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Generating farm independence

Sometimes, the best solution can be for the next generation to build a farm of their own

The roads here are typical for this part of rural Ontario, running between neighbouring towns. On either side, at the end of long maple-sided lanes are well-kept dairy, beef and crop farms divided into 100-acre parcels, with red and black barns stamped proudly with farm names, usually family names.

Occasionally too a lane is overgrown, an empty barn tumbles into itself, and fence-rows have been removed so the fields can be cropped with larger equipment, reminding us that nothing is ever guaranteed in agriculture.

On this particular concession, just south of Tara, though, a new enterprise has sprung up at the end of one lane.

Five years ago Amanda and Steve Hammell built a new free-stall barn with a robotic milking system.

The Hammells have learned that sometimes it’s easier to build something new than to try to force the situation.

And not just in the dairy barn.

The couple were among the 10 people selected through the Dairy Farmers of Ontario’s new entrant program, which means they got 12 kg of quota loaned to them for five years.

Now, with constantly purchasing quota and an additional allocation, the Hammells are milking 36 cows, filling 46 kg of quota.

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photo: Rovers Photography

But they’re not stopping there. Steve and Amanda are in the process of adding to their existing facilities so they’ll be able to raise their own heifers, have a better place to house dry cows, and put in additional stalls for milking cows, and they have their eyes set on boosting their cow health, longevity, and days to calving.

Meanwhile, on the farm directly to the west, Steve’s parents, Jim and Marie, and his brother, Tim, milk cows in a separate business.

It wasn’t always this way.

Steve’s farming career began in 2001, after he graduated with his diploma in agriculture and came home to work on the family farm. By 2006, the family was milking about 80 cows, owned about 100 kg of quota and 400 acres, and paid a salary to the younger generation.

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They built a new barn and the parents formed a corporation, the sons earning commons shares each year while father Jim owned most of the equity as preferred shares.

A couple of years later, Steve and Amanda were married and purchased what used to be his grandparents’ farm next door. “We were adamant about having something of our own, something to build of our own and in our own names,” says Amanda.

Richard Cressman, farm family communication and relationship coach from New Hamburg, Ont. says it’s a real phenomenon.

Building something of your own can be very motivating, he says. It can be satisfying, and often it’s emotionally easier. Nor does it get stuck in all the relationship baggage from childhood, or unrealistic child-based assumptions. It also avoids the mismatched expectations that can arise in family groups, the group decision-making, and the pressure to constantly communicate.

“Everyone should own their own kitchen,” Cressman says.

“And,” he adds, “a corporation should be structured keeping in mind how to dissolve it at the end of the day.”

In the Hammells’ case, although the legal transfer of the family business had begun, the parents hadn’t allocated any management authority to the younger generation. Their two sons were paid wages and had shares, but had very limited say in any decisions.

For Steve, approaching his 30s and starting a family, having no control to make changes was very stressful.

For many parents, the most difficult part of succession can be letting the younger generation make changes to a business they’ve worked on so hard, and that they’ve poured their hearts into and sacrificed for over so many years.

In today’s world, too, the older generation is often physically still young and healthy, and retirement hasn’t really entered their minds.

Even now Steve’s parents are only 64 and 62. “The transition of control is the hard thing to do,” says Steve. “For many parents it’s really hard to even talk about retirement.”

To survive as a startup, your production has to be above average, says Steve. And, adds Amanda, everything has to have a financial payback. Every decision has to make money.

To survive as a startup, your production has to be above average, says Steve. And, adds Amanda, everything has to have a financial payback. Every decision has to make money.
photo: Rovers Photography

Cressman says the transition of power has to be voluntary and it has to come from the parents, and sometimes it’s very subjective and dependent on the whole family situation over many years, even generations.

One of the keys, Cressman has noticed, is whether the parents are confident the kids understand the numbers. If they do, the parents have a sort of default belief that the kids will do the work. Only then do they begin to transfer the decision-making.

“The transition of management should happen before the transition of ownership,” says Cressman who helps families when there’s been a breakdown in communication, and who is often called in after the legal structure for succession has been created but transition of management has failed.

He’s frustrated with succession planners who follow a formula for succession, write a legal prescription (often involving insurance they happen to be selling) and do no work on how to transfer management. “Wills don’t get changed and everything is put on the shelf to collect dust,” he says.

That’s more or less what happened at the Hammells. Mom and Dad did a great job of creating a company and issuing shares, but they had no pathway for transitioning the decision-making to the next generation.

Complicating their succession, another sibling came home to the farm to work.

Multiple successors are not always at the same phase in life, and this can cause problems. Although the Hammell brothers got along, they had very different goals. Tim wasn’t married and was happy to get paid a wage. On the other hand, Steve wanted to have family time and was ready for change and to make improvements.

“I wanted to contribute to the operation but my ideas weren’t even being considered,” says Steve.

In academic circles, farm succession refers to the transfer of managerial control over the use of farm business assets. In 2010, Matt Lobley, professor at the University of Exeter in the U.K. identified a common problem with succession called “the farmer’s boy,” describing an adult son who spends years working for his father but has little input into managerial activities or decision-making, and is mostly used for manual labour. The son never develops the skills he will need to take over the farm business, so when his father retires (or dies), he often lacks the motivation, confidence and competence to assume control.

Or the stress gets to him or his wife.

By 2009, Steve was coming home angry and stressed, and Amanda was pregnant with their first child.

Over the years, the whole family had met with three different farm advisers to work out a solution, but the working environment wasn’t changing. However, one of those advisers said something that gave Steve and Amanda the confidence to think about starting a farm of their own. “He turned to us and asked, ‘Why don’t you consider going on your own? You have the ability to succeed, why not?’”

Despite the advantages of economies of scale, families shouldn’t forget the power of independence. Yes, working with siblings, children and parents can be a wonderful way to expand a farm and take advantage of scale, but it requires a shared goal and similar work priorities.

For some families, creating segregated businesses and helping each other instead of forcing everyone to make decisions and work together every day is a much better option.

“Succession is a process and there’s no one right answer,” says Steve. “It’s different for everyone.”

Frustrated but not defeated, the Hammells made a joint family decision for Steve to leave the farm and find employment somewhere else, so he took a job with a landscaping company for the summer. In the fall, he found work doing sales at a dairy supply company.

Taking this time to work off farm turned out to be an excellent decision, because Steve saw the inside workings of many dairy operations, learning and asking questions all the while.

With two incomes, the young couple were able to finish paying off their farm’s mortgage, bought a small Angus herd, and had another child. In the evenings and on weekends, Amanda and Steve crunched numbers and dreamt. They looked at buying existing dairy farms, but because the cap on quota prices was drying up the amount of quota available on the exchange, the premium for ongoing dairy farms had almost doubled.

Leveraging Amanda’s finance background, they built several business plans, complete with budgets. Then they stress tested their numbers.

Admittedly, it was difficult to use real numbers, and it was hard to build feed rations or develop a herd health program when they didn’t even have any cows yet.

Consistently, however, the numbers warned them there were risks ahead. It would only work with help from the new entrant program. Otherwise, they wouldn’t be able to cash flow their start into dairy farming. It would also only work by owning a farm already, and by injecting off-farm income.

For years, too, all the money the farm would make would have to be poured back into the operation, and the couple wouldn’t be able to take any draws, despite all their work.

However, they also knew Steve loved dairy farming, and they knew this is what they wanted to do with the rest of their lives.

“Do what you love to do,” Steve now says. “You’re going to be at it 365 days a year.”

In January 2011, they were accepted into the Dairy Farmers of Ontario’s new entrant program, but there was a key proviso. They had to be up and running by January of the following year, which meant they needed to source their financing, build a barn, buy cows and be in production in less than 12 months.

When it came to getting financed, they tendered to four lending agencies, including the one Amanda works for. It helped that their land had doubled in value since they originally bought their farm. Plus, with supply management and off-farm jobs, they had guaranteed cash flow, and when they were also able to borrow some money from Amanda’s parents that they only pay monthly interest on, the loan value was treated in calculations as equity since there is no set repayment requirement.

This stronger debt-to-equity position gave them the ability to also finance the purchase of a robotic milker, which proved an important part of the mix.

“The robot enables us to have family time,” says Steve. “And to work off farm.”

Having the robotic milker also allows them to more fully leverage Steve’s management skills, and to make data-based decisions instead of spending the time physically milking. “He’s an information nut,” says Amanda, smiling and shaking her head.

Having a robotic milker allows Steve to meet the bus, and he is able to care for the kids after school while Amanda finishes her day working as a senior finance specialist working in agricultural lending with RBC. They get up at 5 a.m., so Steve can do chores and put in the extra management needed to get the cows to a higher level of production. Amanda organizes the kids, and gets them on the bus and to daycare. They both have off-farm jobs, Steve as a municipal councillor.

The Hammells understand their farm is small, and they know that institutions could deem it not big enough to be efficient. However, compared to many larger farms, they carry very low machinery overhead and draw little for their labour. And they sweat the numbers, maximizing litres per cow, per paid labour and per fixed equipment costs.

“Many farms struggle to hire qualified people and it ends up with someone who just runs through chores, missing all the information management needed to manage a dairy herd effectively. Nine out of 10 times, cow care pays for itself,” says Steve. “It’s all in the details.”

Managing the cows with data, information and close attention has paid off with high production levels. In 2015, their herd was the top for total herd management scores in their county and eighth in Ontario.

Would their approach work for other farm hopefuls?

If you are contemplating farming on your own, you need an above-average work ethic, says Steve. And to be viable, you have to be in the top 10 per cent, which in the dairy sector means high scores for production, reproduction, longevity and milk quality. It’s just a fact, Steve says. “You have to be above average to be a startup and survive.”

Beyond lost opportunity costs due to scale, there are costs to setting up a separate farm. “When we left the corporation, we left years of work and investment, and we left an established infrastructure and support system,” says Steve.

However, they’re happy they went on their own before it affected their family relationships. Indeed, as they continue along this path of segregated succession, they’re happy that those relationships are getting stronger.

“We still have family harmony; we celebrate birthdays, Christmas dinner together, and all that important stuff. And we still help each other,” says Amanda.

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photo: Rovers Photography

A recent research report from Spain, called “Extended farm family arrangements: What statistics do not say about agricultural structure,” identified that farms today are no longer single household and single family, but are much more complicated. Often they consist of two or more households linked by a collateral relationship with complex structures, involving up to six households from three generations, like farm family networks.

These farms were not always within one corporation and instead were commonly branched out on their own, but helped from each other. These were called horizontal multi-family farms.

In the survey, the horizontal multi-family farms exhibited the greatest economic size in the study area. Researcher Olga María Moreno-Pérez identified the advantages of extended family partnerships compared to mono-family farms as economies of scale in certain aspects of farm management, and more efficient use of farm irrigation infrastructure (this was an area of Spain dominated by greenhouse production). Although many of these horizontal family farms were separate businesses, they enjoyed the synergies of shared resources.

Like the horizontal family farms in the Spanish survey, the Hammells have also been able to take advantage of synergies with family farming nearby. They rent equipment from Steve’s dad and brother and they help each other during crunch times, like harvest. Having this nearby line of equipment to lease has helped them keep their fixed machinery costs to a minimum, so their farm only has to financially carry one loader tractor and TMR mixer.

Also, a neighbouring aunt and uncle, retired dairy farmers, have helped them tremendously. Steve and Amanda rent them their land and the uncle helps with the cows, loving the daily routine of working with animals. “Uncle Ron’s an integral part of our operation, and when it gets busy he’s able to help out. He’s here every day,” says Amanda.

For a dairy farmer, investing in more quota is the fundamental way to make more money, spreading more income over your fixed assets and increasing gross income. Every month they continue to bid on quota on the exchange and last year were given additional production.

However, these purchases come with a political risk that the Hammells are quite aware of. They’re convinced they’ll have at least 10 to 15 years until any trade deal threatens the existence of supply management and their quota value. With the world dairy price plummeting recently, it makes Canada’s quota and tariff system look stable, says Steve. “The biggest risk right now is the system collapsing from within.”

To help them sort out production and strategic decisions, they’ve built a small team of advisers, leaning on an accountant, a banker, a vet and a nutritionist. Also, most of their friends in the area are farmers.

“For us it was the best decision — having two separate businesses instead of sharing one,” says Steve.

“It’s just me and him,” says Amanda. “We’ve got no one else to blame if things don’t go right. It’s made us stronger as a couple.”

 

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