Hope for the family farm lies in modern business savvy

Two years ago, an Iowa family farm had $50,000 in the bank, owed less than that much on land, and otherwise was free of debt. But by the end of 1981, doing things pretty much as it always had, it was half a million dollars in the red and no one knew why. Something had to be done quickly or the farm almost certainly would fail.

''In 1980,'' said Bill Shirley, a Shawnee Mission, Kan., agricultural consultant, ''they lost over $250,000, and in 1981 another $250,000.

''They were feeding cattle and hogs and had a small cow-calf herd. They knew things were going bad in a hurry, but they didn't know why.''

Mr. Shirley, who for a fee of $9,000 to $15,000 helps farmers reorganize their failing farms into profitable businesses, had helped the family with its cattle operation. Satisfied with his work, the family wanted to know if Shirley could help with their financial problems. The ''farm doctor'' agreed to try.

''The first thing we did was send them about two pounds of work sheets,'' Shirley said. ''We went back through their check register for three years and looked at every nickel they had spent. We decided whether the money had gone to hogs, cow-calf, crops, cattle, or general management. As best they could, they reconstructed profit and loss statements for each business within the farm.''

Shirley practically lived with the family for several days. He was there when they did their chores. He interviewed each family member separately. He called in other consultants to help predict market trends and make other suggestions.

''We discovered they were losing money in the livestock operation faster than they were making it on crops,'' Shirley said. ''Most of what the farm produced went through cattle and hogs.

''If the books had been set up correctly, they would have known the farm was making money and the livestock operations weren't. They could have straightened them out or shut them down.''

Most farms operate on the cash-basis accounting system, Shirley explained. It can tell a farmer at the end of the year whether he made or lost money, but that's about all. Shirley recommends accrual accounting, in which income and expenditures are entered when the farmer commits himself to them. Income is entered the day a deal is sealed. A bunch of calves may not be delivered for six weeks, but the transaction goes into the books as this month's business if the calves were sold this month. Using the cash basis, the items would be entered only when money changes hands.

''You can't run a multimillion-dollar business on cash-basis accounting,'' Shirley said.

The Iowa farm was on the cash basis, and there was more than $600,000 in short-term notes at the bank at 18 percent interest. Debt service alone was sinking them, Shirley said.

''We had to mortgage some of the farm to get the short-term debt to where it was manageable,'' he said. ''We had to shut the feedyard down temporarily. The strategy was to stop the losses.''

Shirley found that not enough money had been put into the farrow-to-finish hog operation to make it work properly. Some barns and out-buildings had been converted to a nursery and farrowing houses. But they weren't good enough and some of the pigs were lost.

''You've got to be weaning 10 or 11 pigs in a litter to make it in hogs,'' Shirley said. ''They were getting only eight or nine.

''But they had a pretty good feeder-pig building, so they sold the sows and started buying feeder pigs. When things improve enough that the farrow-to-finish hog business can be capitalized properly, plans are to reinstate it.''

Though Shirley usually urges clients to get out of cow-calf operations - a tough business, in his opinion - he advised the Iowans to stay in.

''In their 2,000 acres of leased and owned land,'' he said, ''they had about 700 in pasture. Any ground that couldn't be plowed was fenced and grassed for cows - a beautiful setup. More important, they had the right mind-set.''

He said the two herd bulls, however, looked as if they might have been worth more as hamburger. So he called in a consultant who arranged for four aggressive Simmental bulls.

''Now those cows are dropping some marvelous calves,'' Shirley said.

All possible crops were put into government programs, and what didn't qualify was put into alfalfa. It wasn't that the government programs were particularly profitable, but under them, losses were minimized. Seed varieties were chosen for versatility. No decision was made at planting time to put the grain through the livestock as had always been done in the past.

''That way,'' said Shirley, ''they had some options. They could sell crops on the market, store them, put them in the reserves or feed them to the livestock.''

Other changes were made, but the main ones were that losses were stopped, the bookkeeping system was changed, and most farm operations were computerized. The losing businesses were shut down and the profitable ones kept and in some cases expanded.

''I set them up on a TI-59 calculator and some programs that I developed for it,'' Shirley said. ''It allows them to predict before they buy calves what the cost of production will be.''

Shirley says it doesn't make sense to feed all calves to finish in all cases just because there is a feedyard to put them through.

To make it in a cow-calf operation, Shirley explains, you have to wean a 550 -pound heifer or a 600-pound steer calf in 205 days.

A 400-500-pound calf ''will put you in the poorhouse,'' he said. So an efficient farmer will keep good, mature cows - matched to the right bulls - so that he will have a 600-pound steer calf at weaning time. These animals will go straight into a feedyard and will be butchered at 13 months, finished animals, he said.''That's the kind of calf you have to take into the feedyard,'' he said.

''It won't pay to own the lighter calves another couple hundred days and feed them out. Let someone else do that.''

This is the kind of information a farmer needs for good management, says Shirley. Using it can foster self-confidence. And that, according to Shirley, is the biggest change the Iowa family experienced. He may have pointed the way, Shirley said, but they did it themselves.

A growing number of farm families are not so fortunate.

In the past six months, for example, bankers in the 10th Federal Reserve District have reported that 4.5 percent of the farmers in their trade areas went out of business or filed bankruptcy.

Among the Farmers Home Administration borrowers there were more than 6,000 foreclosures, bankruptcies, and liquidations last year. What is wrong?

''Somewhere in the middle 1970s,'' Shirley replies, ''agriculture began to change. The emphasis had always been on production. The tractor came along after World War I, and instead of plowing a small field in a day, you could do three of them.

''New chemicals, better seed varieties, new irrigation technology, and other scientifically based things came along after the Second World War - all to increase agricultural production. Until recently that's all a successful farmer needed. Now, without sacrificing production, the producer has to make better use of his economic resources. He has to become a financial manager.''

Shirley tells of a family in western Kansas: Two sons are married and the daughters-in-law have been brought into the family operation. Two married daughters and another son are involved. In an office next to the feedyard, the daughters buy and sell cattle and grain and hedge in the commodities market.

The men clean pens, feed cattle, and move irrigation pipes. The 10,000-acre farm has two feedyards with a capacity for 11,000 head. Grandma fixes the noon meal for everybody. Dad spends much of his time in a pickup truck with a radiotelephone, coordinating everything. It works beautifully, Shirley said, partly because specialists run it. It's where the future lies, he says.

On another farm a daughter is in graduate school studying computer science. She knows how to run a feedyard and has mixed feed and driven trucks. She will come home and be the office manager and eventually the controller, probably.

''There are many opportunities for young women on farms today,'' Shirley said. ''Farm women are going to seminars and learning about commodities trading and how to chart accounts. They are taking part in marketing decisions. No longer are they just farm bookkeepers.''

The move is toward larger, family-scale farms with well-trained specialists, Shirley said. Complex machinery needs the care of expert mechanics. Breeding animals is a science in itself that can be almost a full-time occupation.

''I don't think we have to worry about the big corporations taking over farming, though,'' Shirley said. ''The demands are such that you have to want to do this as a way of life.

''Farmers will need the discipline and intellectual development of a college education to handle the complexities they will face. The kid out of high school isn't going to be able to farm with dad and bypass college. He's got to be a top-notch thinker, an aggressive professional.

''If we don't raise them in the next generation, the farm will move out of the family. But I think we will do it. I think there is hope for the family farm.''