Grainswest - Spring 2019

Spring 2019 Grains West 36 want to take your business?” Consider where and why you want to purchase land. “Look at that from an income statement standpoint, thinking what’s the debt repayment capacity if I do purchase and make that investment.” This, as well as debt-to-asset ratio and leverage capacity are what lenders look at first. They will additionally stress test your purchase scenario, determining if you’ll still be able to make your payments should interest rates go up. This will help formulate a solid Plan B and C to account for any unforeseen trouble. “As long as you do that, you should be in a good spot,” said Gervais. He explained a simple formula can be applied to determine whether or not a land purchase makes economic sense. What’s the price of land compared to what you can earn from that acre of land? The higher the ratio, the more you’ve got to be efficient in keeping your production costs down in order to expand. AN EMERGING BUSINESS MODEL Jonathan Small, chief research officer with Global Ag Risk Solutions shares Gervais’s assessment of the market’s direction. With interest rates as the key barometer, he believes farmland values will merely cool. Before coming to Canada, Small lived in England, a country notorious for the sky-high value of its farmland. The business of farming endures, but this environment of ultra-pricey acres has popularized a business model in which farmers may own no land. With a comparatively small amount of money and owning nothing more than working capital, farmers can make a healthy go of it. “It’s a very extreme business model,” Small readily admitted. In Canada, where land has traditionally been a sound investment as well as a sort of insurance policy and the family legacy, considering the adoption of such a model is terrifying for some. “But, in order to buy land, you need profit,” said Small. “Or a lottery win, but let’s exclude that as a business model.” As land value has escalated in Canada, it has become a barrier to entering the industry. “It makes it very hard to get into ag unless you’re prepared to accept a different business model. “The industry is very reliant on continued appreciation in value for its equity growth, and not reliant enough in my view on just making profit,” said Small. “The paradox is that if you want to own lots of land, the best thing you can do in the beginning is own none. Just be as big as you can and manage that really effectively. That way, ultimately, you’ll buy land quicker.” Utilizing other people’s assets by renting land and equipment, you can get to scale quicker while increasing return on investment. “Even if you only go a little way down that path, you can change the way your farm performs. You’ll make more money.” He said that while this may prompt eye rolls among established farmers, younger ones just getting going are much more likely to get it. For new farmers who’ve just purchased their first quarter and must juggle a day job to build the farm, the model is a lifeline, according to Small. However, such a model meets resistance in the risk department. “That working capital is really risky, and every farmer knows it,” said Small. “Tell them to put 90 per cent of their money into seed, fert and chem, and ask how many acres could they farm that way, and they’ll say ‘Well, what if it doesn’t rain?’” He predicted farmers will gravitate to owning less and renting more over the coming quarter century and suggested risk management packages must reflect the shift. When advising young farmers, he suggests for every acre they own, they rent 10 more. Their central concern, not surprisingly, is losing access to the land they rent. “You can’t insure against that, so manage that. Be ready for it,” he said. He suggested rental-dependent farmers must develop a new skill set. While constantly prospecting for more land, cultivating good relations with current and prospective landlords is essential. “And you need lots of them,” he added. “If you’re 90 per cent rented, better to have 20 landlords than two.” HAPPY TO RENT, PREFER TOOWN A third-generation family farmer with a FEATURE “Where it takes three acres to make one acre of principal payments, that’s a real easy way to run out of cash if you don’t have reserves or you don’t have a plan.” — Kristjan Hebert