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Farm failures

Big bankruptcies make big headlines, but smaller farms are under pressure too

Their names are widely known, including Wigmore Farms, Broadacre Agriculture, Big Sky Farms, BioExx Specialty Proteins, and others. They’re among the high-profile farms and agri-businesses that have shipwrecked in recent years and applied for creditor protection.

Each has a story that’s unique, but their stories seem to share a lot of similarities too.

The explanations can be very technical as well. Andrew Marshall, chief financial officer of Broadacre Agriculture, stated in an affidavit that the company’s growth and profitability “has been severely constrained due to the lack of sufficient capital which has, in turn, limited the ability to hedge properly and slowed expansion opportunities.”

But, ultimately, when it comes to the iceberg, the ship’s size doesn’t matter. It’s more about the navigation.

“Basically the No. 1 factor is management,” says Glen Snyder, agri-business manager for southern Saskatchewan with Bank of Montreal (BMO). “It doesn’t matter how big or small the farm is.”

Snyder has worked in agricultural banking for over 25 years, and for more than 20 years with BMO. His career has taken him from the Canadian Prairies to Holland to South America.

But when he’s asked what he likes about the business, Snyder is succinct. Agriculture, he says, “is vibrant, ever changing, never-a-dull-moment.”

Country Guide chatted with Snyder to find out more about the bankruptcy process, how to avoid it and what 2015 may hold for farmers.

Misperceptions about bankruptcy

If you met Snyder at a farm show last fall and asked his opinion on Broadacre’s bankruptcy, the first thing he would do is correct you. Broadacre, after all, has applied for creditor protection, not filed for bankruptcy.

But you wouldn’t be alone in making that faux pas. Mixing up bankruptcy and creditor protection is a common mistake people make, Snyder says.

Creditor protection is the first step in the process before total bankruptcy. Generally, the courts allow the company — with the lenders’ co-operation — to continue to run. It’s initially a negotiation process. But there are deadlines for the company to submit proposals to get back on course, as well as deadlines for lenders to accept proposals.

“And if they fail, then it goes into bankruptcy and liquidation,” says Snyder. A receiver is appointed to try to resolve the situation and recover money to pay off the business’s debts and liabilities. Any money left goes to the person declaring bankruptcy.

Some businesses manage to steer back on course, avoiding bankruptcy. For example, Olymel purchased Big Sky Farms and it continues to operate the hog production company.

There are also important provincial differences. For instance, the farm bankruptcy process in Saskatchewan is quite different from other parts of the country, Snyder says, because of the Saskatchewan Farm Security Act. The legislation requires lenders to go through multiple steps before foreclosing on farmland. Home quarters are generally protected from foreclosure, as long as the farmer is living on the quarter, although incorporated farms that put up the home quarter for a loan make that homestead vulnerable to foreclosure.

Avoiding the iceberg

Broadly speaking, there are three things you can do to avoid financial icebergs, Snyder says. This applies to farms in every sector, in any province, no matter what commodity prices are doing.

First of all, farmers should stay informed on both micro- and macroeconomic trends, says Snyder.

“That is such a key area,” says Snyder. “And the information that you’re receiving, sit down and think about how is it going to impact your operation? And then, once you’ve looked at that, take a look at the risks.”

Managing risk includes everything from mitigating production risk through crop and hail insurance to programs such as AgriStability, AgriInvest and other insurance opportunities to reduce your price and income risks. Life and disability insurance, keeping wills up to date, and succession planning all help too.

Some grain farmers use futures or options to offset market risks. Producers can also take out contract frustration insurance to cover themselves in case, for example, the U.S. border closes before they can sell cattle they’ve been backgrounding under contract for a U.S. feedlot.

“It’s not a common one, but with more trade going on internationally, that’s one that’s being looked at more and more.”

BMO reviews financial risks with clients at least once a year (more often if the business expands or changes). This includes looking at the balance sheet, income statement, and projected cash flows. If cash flows aren’t hitting projections through the year, BMO works with the client to figure out how they can meet their targets by year’s end. Usually, Snyder says, BMO’s account managers are able to help farm clients fix any problems through this process.

Farm managers can also turn to third parties, such as reputable consultants or provincial government specialists, to review budgets and financial statements, Snyder adds.

If an agricultural client needs more help than BMO’s front-line staff can provide, more specialized account managers get involved. Solutions might include liquidating some of the business’s assets, equity infusions from third parties, syndications or sale/leaseback options. It’s only when all these options fail that BMO turns to the creditor protection process.

How close are we to the iceberg?

Many readers will remember the downturn in the ’80s, and some are worried that we may be heading into the same kind of riptide.

Asked how today’s trough compares to that downward spiral, Snyder says that it’s similar, yet different. World grain supplies that meet or even exceed market demand are factors in both today’s dip and the ’80s price depression.

But in the ’80s, it was made worse by government subsidies in the U.S., Europe and elsewhere that meant their farmers were sheltered from market signals. Today, says Snyder, those programs are quite “tuned down” and are not having a major impact on the current downcycle.

Such factors combined to create a perfect storm in the ’80s, squeezing profit margins, “which, in turn, decapitalized land values and decapitalized other major farm assets, such as equipment,” says Snyder. Cash flows slowed to a trickle and farmers had trouble keeping businesses viable.

So far, Canadian land values have mostly held steady.

In 2007 and 2008, investors started snapping up Saskatchewan farm land. Now, however, both BMO and other major credit suppliers have noticed that “the smart money basically has been here and left.” These investors sold their land in mid-2013, and most of it was bought by local farmers, he says.

“I don’t think it will have a significant impact on land values unless these tightening margins trigger a mass exodus,” says Snyder of these investors leaving the market. In that scenario, short-term investors may bail, which could affect local land values if they hold a lot of land. Investors taking a longer view won’t liquidate, and so won’t affect land values.

In the last half of 2014, large global money managers left commodity markets. This should make for less volatility in the commodity prices, Snyder says, but it also means fewer chances for farmers to lock in higher prices. Machinery purchases have slowed. Fertilizer and fuel costs are likely to be stable, or perhaps rise slightly. New equipment, chemical, and seed costs will rise a little more.

What this means for you depends on which sector you’re in and what you’ve been doing the last few years. Cow-calf producers look like they’re in the second or third inning of a three- to five-year price cycle, Snyder says. The cow herd looks like it’s stabilizing. From here on, beef prices will likely be subjected to supply and price of pork and chicken in the U.S., he adds.

Feedlot profitability will hinge on managing feed and feeder replacement costs, and mitigating basis, price, and foreign exchange risks.

On the hog side, farrow-to-finish and finisher operations will need to focus on controlling feed costs and managing price risk, Snyder says. Lower feed costs and a weaker Canadian dollar are in their favour.

Despite thinner margins on the grain side, overall BMO’s agribusiness clients are faring well, with no noticeable bump in delinquencies or arrears. Government support programs may take the edge off razor-thin margins.

But Snyder fears lenders may see more delinquencies and arrears over the next year or so from clients who’ve used their equity to recapitalize or expand in the last two years.

Snyder says the best advice he can give agri-businesses is to pick “a lender that understands agriculture and that has a history of supporting clients through thick and thin and through up and down profit cycles.”

“You need some consistency and you need the communication,” Snyder says. “And you need the complete conversation with your particular lender.”

About the author

Field Editor

Lisa Guenther

Lisa Guenther is a field editor for Country Guide.

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