Wayne Black’s day has been life defining. His father John recently sold the family’s dairy herd, so on this particular morning, the father and son milked only a few cows. Although the decision to sell the cows had been made months ago, this was when the reality was sinking in. Wayne Black’s days would no longer be centred around milkings. It’s time to start in a new direction.
Black is like most young farmers today, loaded with an abundance of enthusiasm, determination, education and technical know-how. The shortfall, though, is capital. As young farmers across the country know, it’s a huge challenge to raise enough capital to start commercial farming at a scale to generate a living income.
Read Also
Youth focused on keeping Quebec’s dairy industry strong
In part two of our Making the Future series, Country Guide spoke with Béatrice Neveu from Rawdon, Que. (Read part…
Black has come to acknowledge it as a simple matter of fact. “Because I don’t have the capital available, I won’t be a farmer equivalent to what my father was 10 or 15 years ago,” he says.
Black owns and crops 100 acres near his dad’s 350-acre operation outside Goderich, Ont. He doesn’t have any illusions that his small land holding will be enough to support his family, so he’s starting to look for another job and he is intensively managing his portfolio.
In a way, that means he’s got a lot in common with most other farm families today. The 2006 census showed about half of female and male operators had off-farm work. According to Agriculture and Agri-Food Canada, the average Canadian non-farm income per farm family in 2007 was $53,338.
After graduating from the University of Guelph with an ag degree in commerce, Black worked full time for five years for a seed company that also had farm operations. While there, he witnessed first hand one of the great advantages of such operations, if they’re well managed. “A smart, skilled workforce is available for larger farm operations,” says Black. The irony is that many of those employees would rather be farming for themselves, if only they had the capital to do it. Instead, they end up helping large farmers get larger.
From that job he learned another big lesson, Black says. “There are no closed doors in agriculture.”
However, his enthusiasm is tempered with knowledge that a lot of the open doors are only open enough to walk through if you knock at the right time. For instance, his family had a small feedlot at one time and used to finish 1,000 hogs a year before the plunge in those markets effectively took those options away.
He’s also not deluding himself with false hopes that a small dairy herd or a small land base can support enough growth to capture economies of scale. Plus, on the dairy side, the cap on the quota exchange means dairy quota in Ontario isn’t increasing in value, and also that there are only small amounts available so farms can grow and capture scales of economy.
On the land side, competition is driving up prices. Good land is hard to find, and it looks like it will get even harder. At least three crop farms in his neighbourhood are managing over 12,000 acres — a size that was basically unheard of in Ontario’s corn-and soybean-based agriculture a decade ago. Meanwhile, more urbanites are craving country living, and there are still many smaller farmers like him.
“More people want to get into farming than there is farmland available,” says Black simply.
So, if growth isn’t an option, could Black make a go of it by running his small farm more efficiently than the big farmers can run theirs?
After all, says Black, individual ownership comes with a “bust-my-butt-to-make-it-work ambition,” and there’s also the support that many farm families automatically give to each other.
But big farms have big advantages of their own. Larger farmers often have larger cash flows and more flexibility to add land, make improvements, buy equipment and invest in new technology.
“We don’t milk cows by hand anymore and we don’t gather hay by fork or bale hay using small square bales anymore,” says Black. “Technology and imaginative thinking changes how we farm.”
In the past three years, more change has happened than in any previous three-year window in history, he’s been told, and the pace of change will accelerate even faster in the next three years, Black says. In the process, it would put huge demands on any business plan he could put together.
Where technology is affordable for all sizes of farms, the younger generation has been quick to integrate it. “A farmer can check agronomic information without talking to his local retailer and also book that trip they always wanted to go on — in the middle of his field using a hand-held device such as an iPhone or BlackBerry,” says Black.
Other adaptations, however, can take a lot of capital and a leap in scale. When talking with his dad about buying a combine, Black estimated that he needed about 700 acres to make even a smaller used one pay. Similarly, a high-clearance sprayer requires more than 13,000 acres per year to pay for itself.
The reality, says Black, is that a small farm cannot always afford to update equipment technology and must hire it or lag behind.
“Looking at those numbers the light bulbs went off,” Black continues. “Young people with smaller farms have to look for other opportunities.”
After paying off his student loans, Black started investing in retirement savings funds. His strategy was to buy an RRSP to put himself into a lower tax bracket. Then, when he cashed out the funds to buy some land, he’d quit his job so his income would be in an even lower bracket. The timing worked and it paid for his honeymoon.
In 2001, he bought his farm, and shortly after started working with his dad. He continues to manage some off-farm investments with a financial adviser. Again, though, he is keeping his eyes open. “I count on it for only extra-curricular things,” says Black. “If the value of your investment halved overnight, could you still sleep? If not, you shouldn’t do it.”
“If they don’t manage risk right, they’re going to lose,” warns Len Davies of Davies Legacy Planning Group based in Chatham, Ont. Davies specializes in estate and succession planning and is a certified financial planner. If you buy mutual funds, he says, you need to be able to wait through lower values and not hop out with a loss. If you can’t emotionally or financially do that, stay out of equities.
If you’ve never invested off farm, Davies suggests the first step is to open up a tax-free savings account and deposit as much as you can afford, up to the total allowable ($5,000 per year per spouse). It can be as simple as going down to your local bank, filling out some forms and getting some help choosing an investment.
Davies agrees with Black that with RRSPs, it’s all about tax-bracket timing. “RRSPs are a tax deferral and should be managed around taxable income levels,” Davies says. “For some retiring farmers, when they sell assets is when they’ll have a higher income. Then they’ll be paying taxes on the RRSP at the higher tax rate.”
Also, all the money in registered retirement savings plans and registered retirement income funds are considered income for the year of your death. Withdrawn funds from a TFSA are tax free, even on death.
Davies seldom meets farmers with over $200,000 in off-farm investments by age 65. “Typically when I do meet someone with that kind of portfolio, it’s older farm women who had off-farm income, he says.
After working with scores of farm families, Davies thinks the strategy can be short sighted. Yes, he says, there’s always someplace on the farm that could use the money, but succession can be so much easier if the older generation put aside more in off-farm investments and doesn’t have everything tied up in farm assets.
Black is investing off farm for another reason — return on investment. “The rate of return for primary production is small compared to other investments,” says Black. “If you had $2 million why would you invest in a job where you had to be there all the time, every day milking cows?” He’s had returns ranging from eight to 45 per cent on his off-farm investments, including bonds, over the last couple of years.
The most recent Canadian Farm Financial Data Base shows that investment income for Canadian farmers averaged about $11,000 in 2008, for a total of roughly $1 billion across the country. Only about $17 million of that was derived from RRSPs.
Interestingly, smaller farms with annual revenues between $10,000 and $25,000 had higher incomes from off-farm investments, earning $1,000 more per year than the Canadian average.
Whether farms are small or large, established or new, farmers will be managing their assets and earnings more closely and looking to off-farm investments to balance their business risk. “Money management is going to be a prerequisite for farming,” says Black.
Black also sees opportunities in non-traditional sources of farm income, such as food processing or generating energy.
Huron County is loaded with wind turbines. Yet green energy production has become a hot button issue in Ontario, with its impact on electricity rates taking centre stage, and the turbines are stirring up controversies over environmental impacts, health implications and effects on property values.
When Black was a township director and as past president at the Huron County Federation of Agriculture, he heard many of these concerns. Yet his taste for politics wasn’t dampened. In fact he was inspired to take it to the next level and last winter was elected as a director for the Ontario Federation of Agriculture.
There too, he knows, he’ll need to tackle questions about the growing diversity of agriculture.
The spread in farm sizes and types is the biggest challenge for farm lobby groups today, he says. “In the future,” predicts Black, “ag policy might need two or three sets of directions depending on the group.”CG
