to convert it back to farmland. 

5. Land is useful. 

When completing an appraisal, the highest and best use of the property needs to be determined based on the following factors: size and shape of the property, land quality and topography, industry infrastructure of the surrounding area, uses of surrounding properties, governmental regulations, market influences and current property improvements. The highest and best use may not be the current use of the property.  

The previous factors interact with each other to determine land values in the market area. As appraisers, we know every property is different. It is our task to analyze the subject’s unique properties and compare the subject to recent sales of similar properties. The comparisons between the properties are used to arrive at an opinion of market value.

We recently interviewed Dan Brogdon, a PPP expert, about the recent COVID-relief legislation which passed on December 27, 2020. Dan reviewed the changes to the Paycheck Protection Program (PPP) and how certain farms or individuals may now qualify for the program.

Let's begin helping us understand what key changes to PPP were introduced that makes the program more open to those who might not have applied last year.
The biggest change is that sole proprietor farmers or anybody that files a Schedule F as sole proprietor on an IRS 1040 is eligible to use their gross Schedule F income. Previously, sole proprietor farmers had to use the net profit from Schedule F. 

So what's this mean? If you had a Schedule F loss in 2019, you previously weren't eligible for a PPP loan. However, now you can be eligible for a First Draw PPP loan based on your gross farm income. There's a potential of obtaining up to $20,833 maximum loan, since the gross income's cut off is $100,000 and the formula would yield a $20,833 PPP loan.

However, you don't need to have $100,000 in gross income. Anybody that's a sole proprietor that files a Schedule F with any amount of gross income could qualify. You could be a full-time farmer that has lots of gross farm income, or you could even be more of a lifestyle or a part-time farmer and qualify.

In order to qualify for any PPP loans that I'm going to be talking about today, you must certify, amongst other things, that the current economic uncertainty makes the loan request necessary to support the ongoing operations of the applicant. It’s really up to you to make that determination, and if you're uncertain, you can always contact a financial adviser, such as a tax accountant, attorney or financial consultant.

In summary, the greatest change to the agricultural industry is the allowance of the gross farm income. Sole proprietor farmers who didn't qualify in the past may now qualify. 

I’ll also add, anyone that's in a partnership who didn't use their K-1 net earnings from self-employment, may now qualify for a PPP loan as well.

For individuals that already received a First Draw PPP loan back in 2020, what options are now available given the new COVID Relief Act?
Again, the biggest thing is this being able to use gross farm income to determine the PPP loan amount. Even if you had already obtained a PPP loan, you may apply for an increase in it. We call that a First Draw Increase, and you may use your gross Schedule F income if you're a sole proprietor.

In the case where you have a PPP loan because you have labor and you had a net Schedule F loss as a sole proprietor, now you may use your gross Schedule F income. You will have to reduce that gross Schedule F income by your labor-related expenses, but in many cases, it will be easy to yield the maximum allowable gross from income of a $100,000 which would result in a $20,833 First Draw Increase.

Other farmers who had a net Schedule F profit or less than $100,000 will also benefit from this new rule, because they'll be able to make that eligible amount up to $100,000.

Let me give you a quick example:
If a farmer had a $50,000 Schedule F profit, that would've added about $10,400 for their PPP loan. With the new rule, since the gross farm income will yield the higher amount for sole proprietor, they would qualify for that full $20,833 as a result of their Schedule F income if they're a sole proprietor, so that means they would receive an increase of about $10,400..

There are a couple other cases where you can receive a First Draw Increase, such as if you didn't use your K-1 net earnings from self-employment as a partnership.

Or if you're a seasonal employer (and there's a specific test for seasonal employer), you may use the highest 12-weeks of payroll between February 15, 2019 and February 15, 2020. You would annualize that 12 weeks' worth of payroll, and then use that to determine your PPP loan. So basically, the formula is still the same. It's 20.833% of your annual eligible payroll.

Those are the three cases where you may be able to obtain a PPP loan increase. 

Once you've received your increase, then you may then consider a Second Draw PPP loan. Requirements for the Second Draw PPP loan also include that you must show that you had at least a 25% reduction in gross revenue in any quarter of 2020 compared to the similar quarter of 2019, or for the entire year of 2020 versus 2019. Like a First Draw PPP loan, you will also need to certify that the current economic uncertainty makes the loan request necessary to support your ongoing operations of you. Again, the gatekeeper for a Second Draw PPP loan is the 25% reduction in gross revenue.

In many cases, the amount you could qualify for in a Second Draw loan could be the exact same amount as you qualified for in the First Draw loan plus any increases. Second Draw loans allow you to use 2019 or 2020 payroll to determine your loan amount.

With the new changes and the opportunities to qualify for some of this additional PPP funding, when do you think a borrower should apply for loan forgiveness?
Borrowers need to remember to wait to apply for forgiveness until they’ve received any First Draw increases. The reason is because once a borrower received forgiveness, they’re not going to be eligible for any increases. 

At this point, we're not sure if there might be any additional rule changes that would qualify more increases, but who knows? We’ve seen the PPP program rules change before.

If you're afraid that you might miss out on any rule changes that might entitle you for more increases, you might want to wait until the end of March to apply for your PPP forgiveness.

What else is important for our listeners to know about the PPP?  
If you didn't receive a PPP loan in 2020, consider applying for your First Draw PPP loan if you qualify.

If you have an existing PPP loan and you meet the criteria for an increase as I outlined earlier, apply for your increase. Once you've obtained an increase and you're done with your First Draw loan, then take a look at a Second Draw loan. You will need to certify that you've obtained your First Draw loan and used your funding and increases by the time you obtained your Second Draw loan. Then once you've considered the Second Draw loan and determined whether or not you're eligible, think about when you want to apply for forgiveness and have a strategy in mind.

Horizon will  keep its PPP borrowers up-to-date on any program changes and considerations for forgiveness. There's a new, simplified loan forgiveness process for loans $150,000 or less which includes a one-page form. Listen to our January 12 podcast for further details on loan forgiveness. 

If you're interested in any of these items I talked about today, the First Draw increase, a new First Draw loan, or a Second Draw loan, contact us at Horizon and we’ll help guide you through that process.

Understanding how to buy land to build a house can be overwhelming - we get asked the same questions all the time. To answer some of these questions in a single place, we interviewed Alyssa Harzell, loan officer with Horizon Farm Credit, for all the in and outs of land loans and home construction.

Can you buy land and build a house later, or is it better to do both at the same time?

Many people ask the question if they should buy land now to build their home later, or if they should just wait and do both at once. Neither way is better or worse than the other, it's up to the potential borrower to determine what works best for them and their financial situation. Working with a loan officer is the best way to get information on your particular case, but we can still touch on a few things. 

Is it smart to buy land and then build later?

There are lots of reasons why you may be ready to buy land but not build on it right away. Perhaps there's a perfect property that comes up for sale and you don't want to lose it, so buying the land now and building later makes sense. From a financial perspective, it may be much more feasible to split up the investments and have time to rebuild your savings before being ready to build.

Perhaps most importantly, waiting provides time to:

• get familiar with the ins and outs of the property
• find your ideal building site and
• shop around for builders that will make the construction part easier.

Customers can work with a lender to do the land loan first and then combine any balance into a construction loan when they're ready to build. Your lender can work with you to see what options make the most sense so you can go at your own pace. 

Can I buy land and build a new home, all at the same time?

Yes, you absolutely can. Home construction loans can allow the borrower to buy both the land and construct a home at the same time. This scenario may be a bit more efficient in the long run - saving some fees and doing one closing - as compared to buying the land first and then building. But it's important to be financially prepared. That typically means having a good nest egg and savings. Also, you'll need to have your house plans all sorted out and a builder all lined up to start right away.

What are some other things to consider when buying land and building on it?

It's important to think about things like access to utilities and roads, zoning, permitting, and restrictive covenants and deeds. Some properties could require long driveways or have expensive fees to connect to utilities.

Others may specify the type of home that needs to be built on the property. You want to know this information upfront so you're aware of any major investments that may increase your cost of construction. 

Talking with the seller, your real estate agent, and township municipal office are all good resources. Additionally, I encourage all potential buyers to not only consider your needs today, but what your needs will be for the property in 10 years. Purchasing land is an investment and it's important to make smart choices and purchase a property that will meet your needs as you and your family change.

Is there anything else you'd like to share with us?

I want to emphasize the point that it's important for you as the borrower to be comfortable with their decision on when and how to buy the property and build a home. It's also critical that you work with a lender who understands your needs. At Horizon, we work with customers to help them through this process, step-by-step.

I am one of several loan officers who specializes in home and land loans for Horizon. If you are looking for property in central, western or northern Pennsylvania, reach out to us to help. We can talk through your options with you to determine what is best for your situation and help your dreams come true.

This week's episode is a recap of a recent webinar we hosted on Horizon's Dairy Industry Outlook. Each year, a team of Horizon employees compile a document, which includes an analysis of global, national, and local dairy trends, a price forecast for the current year, and recommended best practices for Pennsylvania dairy producers.

In today's episode, we'll hear from Mike Hosterman and Heather Weeks, who are Horizon Ag Business Consultants, with extensive dairy backgrounds, who together authored The Dairy Outlook document. They'll share highlights from the report, to help us better understand factors impacting the dairy industry. To kick off the discussion, Mike will share the team's projections on 2022 Pennsylvania milk prices and costs.

Mike: 2021 is going to come in roughly at an average year. If you look at Class III and Class IV prices, they're at record highs; so, we're probably going to see a record high milk price in 2022. We are anticipating that the 2022 milk price, the gross milk price for our PA producers, will be $6 to $6.50 higher than it was in 2021. If you look at an EBITDA (earnings before interest, taxes, and depreciation) per cow, this is a way a lot of lenders will make projections without getting into the weeds on feed price or labor prices. EBITDA per cow will be higher than it was in 2021. What we are saying for the EBITDA is to project about $100 per cow higher in 2022 than it was on our five-year average.

Mike: It won't be a record year from a profit standpoint. It will be good profit for most producers when you look at net income per cow or net income per hundredweight. It's probably not going to be like 2018, where we had really high prices, because cost of production is up. When you really think about what's going on there with inflation, shortages of fertilizer, chemicals, and seeds, we are seeing a higher cost of production. We are anticipating that the cost of production, which will cover net worth, equity, and maintaining our balance sheet, will be somewhere around $22 per hundredweight. This will be up significantly from our prior years of $19-$20, up $2-$3 a hundredweight. At the same time, our break-even costs will also be going up to almost $23, based on what debt has done.

Next, Mike and Heather will tag team some areas of focus for Pennsylvania dairy producers this year.
Mike: In the Northeast, when you think about areas for us to focus on, we have an infrastructure that may be somewhat limited. We haven't seen a lot of reinvestment in it. We have typically produced fluid milk with not a lot of other products to go with it, which makes it difficult on us when fluid consumption is down. Dairy consumption is up. It's just not in what products we produce here in the Northeast.

Mike: When you think about being at record high Class III and Class IV prices, a lot of us out there keep hearing this term risk management. Producers have to do risk management. 2022 has some record high prices. Our input costs are up, but there's a lot of opportunities out there, if we focus on a few things.

Mike: One of the things they tell us to focus on is making sure every producer is enrolled in DMC which is cheap insurance for producers to do some risk management. I would say from the producer standpoint, they need to focus on components. We tend to look at Pennsylvania as being lower in milk ship per cow, but if you dig into that deeper, even on an energy corrected milk basis, we ship less components than other producers around the US do. We need to focus on that. We need to increase our percentages of butter fat and protein along with production levels. The more components we can ship and the less water we ship, the more potential there is for profits. We're not paying to haul that water down the driveway to the processing plant.

Mike: They really need to focus on some component levels here in the Northeast to try and improve it. Top herds across the US tend to be greater than six, more around six and a half. There are producers out there shooting for seven pounds of components per cow per day, or even higher levels than that. Again, for me, one of the focus areas that we should be working with Pennsylvania producers on are our component levels and increasing how many pounds of components are we shipping per cow per day.

Mike: With record high prices producers should consider contracting. Producers should consider taking the risk off the table and contracting at these high prices. One of the things I hear from producers all the time, "If I contract, and prices go higher, I left money on the table. I'm losing money." I would argue they aren't losing money. In fact, I tell all the producers I would work with, "The best thing that can happen to you if you contract, especially when you go to the co-op with that contract, is to see a negative on the milk check for those contracts." That means your market prices are higher.

Mike: In theory, we are still making more money, even though we left an opportunity cost on the table with that contract. These prices are at record highs. Our costs are going to be up, but with these record high prices, you can lock in a profit. Producers should be trying to focus on locking in those prices before you see the market turn and then start coming back down.

Mike: If you compare it to corn or soybean producers in the US, usually when you go into a crop season, you aren't pricing the crop, you’re getting ready to plant. We're actually looking to contract or price the crop that's a year away, the following year. In 2022, they'd be marketing the 2023 crop before the 2022 crop is in the ground. This is because the Chicago Board presents a lot of opportunity. The same is true in milk. Producers need to try to focus on where they can lock in these prices at.

Mike: Another cheap way to do that is the DRP insurances. I say cheap, because it is somewhat subsidized by USDA. They are at a higher cost today than what DRP was a few years back when it first came out because of volatility. Again, if you want to look at ways to focus on securing profitability or securing these reasonable prices, there are tools out there that producers should be focusing on.

Heather: Mike talked about prices. When you take your milk price and you subtract your feed costs, you get milk margin. Milk margin is one of those things that we really believe that farms need to monitor this year. Some consultants or people might call it income over feed costs. They are one in the same. There are a few different vocabulary words to talk about them. Farms need to monitor that margin and that cost of production as they are making decisions on their farm. If you are working with farms to help them, try and analyze their business.

Heather: I have had a lot of producers ask me, "Will 2022 be profitable?" Farms are ignoring that amazing milk price, and they are focusing on the cost of inputs and high feed cost. While we are projecting a marginally profitable year this year, I think it's important to recognize that every single farm is different. One thing I love about working with dairy farms is that they are not cookie cutter. Every farm has different inputs and different focuses on their operation. Without analyzing your specific business, we really don't know what your cost of production is and how to incorporate the different input costs that we have.

Heather: A lot of farms have in some ways contracted for certain inputs this year. We do know that there were opportunities to lock in fertilizer, nitrogen, and chemicals, earlier in the fall. There are some opportunities to contract some feed here, going back. These are all things we have to take into account when we're looking at how we're budgeting out for 2022.

Heather: I have had a few people say, "Well, I'm just going to cut costs and put as little crop inputs as I can out. That way I will minimize my costs as much as possible." I think that's a really dangerous thing to do without truly looking at the budget that we have. It's very possible that you can afford to continue with a fairly normal cropping plan, knowing that we do have some of these income factors locked in, especially if you've taken Mike's advice from the first couple slides and contracted some milk, are using DRP, or have DMC locked in. We know that we're fairly confident in our milk price. We can then budget on the input side and know essentially what we have to spend to know that we're getting some quality forages off of our fields.

Heather: I do really caution that if we are taking some shortcuts on the cropping side, we might end up purchasing expensive grain substitutes if we don't get the yields we think we're going to have. If we cut corners on the feed side, it might result in lower components and lower production overall. That really is going to undercut the whole goal, which is to save us money in the long run. We're really just going to cut off that income driver to start out with.

Heather: To really make strong decisions there, especially when we are dealing with so many things that are uncertain, we need to have good numbers and good data to back up the decisions that we're making. We're not asking you to do it alone. There are a lot of people out there that are comfortable helping you work through some of these numbers, whether it's your agronomist, your nutritionist, folks at Horizon, or at Penn State Extension.

Mike: Heather is right. Don't cut costs; try to control your cost. Every time I've worked with producers, and they say, "We're going to cut costs." They end up cutting their costs, but they've also tended to cut their production. The bottom line is, if you don't cut your cost enough and maintain the production, your cost actually goes up. Overall, it works against them.

Mike: I think we have to control our cost. One of the ways you can do that is through what you buy. You can buy in bulk. Again, I know for some of our smaller farms, buying in bulk is not easy and they might come in larger quantities than a single producer needs. Maybe you can collaborate with a neighbor to partner up to buy things together. Heather and I have been involved with a group in Chambersburg that did that on their seeds. There were savings they could get by going in together to buy their seeds.

Mike: Another thing to think about is that whether you have excess heifers or excess crops to sell, make sure they are the highest quality. If you have extra space and you are feeding out a few steers, that can drive the income side of the equation.

Mike: I have found through my career that it’s better to encourage producers to work on the income level, rather than cutting expenses. You can control the costs by focusing on those other enterprises you have. You also need to find efficiencies. If you have employees, can you empower them so that you don't need to watch over their shoulder all the time? This will ensure that they're doing their job well at a lower cost to you. Maybe they will even perform at a higher level. Sometimes giving them the authority to do things so you're not having to supervise as much or watch over their shoulder makes a difference. Overall make sure you stay efficient and that the labor pool is doing the right things that you want. It really is about trying to control the cost and maximize the output.

Heather: One of our areas of focus is to use some of those earnings really wisely to build some cash reserves. That way you can pay down the line of credit where possible. To illustrate that, these are some of the things that we look for on our farms when we are analyzing a farms balance sheet: we look at current ratio and working capital. These show how well the farm is doing at holding onto their cash and how liquid they are. Our estimates go back to where we feel that 2021 has ended up. We don't have the final numbers yet. Current ratio and working capital have been fairly strong for the last couple of years. They do meet our goals; our goals are based on industry recommendations.

Heather: I do want to caution that some of these numbers can be clouded by where those values are hidden. Is it all in inventories or is there some actually in cash? We may need to tease that out by going a little bit deeper. If you are building cash reserves, one of the easiest ways to do that is to pay down the credit line. Some farms think that getting a couple of notes off of their payment schedule sounds really great. If they can get rid of a piece of equipment in order to drop that payment, they think that that sounds like a really great idea. It may only save them a few hundred dollars a month on debt payments, whereas paying down that line of credit really gives a lot more flexibility to the farm. If they are able to get a line of credit paid down, it's still available to draw back out if something happens and they need that cash available.

Heather: Those are some areas we really want to work on. Mike has touched on the debt question a few times here. Even with a strong couple of years from 2019 through 2021, we really haven't seen a lot of movement on that debt level. When we look at debt to EBITA, we're looking at how many dollars of debt the farm has to every dollar of earnings. We really want to see that number below that $5 mark; really under $4 would be great. We just really haven't seen it improve a whole lot at this point. Farms really are re-borrowing. We touched on that capital purchases number that is staying strong whether we have a positive net income year or not. This is something we want to watch and be cognizant of.

Heather: When you're looking at percent equity, how can you really focus on getting that farm in position to make some improvements that are going to position their farms to have that presence and that competitive nature with the rest of the dairy industry? What is the relationship between percent equity, which is the overall health of your balance sheet, and that debt to EBITDA ratio? We want to see that percent to equity looking fairly strong. We want to make sure that our farms are utilizing debt smartly and understand where that debt is going. Is it all in equipment debt? Is it operating debt? Where are they focusing on that, and how can we really get them to address some of these questions that really puts them in a strong position to take advantage of opportunities when they see them? We've got a strong milk price here, so how can we use it as a good opportunity, rather than just looking at some of the challenges that we see in front of us today?

Heather: What's driving all of these numbers is that debt coverage ratio at the bottom line of cash flows. How are we driving the income to be able to cover some of these things and to pay down debt? It looks like we have had a few years of more positive debt coverage opportunities. We have had the cash to be able to cover these debt payments. If you look at that five-year average number, we've pretty much been breaking even. We need to be taking advantage of every option possible to get our balance sheet in a position to where we have the options long-term to be successful in dairy.

Mike: The bottom line to me can be summarized by the 2022 milk prices looking good at $6 higher than last year. We're going to be profitable. We're going to have a positive cash flow. We need to focus on those areas that Heather and I have discussed: build that balance sheet, control your costs, focus on production. If you do that, there are opportunities out there. Again, there is going to be a profitable year here. Talk with advisors, neighbors, and mentors about how you can take advantage of those opportunities, how you control your cost, or how you do risk management.

Mike: If you had to sum it up in a few words, make a budget, monitor it, and adjust it regularly. When I say regularly, do this on a quarterly basis. Again, 2022 is looking to be a good year. It may not be record profits, but it will be a good year where we can rebuild our balance sheet and continue to do some improvements. More importantly, if you are a business owner out there, or you're employed, have fun with what you do. I tend to always want to conclude by telling you to have fun; because if you're not enjoying what you do, you may want to rethink your business plan.