As she closes the book on a career spanning regional and national leadership roles at RBC, Country Guide asked Gwen Paddock about the level and pace of change she sees in cutting-edge farm businesses.
Size, sector and location aside, what traits do the owners of these farms have in common? How do they stay on top of their management game?
“First and foremost, they have a business mindset and they know where they want to take their operations,” Paddock says.
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When Paddock finished school with a degree in agricultural economics, the industry was in the midst of some of its toughest times. The farm debt crisis had reached its peak in the mid-1980s and interest rates soared past 18 per cent. Land and commodity values collapsed.
Although Paddock had grown up on a family beef farm near Guelph, Ont., she didn’t see herself as a farmer, but she was keen to stay involved in agriculture.
Despite the challenging climate, Paddock had her eyes open to the finance sector. She accepted a job with the Royal Bank of Canada, moved southwest to Chatham, Ont., and began training as an agricultural account manager in 1985.
“It was actually a pretty depressing time,” she admits. “I was hearing really heartbreaking stories of farmers who, notwithstanding good management, were going out of business because the interest rates were just too high and their operations couldn’t cash flow.”
Thankfully, that farm crisis ended by the early 1990s and most of Paddock’s 37-year career was spent in a declining or stable rate environment.
Now, she’s retiring from her role as vice-president of agriculture at RBC, and interest rates are starting to move in the only direction they can go — up.
Is it time to get nervous, or frightened?
“A lot of the account managers at the bank right now have never lent in a rising interest rate environment. And by the same token, many next generation producers have never operated in one,” Paddock agrees.
Like commercial clients
One thing is certain. Interest rates are back on the table, and there will be some challenging conversations in the near future.
But there’s a difference this time. Not only does it seem unlikely that rates will spike as high as they did in the ’80s, Paddock is also confident that today’s bankers and producers are well positioned to manage changing risk environments.
In fact, the business and financial acumen of agriculture and agribusiness clients stands out as one of the major developments she has witnessed over the last few decades.
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When Paddock began working in finance, she recalls many people referring to farming as a lifestyle. And while there certainly are some unique aspects of agriculture that can blur the line between work and home, most farm clients today think of their operation as a business first.
Business planning practices are significantly more common than they used to be. Perhaps the banks can take some credit for advancing the quality of financial analysis clients complete each year as part of their loan agreements, but Paddock also points to groups like Farm Management Canada for promoting and teaching best practices in farm management.
“Tools like sensitivity analysis, cash-flow projections and risk management strategies have evolved to a place where most farm clients are now approaching business the same way mid-market commercial clients are,” she explains.
Strategies for success
In terms of financial management, successful producers are intentional and do not follow boom-and-bust cycles, Paddock has observed.
In other words, they don’t go out and spend all of the additional money they make when prices are strong. Instead, they consciously retain working capital and bootstrap their balance sheet, and reap the benefits down the road.
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“If cash is conserved during good times, they can go out and perhaps be more aggressive about acquiring assets in the poorer times, because their balance sheet is strong and can support growth,” she explains.
Paddock adds that the most successful farmers she knows understand and appreciate the entire supply chain.
What does that mean? Says Paddock: “The farmers who end up being most successful realize business relationships and pricing needs to work for everybody in the supply chain in order for the supply chain to be healthy.”
Business comes first
Paddock has seen first-hand how having a clear, consistent strategy improves focus and helps to guide decision-making and resource allocation.
She references Iowa farmer and professional speaker Jolene Brown, who coaches farmers to operate as a business-first family instead of a family-first business. It’s a structure that improves productivity, profitability and peace of mind, according to Brown.
Paddock also notes that top producers tend to think about succession early on and start transitioning management responsibilities long before they’re in their senior years.
“The most successful operations are bringing the next generation into positions where they can actually make decisions relatively early,” she explains.
Addressing risk matters
As farm businesses grow in size and complexity, Paddock believes effective risk management will continue to increase in importance.
She urges all farmers to take the time to identify the risks they face and evaluate them. This includes assessing business risks (including production, market, human resource and weather risks) as well as financial risks (including the operation’s debt, leverage, working capital and interest rate exposure).
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“There’s a huge impact between business risk and financial risk,” she says. “In a situation where a farm has high financial risk, the owner needs to look at ways to reduce their business risk so their total risk doesn’t get out of hand.”
The next step is to make a conscious decision about how to address each risk. If a risk is identified and a manager chooses not to do anything to mitigate their exposure, that is making a risk management decision, she emphasizes.
To manage interest rate risk, for example, she recommends strategies like laddering exposure by spreading debt over both short-term and long-term rates. In the current rising interest rate environment, farmers can also evaluate the opportunity to convert variable rate loans to fixed rates.
Farm advisors are partners
While many aspects of agriculture have evolved over the course of Paddock’s career, the importance of open and honest communication with the bank has not changed.
“Bankers are financial partners,” she says. “When they are able to really understand the business and get a deeper appreciation for the producer’s goals, they are better able to make suggestions on how to position the business to achieve those goals in the future.”
Even though it may be difficult to discuss finances when things aren’t going well, Paddock says proactive communication with the bank during hard times is key. The sooner the conversation begins, the more options there are available.
She encourages farmers to pick up the phone and talk to their banker as part of their risk management assessment. In the current interest rate environment, any banker would be pleased to have a conversation about interest rate forecasts and what options are available to mitigate risk, she says.
After 37 years, Paddock is an optimist. Seeing clients grow their operations and achieve their goals is very rewarding, she says.
And she’s learned that there’s never a dull moment in the business of farming. Just when you see a set of circumstances that has never occurred before, you also see a farmer doing something new and innovative, and a new market evolving.
