Time Expansion to Market Cycles

Time Expansion to Market Cycles

Minnesota hog producer poises to pounce during down years 

Matt Lantz knows a thing or two about adversity. As a young man, he learned firsthand the importance of controlling debt and keeping costs low. 

“The ‘80s were very challenging times, very stressful,” he says. “It was sink or swim. Back then, when I was 25, I didn’t have the patience to manage like I do now. What I learned from those times was to be careful how fast you grow.” 

Those days inform Matt’s business today. “With current corn prices, we’re going through each expense item line by line,” he explains. Expenses that made sense during $8 corn, such as multiple fungicide treatments, are now questionable.

Matt also knows what it’s like to be on the other side of the lending desk. As board chairman of a bank in which his family holds majority ownership, he hears the hard discussions about loan terms during down markets. Taking a lesson from Warren Buffett’s playbook, Matt has observed that not everyone faces hardship in lean times. For those with the cash and credit, it is often the best opportunity to expand and position for better times to come. 

Keep Profit Intact. Expansion during lean times has become one of his management mantras. Yet Matt says it only works because he takes time to benchmark and look at his farm on a cost-per-acre basis. One of the first times he put his business idea into effect happened in 2008, when he and his brother Luke took on a major hog expansion when the short-term outlook for the hog industry was bleak.

“We could see profit on pigs, and the cycle changed,” he says. Detailed analysis showed investing $600,000 in finishing barns would provide a much better return than farmland, Matt notes. “Assume you take on 1,000 acres and can make $75-peracre profit, being optimistic. But we can make $25 per pig. That’s $125,000 instead of $75,000. I’ll take that deal all day long,” he says. 

Growth in lean times takes a certain leap of faith that things will get better. It also requires strong levels of working capital. Those resources allow the Lantz brothers to take calculated risks while keeping debt manageable. Based on this logic, they have not expanded their 2,800-acre corn and soybean operation in a major way in recent years because they thought land prices and rents were too high to justify it. They see growth opportunities in upcoming years, though, just as there were in the 1990s and early 2000s. 

“So many people want to grow their crop operations that they bid the profit out of it,” Matt notes. Expansion discussions always involve the family and focus on which owner is in the strongest position to make a purchase.

To generate the right financial data, they set up two distinct farming operations: Lantz Enterprises, the 2,400-head farrow-to-finish hog operation, and Lantz Farms, the crop operation. “The farm sells grain to the hog operation at market prices,” Matt explains. “It allows us to know whether we are making money.” 

In similar fashion, Matt and Luke lease farmland to Lantz Farms at market rates. “We don’t subsidize the farming operation,” Matt points out. “We do the analysis on whether we’re better off to add 150 more acres or add more sows.” 

How They Benchmark. The Lantz brothers also benchmark the hog and crop operations against other operations. They use PIC on the hog side and farm management association data on the crop side. That led Matt to use FINPACK, a system developed by the University of Minnesota but widely used by producers and lenders nationwide. It gives him a detailed picture of his finances. “The big things I like to see are where we stand up on yield per acre and cost per acre versus our peers,” he says. “Are our costs in line?”

Producers often have difficulty comparing their operations to those of their peers, relative to people in other industries, says Bob Craven, director of the Center for Farm Financial Management at the University of Minnesota. 

“It’s hard to identify your strengths and weaknesses if you only compare yourself with yourself,” Craven says. One tool for expanding the scope of comparison is FINBIN (finbin.umn.edu), which allows producers to measure themselves on a whole-farm and an enterprise basis. Additional states also are in the FINBIN database. Craven is also a farmer, and he benchmarks his operation against 1,000- to 1,500-acre crop farms in south-central Minnesota. As valuable as benchmarking is, probably no more than 10% of commercial farms do it, he says. Not only does benchmarking point out individual strengths and weaknesses relative to other farmers; it also helps producers sharpen their financial skills. 

Although high yields are always desirable, they must be viewed in light of the costs needed to achieve those yields, Matt explains. “We are in the top 10% to 15% in overall production. I don’t need to be lowest cost as long as I’m in that percentage group,” he says. “There’s the law of diminishing returns.” 

Examine All Expenses. Matt illustrates the importance of having the right numbers: Corn prices are $1.53 per bushel lower than a year ago. With 180-bushel corn, the result is $270 less revenue per acre. “That forces you to examine all expenses,” he explains. 

For example, fungicide treatments on $5 corn proved to be a good investment because they boosted yields and profits significantly. “But if treatments are $18 and I get $24, maybe I don’t apply,” he says. 

Matt is also taking a hard look at seed costs. “In 2015, given present corn prices, we’re not going to plant all first-year elite hybrids,” he notes. Yet he still is increasing his seed costs $3 to $5 per acre. That’s because his field tests show increasing plant populations from 30,000 to 32,000 plants per acre to 35,000 to 37,000 boosted returns by $20 per acre through higher yields of 5 bushels per acre. “That’s a good return on investment,” he says. “I’ve seen an economic advantage.” 

Matt also thinks he might be able to trim fertilizer expenses by $20 per acre. “Pretty soon, I’ve netted $40 per acre,” he explains. “This is important with cash flows where they’re at right now. You need to find every dollar.” The brothers are big believers in precision agriculture and its profit opportunities. They aim to manage land by soil type and have found by experimentation that 20" rows provide the greatest return. “If we can be 2% to 3% better, it makes all the difference on our profit levels,” Matt says. His experience is that precision planting boosts yields 5%, worth 9 to 10 bu. per acre. 

On-farm testing also has shown where fertilizer can be added to achieve the best results. This is especially true for boron, zinc and sulfur, which can improve soil tilth and yields, Matt says. Boron alone has boosted yields 5 bu. per acre.

They work with Mosaic in its Pursuit of 300 program to stay up to speed on fertilizer strategies. Producers in the program have also started a mini-peer group, so they can compare notes on best practices. 

For the Lantz brothers, precision ag is a team effort of the local co-op, equipment dealers, fertilizer dealers, seed suppliers and others. 

“We want to take advantage of the data,” Luke explains. “We want to use all the tools in the toolbox.”

Lock In Margins. A firm handle on costs also allows them to lock in profit margins. They took that approach during the winter of 2013/14, when crop prices moved up considerably. “We sold 2014 corn at $5 to $5.25,” Matt says. “As crop farmers, we want to take advantage of those opportunities.” 

Over time, Matt has placed more emphasis on incremental sales. He uses put options and futures contracts, though the latter can require significant liquidity to meet margin calls. Through 80% to 85% crop insurance coverage, the operation has strategically reduced the risk of taking future market positions.

On the hog side, they work with a Chicago broker. When hogs are sold, the brothers buy corn and soybean meal to lock in a margin. 


A Contrarian Approach That Works

For Matt and Luke Lantz, there are no small decisions. “Matt gives a $5,000 decision the same consideration and weight as a $500,000 decision,” says Paul Gorman, Matt’s former farm management instructor at South Central College, Minn., and now a consultant. “He’s a bit of a contrarian,” Gorman adds, noting he expanded his hog business when no one else wanted to. 

Another reason for Matt’s success is his intense focus on costs and efficiency, Gorman explains. “He spends more time in the office working numbers than any of my clients.” Yet, while Matt is intense and focused with a strong work ethic, “he does a good job of balancing work and his family.” He has cultivated quality employees who are allowed to do their jobs. “He has clear expectations. He does not micromanage them but holds them accountable,” Gorman says.

Matt and his brother, Luke, are in a strong position to make the right marketing decisions, adds Dan Fitzsimmons, grain merchandiser for Protein Sources Milling Co. “The thing that sets Matt apart is that he is not afraid to make a decision on making an investment or when to market,” Fitzsimmons says. 

Banking experience has helped Matt Lantz grow his hog business.

Fiscal Focus Enables Hog Expansion

Matt Lantz knows what it’s like to sit on both sides of a banker’s office. He recalls a tense meeting with his lender at the peak of the farm financial crisis in the 1980s. A lawyer sat on one side, and an accountant sat on the other. “I had some important decisions to make,” the Minnesota producer recalls. “We didn’t want to liquidate. That forced me to look at options and to make sure we had the right numbers and that they were accurate. The banker said, ‘I think we can take you, Matt,’ and we moved forward.”

As an investor and chairman of the board of Minn Star Bank in Lake Crystal, Minn., Matt has obtained a lender’s perspective on why the right numbers are crucial to good decisions. “We want good data,” Matt says. “We want to know that what we do is making money.” Although his experience on the bank board has heightened his appreciation of detailed financial analysis and data, it also has given Matt an appreciation of the banking regulations that influence lending decisions. He thinks more financial transparency is good because it allows farmers to know where they sit financially.

A healthy reserve of working capital paved the way for Matt’s brother, Luke, to come back to the farm five years ago. Luke focuses on the production side of both hogs and crops. He also spent 18 years overseeing between 400 and 500 projects for Rutland Homes, a national home-building company. That has enabled him to oversee construction of hog buildings during farm expansion. Meanwhile, his experiences managing a 50-person department gave him the tools to develop more employee cross-training for the farm. Team members can move where needed within the operation and also provide back-up for Matt and Luke. “My experience helps me be people-focused,” Luke says. “I’m the farm’s eyes and ears out there.”

Matt credits his parents for inspiration. “Both, who started farming in the early 1960s, had a passion for farming,” he says. “They were self-made.”

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