Of course any story on what’s ahead for Canada’s mid-size farms is going to start with a forkful of numbers. And of course, if you’re a mid-size farmer, those numbers aren’t exactly a joy to read.
Instead, let us reprint part of an email from our in-box at Country Guide, just one of the more recent of such emails that have come our way, with content that’s probably very similar to what most of our readers have been hearing in their own conversations.
“I have read your magazine for a long time but think you have ignored a big issue at least in Ontario,” the email says. “That is the future of smaller farms in the $200,000 to $500,000 annual sales.”
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“I have about $260,000 in sales from cash crops and livestock and some custom work and can’t figure out how to grow,” he went on. “I have $1,500 in long-term debt per acre and own a full line of equipment but can’t begin to financially make any expansion work…
“Makes me wonder what I am doing wrong. I have decent yields as far as I can tell compared to neighbours who are bigger, but they are buying tractors, tile and building, and I can’t even begin to try expanding.”
He has looked at buying land, he went on to say, but there’s no way he can cash-flow it. The margin on the extra crop wouldn’t begin to cover his additional costs.
Veteran Ontario succession advisor Len Davies has immersed himself in the financial statements of a generation of farmers caught in our email writer’s squeeze, and he knows the pain they feel.
In fact, though, he’d say this reader has already dropped below today’s mid-size segment. “$500,000 to $700,000 in annual sales sounds about right for me when I think about defining the mid-size category,” Davies says. “From the conversations I have, I’d say there’s a fair amount of consensus in the countryside about that.”
The size dilemma
But even then, there’s a big difference between a farm with $500 and $700K, Davies says. “Somehow, you have to get to $1 million in sales… that’s where it really seems to start if you’re looking for a farm that’s really sustainable. It’s just different when you get to that level.”
Trouble is, getting to $1 million from $500K a year in sales is lot different than from $700K. In fact, it might be the difference between possible and impossible. “It’s tough from $700,” Davies agrees. From $500, it might be out of reach, even though it’s dangerous to bet against farmers when they’ve got their minds set on passing the farm on to the next generation and they are willing to make all kinds of sacrifices to get there. “Just put it this way,” he says. “You might be signing yourself up for a lot of years where, if you want some excitement, the only excitement you can afford is a trip to Tim’s.”
There is some truth, though, in the old saying that there’s more difference within each sales category than there is between them. In other words, when you look at their numbers at the end of year, there’s more margin difference between the most- and the least-efficient high sales farms than there is between the average $1 million selling farm and the average mid-sizer.
Eastern Ontario ag account manager at TD bank, Kelly Fawcett-Mathers, says such differences are crucial in the mid-size category. And when dealing with agriculture, she also adds, it’s always important to focus not just on the challenges, but also the opportunities.
To do that, she says, you not only have to know the farm’s numbers, but its aspirations and objectives. “You have to look at each file on its own unique merits.”
It’s also essential to recognize how, even if the segment is under more pressure than in past because of today’s land prices, machinery prices and interest rates, its farmers also have more business tools than ever before, she says.
Crucially, those business tools and the data needed to utilize them are broadly available to all farm sizes, she adds. “If you’re wanting to progress and advance in your operation, there’s all this information available,” Fawcett-Mathers says. And more than that, “people are really leveraging the partners that surround around them to help them be successful… their accountant, their lawyer, their banker their production specialist….”
Focused on survival
“In my experience as an ag lender, producers who are extremely focused and accountable will go to great lengths to pivot and make changes to their business model in order to achieve their goals,” Fawcett-Mathers says. “It’s quite admirable, to be honest.”
Davies agrees. “Some of the mid-size farms out there are basically on their way out of the business now… you know the phrase, ‘they just don’t know it yet,’” he says. “But some of them will make it.”
He thinks he can pick some of the survivors out now, although let’s come back to that in a minute. First, we’ll take a look at the numbers that I promised.
Here are just a few, courtesty of Alfons Weersink, ag economist at the University of Guelph, starting with the census finding that the number of farms in Canada fell 44 per cent from 1976 to 2021, dropping in round numbers from 340,000 to 189,000.
That’s bad enough. A 44 per cent drop in mid-size farms would be tectonic on its own, especially considering that in 1976, mid-size farms represented the core of Canadian agriculture.
But for mid-size farms, the picture is even worse than that. By 2021, mid-size farms had actually fallen 59 per cent, dropping to 22,000, a ghost of their former strength.
That is shockingly different than the numbers for either small or large farms. The number of our smallest farms, for comparsion, held more or less steady (which is why their percentage share of the total but smaller pie actually increased).
And large farms grew (or maybe that should be GREW), more than doubling to 17,000 from their early 8,000.
It’s why, when you plot Canada’s farm numbers on a bar graph, Weersink says you used to get a classic bell curve with the biggest numbers of farms concentrated right in the middle of the pack. But now you get something much closer to a straight line. There are roughly similar numbers of farms in every category.
If you look at farm output, though, what you get is anything but a flat line. In the 2021 census, Weersink reports, 10 per cent of farms had sales over $1 million and four per cent over $2 million. Overall, too, the biggest 10 per cent of Canada’s farms — just under 20,000 of them — now produce 70 per cent of total farm revenue, or four to six times more per large farm than for Canada’s remaining mid-size farms.
Historic change
The mid-size farm used to be what Canadian agriculture looked like. Governments designed farm support programs to protect the mid-size farm. As well, research programs were designed to make them more productive and marketing systems were built to handle their crops and livestock.
More than that, the mid-size farm was the backbone of Canada’s rural development strategy.
Now, says Weersink, “it is difficult to define what the average farm is.”
How do Canadians think of agriculture when the farmers they see on their television ads no longer reflect real farmers? And how does government support an industry that isn’t as crucial to saving small towns?
There are huge implications, Weersink says.
But, of course, it’s nothing like the impact on the family itself if it’s forced to sell up.
“It’s worrying,” agrees Al Mussell, lead economist at the research group Agri-Food Economic Systems. Although some mid-size farms will survive, the writing has to be on the wall for large numbers of families in the category, he says.
The loss of mid-size farms is also accelerating, he says, even if farms in the category are trying to take defensive action. The hard truth, he says, is that agriculture is different from many other business sectors. The businesses in those sectors compete for market share. Farmers compete for production resources.
And in this competition, large farms win. That isn’t to say that every large farm is guaranteed a great future. They face risks too (see, for example, “Long-Distance Farming” in this issue).
Except, their financial resources do make expansion easier. It’s easier for a large farm to buy a quarter section or a 100-acre farm that adds a small percentage to their land base than it is for a small farm that is pushing itself much closer to its limits to buy that amount of ground.
In a high interest rate environment, that’s potentially insurmountable.
Interest rates
But are we really in a high interest rate environment today? After all, interest rates in the 1980s reached upwards of 18 per cent, roughly three times current rates.
The answer is clear to MNP consultant Jordan Bowles. “Today’s producers are going to have as difficult a time servicing their debt as any of their predecessors,” he told Farm Management Canada’s recent Ag Ex conference.
While rates are lower than their absolute peaks, debt is higher. So, while rates were higher in the 1980s, average farm debt was $60,000, or four times the average farm’s net cash receipts of $15,000. Today, debt is $750,000, eight times net cash receipts.
Higher interest payments will squeeze cash flow. Some farms may find their operating credit runs out before the end of the season, others that they’re simply scrambling to keep in the black.
Bowles is encouraging farms to stress test their financial position, and for all farms, including those searching for a way to grow, he recommends keeping your eyes wide open, summing it up, “You should know more about the financial health of your farm than your banker.”
Once the large farm owns the ground, as well, they pay it off faster, largely because the big farm cannot only buy better, more efficient machinery, it can also run that machinery closer to capacity.
It’s an advantage that is driving one of the biggest changes in the agriculture market, according to research by Mussell’s colleague Doug Hedley. It’s this: Increasingly, the large-farm sector isn’t growing as it did in past, i.e. because more mid-size farms are getting bigger, but because farms that are aleady large are getting even larger.
Across the country, Mussell says, more mid-size farms are disappearing than growing.
The human dimension
And that isn’t the only change — a fact that Davies urges his clients to get on top of. Increasingly, his job is to work with them as they get their heads around two of those trends in particular.
First, the spike in land prices is leading to a related spike in family fights. Farm net worths have soared, and the old approach that saw Mom and Dad give most of the land to the child who was going to keep farming — because that child wouldn’t have a chance of making it if the farm wasn’t big enough — no longer washes with the siblings. They’re asking Mom and Dad: are you going to tear this family apart by creating one set of grandchildren who are wealthier than any of us have ever dreamed, and all the others who get basically nothing in comparison.
Shouldn’t we sell the farm and split, those children ask. And it’s a question that often has merit, not only in a business way because the long-term profit outlook for the farm as it stands isn’t great, but in an emotional way too because this way Mom and Dad would be able to make real gifts to all their children at a time in their children’s lives when such gifts could have huge impact.
And there’s also the second human factor. Increasingly, all ages are looking for better balance in their lives. Mom and Dad come from a tradition that always honoured hard work and sacrifice, but Davies says they should ask themselves who it helps if they tie the family to years and years of always saying no to themselves?
At the very least, Davies says, the family needs to work on how they will come to a decision on such crucial questions. Communication is pivotal, he says, and so is a hard look at the books.
“Can a mid-size farm make it?” Davies asks. He says he absolutely believes that some of them can and will. “But that certainly doesn’t mean it will be easy.”
– This article was originally published in the January 2024 issue of Country Guide.
