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Compete and win

Your machinery strategy may be nothing less than the factor deciding how long you’ll be in the world of agricuture

I’m generally anti-lease,” says farmer and economist Joerg Zimmermann, who believes today’s machinery decisions will help determine whether Canada can be globally competitive
photo: Supplied

It’s an impressive resumé, showing how Joerg Zimmermann’s work and his research, plus his strong entrepreneur/farmer streak, have taken him to most of the main grain-growing regions of the world, including in Canada.

It’s a series of experiences that have given Zimmermann a unique perspective about what farming looks like in the world’s breadbaskets.

And because that same resumé lists his PhD as an agricultural economist, it’s also bred insights into how Canadian farmers can compete and win.

It has all convinced Zimmermann that machinery management is maybe even more crucial to farm success than many farmers realize.

Today Zimmermann has settled outside of Winnipeg, from where he consults, teaches and runs a peer group for farmers on both sides of the border. He continues to travel the world researching efficiencies and working for agri-benchmark — a non-profit international benchmarking group that compares costs and prices using typical sample farms around the world.

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Country Guide caught up to Zimmermann while he was helping teach AME’s “Investing in Machinery and Equipment Course” in Saskatoon. For this course he created spreadsheets to help the farmers set a machinery replacement strategy for their own farms.

“We are trying to take out the emotion in buying decisions and give farmers other criteria to make their decisions,” Zimmermann explains.

Zimmermann’s main point is that deciding about machinery inventory turnover must be about more than sorting through the physical requirements and technical stuff, like horsepower. It’s about calculating the total cost of continued use and repair versus replacement, and about seeing the impact on amortization and/or lease payments. It’s also about seeing the effect on the whole farm’s debt servicing capacity, cash flow and taxes, and then fully comprehending the time value of money.

“It’s like checking an oil gauge on a tractor,” says Zimmermann. “Are the ratios where they should be, or are they in the red?”

A machinery management strategy includes how much equipment to keep, how to choose the best options between owned, and financed or leased, or rented, and for how long it is held. Instead of making buying decisions on resale value, participants of AME’s course are learning how upfront costs are having an impact on their bottom line for years, and they are asked to justify the extra investment.

The power is in playing with the combinations and figuring out how much you can afford to pay for various options, says Zimmermann. The calculations should help to quantify your arguments, and help you stay focused on risk and investment instead of the shiny paint your neighbour just purchased.

With good deals from the financing arms of an equipment manufacturer, it sometimes makes more sense financially to lease, but you have to crunch the numbers to see that clearly. “I’m generally anti-lease as they catch you in the back end whereas purchases hit you in the front end,” says Zimmermann.

North Dakota

Zimmermann facilitates a peer group with farmers from North Dakota and Manitoba. He also consults for farmers on both sides of the border, and he’s been witnessing first-hand the cash-flow contrast between countries over the last few years.

Although the natural conditions in southern Manitoba and northern North Dakota are similar, the man-made line (i.e. the border) along with the different currencies are making for very different profitabilities.

“Right now with the U.S. dollar exchange rate, farmers in Canada are making fairly good money, but down there they haven’t made a whole lot of money for three, maybe four years,” he says. “What if the U.S. dollar and the Canadian dollar go to par again? Our farmers will lose profitability quickly.”

Zimmermann says from what he’s seen, the farmers in the U.S. have adapted to the downturn and now are in better shape. It’s a lesson he says Canadian farmers should be implementing now when they still have good cash flow. “In Canada a lot of grain farmers are tight on their debt servicing capacity and should think about ways to reduce it when things are relatively good,” he says. “Instead of maintaining lease payments at the same dollars, maybe they should look at ways to stabilize cash flow for the future, if interest rates continue to rise or the Canadian dollar decreases.”

U.S. farmers are slowly going through the used equipment glut that built up when their farm incomes were higher. A larger tax incentive to buy new equipment — they can write off bigger depreciations than CRA allows — spurred a massive transition when prices were strong.

Machinery debt is often a noose in tight-margin conditions and yet is sometimes overlooked for operating efficiency gains. “That is,” Zimmermann says, “until the chair is pulled out.”

Russia/Kazakhstan

Zimmermann knows first-hand the destabilizing effects debt servicing can have on a tight budget and unforeseen circumstances. In 2002 he started a 2,500-acre grain farm in Samara, Russia, with his father and a partner. Only a few years into the business, the worst drought ever recorded hit the region, eroding their working capital and within a few years they simply couldn’t afford to keep operating.

Their farm was also relatively small compared to other farms. In Russia, and in much of the Commonwealth of Independent States (CIS), which formed after the Soviet Union dissolved, the size of farms has grown exponentially.

Zimmermann explains how after the breakup of the Soviet Union, each of the employees on the communal farms was given a land certificate. So if there were 1,000 employees on a 10,000-acre farm, they each got a certificate for 10 acres. The idea was they’d farm together but also have part ownership in the big farm.

But in many cases it wasn’t sustainable. The massive, almost monopolistic grain trading/elevator/processor and poultry companies began ratcheting all the margins out of the system. Since these companies were the only game in town, farmers had no other choice but to sell to them.

Not surprisingly after a few years the farmers ran out of operating cash so the sole elevator (and processor, poultry company and trader) in the area financed their inputs and then gently squeezed the margins tighter again. When drought inevitably hammered an area, the farmers couldn’t pay back the company, and the company got the farms. “They were entrepreneurs seeing an opportunity,” says Zimmermann with a shrug.

Today about a quarter of all the farms in Russia/Kazakhstan are owned by grain trading/processing companies and are massive, up to 2.5 million acres. They operate as big businesses often with staff and technology, modern facilities, genetics, equipment and management imported from all around the world.

Zimmermann says even though very smart people work for these large farms in Russia, they’re not able to adjust to change as quickly as family farms in Canada. “Transaction costs are larger,” he says “There’s much more friction while operating these big structures. They burn parts of their advantage with friction.”

Canadian farmers have an opportunity to use our management and operational powers to react relatively quickly. Plus we have the logistical infrastructure and the ability to grow high-quality grains and oilseeds.

Although we might not be able to compete with Russian feed wheat because of their low cost of production, we can manage commodity niches, sign direct contracts and go for higher-quality markets, says Zimmermann.

With their scale, Russian farms can compete in the lower-quality grains segment because of the low cost of production and low land cost, and their unimaginable equipment buying power.

Even so, machinery maintenance has been a struggle, especially in the early years of the open market. With so much growth and investment, dealerships were focused on sales only so they didn’t repair much or even keep a parts inventory, says Zimmermann. “In Russia we bought Russian-made equipment so we could get parts.”

In much of Russia, farmers grow cereals and sunflowers. Sunflower oil is the most popular cooking oil and they have their own crushing plants. Southern Russia grows more corn and soybeans but also needs to import meal to feed their livestock.

“They’re often forced to look at liquidity before profitability and that’s why lower input crops are more popular there and canola is a higher-cost crop,” says Zimmermann.

Siberia is similar to Western Canada and Zimmermann believes this area has huge potential to grow canola and pulses.

Between 2005 and 2008, Zimmermann developed a canola seed sales network in northern Kazakhstan and managed an affiliated 5,000-acre demonstration farm for a Saskatchewan company. The company had trials of different crops, including canola, wheat and barley varieties from Canada. He says the natural conditions in northern Kazakhstan are very similar to Western Canada, and they grow mostly cereals, but are slowly diversifying into pulses and oilseeds.

From that job sprang an opportunity, that for a few years Zimmermann was able to analyze and benchmark the farms owned and operated by a U.S.-based investment fund with large farm operations in Eastern Europe and the CIS.

One of the most significant differences Zimmermann noticed is the work culture in Russia, especially on the corporately owned farms.

He remembers one Sunday morning driving to a farm he was responsible for and finding everything had slowed to a stall, even though it was the middle of harvest and the weather was good. Nobody expected someone from the city would come out on a Sunday to check.


How competitive is Canada?

Below is chart comparing direct and operating costs and revenues in US$ for wheat between typical farms in various countries throughout the world in 2016 as supplied by agri benchmark. Surprisingly, Canada’s direct and operating costs were higher than France, Denmark and lower than the U.S. and Australia, while in Russia it cost about a third less to produce a tonne of wheat than in Canada, mostly due to land and direct costs.

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