GrainsWest Fall 2019

Fall 2019 grainswest.com 33 xpanding the farm isn’t something you do overnight and shouldn’t be done without planning. Making a profitable move requires being prepared when opportunity knocks by the quarter section, half section or beyond. Adding acres to family farm operations is most often a process of evolution, say farmers and agricultural lenders. With decently productive land selling in the range of $300,000 to $500,000 per quarter section, or $2,000 to $3,000 per acre on average, many farmers don’t have the financial resources to purchase a neighbouring 5,000- or 10,000-acre farm in one fell swoop. “There may be some circumstances where people have the equity to buy a whole farm, but it is usually more incremental growth,” said Melissa Reinhardt with Farm Credit Canada (FCC). Previously on the lending side, she is manager of business development for the Red Deer district. “Producers more commonly are looking to buy a quarter or half section of land at a time,” she said. “But even that can easily be costing $500,000 or more, so it is a decision that requires thought and planning.” When considering a land purchase, “producers need to crunch the numbers,” she said. “A good starting point is to look at farm numbers over the past five years. Knowing your cost of production is critical in decision making.” Reinhardt advised running through the numbers with an agricultural lender or trusted advisor. “In many respects, it is straightforward, but a producer needs to consider a number of factors,” she said. How much is that purchase going to cost per acre, and how much debt can E you afford? What is your current debt-to-equity ratio? What will it mean in terms of per-acre cost over a term if the purchase is financed? What will those additional acres require in terms of additional input, machinery, labour and operator costs? “Two important areas producers need to look at when expanding are their operating or working capital as well as their sensitivity in terms of debt load,” she said. “If the amount of operating capital is tight now, taking on more debt may not be a good idea. If you make a purchase this year, it might be a year or 18 months before you start to see returns from that additional land.” Sufficient cashflow or an operating loan may be needed to cover additional inputs and other costs over that time. In terms of “sensitivity,” when a farmer takes on more land and more debt, they must consider what happens if interest rates increase even by one or two per cent. Additionally, can the farm handle a poor crop year with a 10 or 15 per cent reduction in yield? “If your debt-to-equity ratio is already a bit tight, what happens if there is even a relatively minor increase in costs or reduced income due to reduced yields,” said Reinhardt. She noted there are few average years in farming. A five-year stretch may see three approximately average harvests, one exceptional year and another poor one. Agricultural lenders will want to know if your Plan B can account for such variations. “What are your options if projections fall short?” she said. Reinhardt also makes the point that getting bigger doesn’t always mean doing better. Reinhardt said farmers should review the efficiency of their existing farming operation before buying more land. “Benchmarking is an important tool,” she said. Though numbers may not always be readily available, check sources such as crop insurance providers can provide certain benchmarking services. “See how your production and your cost of production compare with industry averages,” she said. “You may be on track with everyone else, but if yields appear to be lower or production costs higher than area averages, determine where you can improve efficiency within your existing operation.” Reinhardt suggested farmers look at what’s known as the five-per-cent rule. If yield can be increased by five per cent, marketing techniques can be improved to achieve a similar boost in return and “You need to be prepared to act when the opportunity does come along, because it may not come back.” —Kevin Serfas