Others would rather be outside working with cattle or at conferences learning the latest disease management techniques. 

If you’re not in the first category, your banker might know more about your farm financial indicators than you do. 

There are such long lists of financial indicators available it can be hard to know where to start. And once you calculate a financial ratio, how do you know if yours is “good”? 

If you don’t calculate these three financial ratios, your banker will. So, why not start by doing the math at home and taking them along to your next meeting?

Why financial indicators matter

Rising land prices have pulled up many farmers’ net worth statements. 

“There is not an equity issue out in farm country. Most operators are holding land that has appreciated well,” says Craig Macfie, founder of consulting firm Spring CFO (link to www.springcfo.com). Macfie has seen all kinds of farm financial statements through his consulting work, as an accountant, as a past CFO for Monette Farms and through his experience as a farmer in Crystal Springs, Sask.

But lenders care about more than net worth. Lenders want to know if your assets are generating profits, and if you’re able to repay loans. 

In some banks, Macfie says, “the bank credit department is God, and your bank relationship manager is the Pope.” That is, the banker you meet with doesn’t typically have authority to make lending decisions without support from someone in the credit department. 

When you need a loan, Macfie says, “You need the Pope on your side, advocating for you.” Your bank manager can tell the credit department what a strategic farmer you are, but the credit department is still going to want to see the numbers. 

Your financial indicators will have to carry the day. 

The lenders’ perspective

Macfie suggests three key financial indicators can show your farm’s ability to repay loans. 

Roxane Lieverse is an executive vice president and the head of agricultural banking with Rabobank in Canada. When asked which financial indicators are important for lenders, she lists the same three indicators. 

The financial indicators these two professionals see as highly relevant to bankers are:

1. Working capital to expense ratio
2. Debt service coverage ratio
3. Debt to equity ratio

Together, these three indicators show lenders your farm’s recent financial performance and your farm’s ability to repay loans. 

1. Working capital to expense ratio 

What it measures: The working capital to expense ratio measures your farm’s ability to stay in business through the next production season. 

“It shows the actual working capital available for a producer to put in their crop, whatever it is they’re growing or producing,” Lieverse says.

How to calculate it:

First, calculate your working capital:

Working Capital = Current Assets – Current Liabilities

Where current assets equal assets that can be converted to cash within one year (e.g., bank accounts, inventory, prepaid expenses) and current liabilities that must be paid within a year (e.g., accounts payable, operating loans, rent payments, credit card debt, taxes).

Working Capital to Expense Ratio = Working Capital / Annual Operating Expenses

Some financial analysts use these same measures to calculate the Current Ratio, which compares current assets to current liabilities. 

Current Ratio = Current Assets / Current Liabilities

The current ratio can be used to measure short-term viability, but Lieverse and Macfie both find comparing working capital to annual expenses more intuitive. 

A “good” ratio for you depends on your strategy. 

If working capital is equal to annual farm expenses, your ratio is 1:1. “Your farm can finance next year’s crop,” Macfie says.

Many farms’ ratio is less than one. 

“Some farms put all of their working capital into more land and machinery, and that’s how they grow.” These farmers are using cash-on-hand to finance expansion, whether it’s land, machinery or equipment. “That works,” Macfie says, “until it doesn’t.”

If the working capital to expense ratio is too low, the farm will be short on cash, perhaps to the point of financing short-term inputs with expensive retail credit. 

“Once you maximize retail credit, there’s really no options besides refinancing or selling land,” Macfie says.

The safest approach is to keep your working capital to expense ratio well above 1:1. But this plan may not keep your money working hard enough. Maybe some capital could replace depreciated assets or repay high interest loans.

Macfie visualizes this ratio as a teeter-totter, with managers balancing cash on hand against re-investments. “The hard part is that balance.”

What does Macfie advise? “The easy advice is 50 percent,” Macfie says, noting that the ideal situation will always vary from farm to farm according to your strategy and your industry.

2. Debt service coverage ratio (DSCR)

What it measures: “Bankers are concerned that you can repay your debts,” Macfie says. “Why would you loan more money to someone who hasn’t shown recently that they can service debt? If your three- or five-year history doesn’t show you can service more debt, why would I give you more debt?”

The debt service coverage ratio compares your recent annual income to the size of your debt. 

How to calculate it:

DSCR = Income / Debt Service

Where income equals farm revenues (after taxes) minus operating expenses (excluding interest), plus off-farm income. Debt service equals payments on short-term and long-term loans, including principal and interest.

What is a good ratio? If your debt service coverage ratio is 1:1 or higher, you have enough income to pay your debt. A higher DSCR indicates higher profitability relative to debt.

Lieverse would like to see a ratio a little higher than 1:1. “Ideally above 1.25, but it’s very heavily dependent on the industry.” 

Rising interest rates will increase your debt costs, decreasing your DSCR. You could raise your DSCR by restructuring or paying down debt. 

A manager focused strictly on DSCR might turn down growth opportunities that require debt. The ideal ratio is the number that fits your strategy.

3. Debt to equity ratio (DER)

What it measures: The first two indicators on this list are more important to banks, says Lieverse, as they’re more relevant to day-to-day operations. The DER shows your long-term viability. “If there was a profitability concern, long-term, how could the producer sustain themselves?”  

How to calculate it:

DER = Total Liabilities / Total Shareholders Equity

Where total liabilities equals all short- and long-term debt and total shareholders equity equals total assets minus total liabilities.

Corporate balance sheets usually show long-term assets such as land and buildings at purchase price (book value). Updating asset values to current fair market prices makes the results more realistic (and probably more comforting). 

What is a good ratio? A low DER indicates a farm with flexibility to borrow money if opportunities arise. A farm with a high DER may have taken on debt to buy more land or may be in a financially vulnerable position.

While long-term customers may have some leeway, Macfie says, “Banks don’t care if you’re sitting on a bunch of land equity if the farm hasn’t been profitable in a few years.” 

You could raise your DER by selling land or equipment to repay loans. But unless downsizing is part of a long-term strategy, it may not be the ideal solution for you or your lender.

Take action to control financial indicators

Many aspects of farm financials are outside your control. If you find yourself with less-then-perfect ratios, here are four steps to take:

1. Develop good working relationships: “You can’t control the weather, but you can control having a good relationship with your banker and your accountant,” Macfie says. 
2. Timely financial statements: Your financial indicators may not be great, but they can still be timely. “You can control getting your bookkeeping to the accountant on time, so they can get it to the banker on time,” Macfie says.
3. Check your corporate year end: Ratios change depending on where you are in your annual production cycle. For example, if you’re a grain farmer with a July 31 year end, “the bank is testing your balance sheet at the worst time of year.” Your Working Capital to Expense ratio will be low, since your current assets are still out in the field. Re-calculate that ratio on October 31, when your barley is in the bin. 
4. Cut costs: If most of your financial indicators are grim, it’s time to look at your operation. “There are efficiencies to be found across the board on land, machinery, labour, agronomy and other operating expenses,” Macfie says. “Keep looking.”

Looking to the future

Lieverse describes herself as a “disruptive agricultural banking leader.” But even innovative bankers still calculate ratios. 

“Banking has a bit of tradition to it,” she says.

Most of Lieverse’s clients are operational experts. “I very seldom stop at an operation where a producer doesn’t know their costs of inputs down to the acre and cannot articulate soil health with a degree of expertise.”

But some farmers have become experts in these areas at the expense of “soft side” business aspects. “Many farms have struggled in operational items related to finance and HR.”

When rising land prices create strong balance sheets, Lieverse says, “you can make mistakes and not really be forced to learn from them.” This probably won’t always be the case. “We’re going into a commodity cycle where margins are tightening. What are you doing to future-proof the farm?”

“Financial ratios are great because they tell us how the farm has done,” Lieverse says. “But what I’m equally interested in is hearing from producers about what they’re going to do. Financial ratios are about looking in the rearview mirror. But I know that operators are driving looking out the window ahead.”

The post A guide to farm financial ratios appeared first on Country Guide.

Farm groups and lawmakers are concerned that land buys by investors and foreign countries are driving up farmland prices and threatening national security.

Booker’s Farmland for Farmers Act, introduced on Thursday, would ban most corporations, pension funds and investment funds from buying or leasing farmland.

“We must protect farmland from becoming an investment strategy for huge corporations,” Booker said in a statement.

Institutional investors – including Nuveen Natural Capital, a subsidiary of TIAA, and UBS Farmland Investors – own $15.9 billion of farmland, according to the National Council of Real Estate Investment Fiduciaries’ Farmland Index.

Several U.S. senators, including Iowa Republican Joni Ernst and Montana Democrat Jon Tester, have introduced bills in recent months to limit foreign ownership of farmland, citing concerns that adversaries might buy U.S. land to gain influence.

The Senate on Tuesday passed an amendment to the National Defense Authorization Act that would boost federal review of foreign farmland purchases and limit some by China, Russia, Iran and North Korea.

China holds less than 1% of U.S. foreign-owned farmland, according to the Department of Agriculture (USDA). Canada holds 31%.

Jordan Treakle, national program coordinator for the National Family Farm Coalition, said corporate ownership is the more pressing concern for rural communities because of its impact on land prices.

“Most farmers cannot outbid a multinational corporation,” he said.

The average price of an acre of farmland was $3,800 in 2022, a record high and up 75% from 2008, according to USDA data.

Booker hopes to pin his bill to this year’s farm bill, an omnibus package passed every five years that funds farm and nutrition programs, said a staffer.

–Reporting for Reuters by Leah Douglas in Washington.

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Aimee Ferre Stang, her husband and her in-laws farm a combined 8,800 acres of rented and owned land in Saskatchewan.

“Between our two farming operations, we rent about 65 per cent of our total acres,” says Stang.

Their long-term goal is a 50-50 split of owned and rented land, but she recognizes the challenge in accomplishing that.

“With farmland offering an interesting return on investment, many families are holding on to their land,” says Stang.

Brady Deaton, a University of Guelph professor in the department of food, ag and resource economics, adds that non-farmer landlords are also holding onto land and renting it out, as it offers them a way of diversifying their portfolios.

Like any farmer, Humphrey Banack of central Alberta would like to own more land. Three families — his own, his son’s and his brother’s — farm about 8,000 acres, renting about 6,000 acres of that. He says the high cost of land limits just how much he can buy at any one time.

“It’s a challenge to keep up with land escalation,” agrees Banack. It’s a sentiment that farmers all across Canada understand.

Why rent?

By renting land, a farm can generate the income necessary to purchase acres.

Deaton notes farmers are effectively scaling up their operations by renting land.
“They don’t have to have all of their assets in owned land,” says Deaton. “Say you’re growing corn and soybeans and working in the thousands of acres, you don’t have to own all of those acres to get to the scale that you want.”

That’s what’s motivating larger farmers, and it’s not really new.

“Farmers, historically, have found it useful — as they’ve tried to expand production to get to scale — to rent land, which allows them to not have all of their assets in land, and allows them flexibility,” Deaton says. “It allows them flexibility in their holdings that allow them to get to scale, which is important.”

What’s it worth?

Stang notes her farming family won’t commit to rental rates that are above their expected revenues for a particular piece of land.

Farmers are typically tight-lipped when it comes to what they pay to rent land, but Banack allows that his rule of thumb to where prices should be is about three per cent of the land’s value. So, for example, land worth $4,000 an acre should pencil out to a rental rate of about $120 an acre.

The challenge, he says, is that some land is less productive, but landlords aren’t so willing to accept that. They’re apt to make the argument their land is just as good — and therefore valuable — as the other farmer’s across the road.

The dotted line

According to Deaton, handshake agreements are still common in Ontario. Formal legal contracts aren’t typical.

Stang’s family, however, prefers written agreements to ensure everything is clear for both parties.

Banack’s rental agreements are also written down, but with caveats: even if he has a five-year deal, he notes they include a clause that a landlord can take back their acres, providing they give notification before an agreed upon date.

“None of it is locked legally to long terms.”

And changes do occur, Banack says, explaining having received notice that a 400- to 500-acre piece of land he’d been farming was being put up for sale.

It wasn’t unexpected in this case, but sometimes it comes out of the blue.

“There’s always the risk that next year, two-thirds of our landlords could pull the pin on us,” Banack says. That would leave him over-equipped, unless he was able to source more land. Yet if those acres had to be purchased, that would burden him with payments he hadn’t been banking on making.

“You have to understand the risk you’re taking renting land, and what the risks are, and have some plan to mitigate it if it comes around,” Banack says.

When rental land he farms comes up for sale, Banack says he’ll look at purchasing it if it’s an adjoining acreage. In the past, he’s purchased some long-term rentals.

Obviously, he prefers a situation where a landlord gives him a heads-up about an impending sale. At that point, Banack will suggest an independent appraisal of the land, and he’ll try to come to an agreement before the land goes to market.

Maintaining relationships

Beyond paying the rent on time, cultivating and maintaining a good relationship with landlords is key to ensuring ongoing rentals.

“We respect our rented land as if it were our own,” says Stang. “We treat our landlords’ neighbours as if they were our own; in many cases they are.”

She and her family also recognize the emotional attachment their landlords have with their property.

“In many cases, this land has been in their family for some time,” says Stang. “Last Christmas, we sent our landlords photos of harvest on their land, so they were connected to harvest in a small way.”

Banack also emphasizes the importance of relationship building. He believes in presenting a sound image of his operation, which includes supporting the community and going as far as mowing the ditches of the land he rents.

Agronomic practices

Stang adds her family also commits to proper agronomic practices on the acres they rent, including planting crop rotations for the long-term viability of the land.

In Ontario, too, Deaton has found that no till is just as prevalent on land farmers own as on what they rent. That’s largely a product of them using the same equipment on both.

But it goes beyond that too, Deaton says. “When farmers have longer expectations about renting land, then you’ll see them just as likely to plant cover crops as they would on their own land.”

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Talk is starting to make the circuit that it’s time for automation to take over farmland wheeling and dealing, and it might not be that much of a stretch.

As long ago as 2013, which is ancient history for electronic technology, a University of Oxford study predicted an 86 per cent chance of automation replacing traditional real estate sales agents, and a 97 per cent likelihood of supplanting real estate brokers.

Artificial intelligence (AI) is becoming increasingly capable and it’s getting more widespread as it’s applied to numerous sectors and industries.

Included is real estate, according to auditing and consulting firm PricewaterhouseCoopers (PwC). “The real estate industry will not be spared,” PwC writes. “Software algorithms will increasingly adapt and evolve to more complex areas.”

AI utilization will improve the efficiency of operational tasks, and it will also revolutionize the way buyers and sellers make land decisions, PwC says.

Julia Arlt, global digital real estate leader at PwC, doesn’t believe AI will cost the jobs of real estate agents and brokers, but she does think it will change the way they do business.

It’s good news for both buyers and sellers, she says, as it’ll provide more services tailored to their needs at a lower price.

Farm Credit Canada’s senior director valuations, Hugues Laverdure, agrees. “I don’t think it can replace the broker and real estate agent, but I think artificial intelligence is here to stay.”

Laverdure explains that AI will provide real estate agents and brokers another layer of technology to help them more precisely target the types of property their clients desire.

“We can dig really deep in details with the technology available right now.”

Farmland shopping

Today, Laverdure is seeing this more often in the residential sector, but says that if and when AI is applied to farmland, buyers can seek out additional data about potential properties, like soil types, topography, crop production and yield history, water access and availability, and existence of tile drainage.

Information like that would allow a broker or agent to better target property and client.

Farmland real estate broker Tim Hammond of Hammond Realty in Biggar, Sask., loves data and thinks a tool like AI would be amazing. But he stresses that just because the data is available doesn’t guarantee buyers will accept the information and the implied advice on offers.

“You would be surprised at how many producers who currently have access to all of this information will still make an emotional decision. It is human nature,” Hammond says.

Hammond does, however, believe AI could help predict current and future price and market trends. “It will provide people with more confidence in price,” Hammond says. “We will see less variation in the range of values. This is good. People want stability and predictability.”

Those non-locals

AI could also provide more exposure globally, and in provinces that have fewer restrictions on foreign investment in farmland, it could potentially generate more purchases.

“However, it does not matter how well a property can be researched and promoted online if the law prohibits foreign purchases,” says Hammond. “We spend too much time already telling foreigners they do not qualify under current legislation to purchase farmland in Saskatchewan.”

For years, farmland sales typically took place between neighbours. But in cases where nearby farmers aren’t interested in their neighbour’s property, AI could speed up how quickly a non-local farmer is sourced, Hammond says.

Laverdure indicates farmers are already becoming less location specific. “Right now, the buyers are looking way farther than that, they’re looking 10, 15, 20 kilometres,” he says. “They’re looking for the best piece of land that will match their needs, and they’re not afraid to go outside of their close radius.”

Farm data sharing lagging

Farm real estate is data-intense, and although the industry has improved at capturing that data, sharing it hasn’t become commonplace yet, Hammond says.

“Residential data is vastly more public and accessible, and, as a result, AI advances have been much more prominent in that industry,” he says.

Hammond believes the speed of AI advances in the farm real estate sector will be determined by how soon the data is shared. For now, owners of the individual data components in Canada seem protective, he says.

“There isn’t a lot of sharing going on yet. I believe that will change in time. The data is more public in the U.S., and I believe we will head that way,” Hammond says.

Human element

Even if AI advances in farm real estate catch up to the residential industry — or surpass it — there is likely to always be an important role for agents and brokers of farmland, says Jared Carlberg, professor of agribusiness and agricultural economics at the University of Manitoba.

He explains the value of a typical transaction is quite considerable, and he expects most buyers and sellers would want to ensure they receive good advice and service when participating in the market.

“The most serious buyers for farmland are, in my opinion, still more likely to use agents/brokers to locate parcels for sale, and certainly the most serious sellers will use agents/brokers,” says Carlberg.

Laverdure also thinks human intervention will always be required during the process. For one, there’s a level of interpretation of data and a story behind every property that only a person can deliver, he says.

AI will help select the property and help in the processing of administration duties, which will free up time for the broker and agent to focus on the needs of the client, Laverdure says.

Hammond agrees. “By helping quickly analyze the massive amount of search data that exists, technology will enable us as farmland agents to concentrate on the aspects of our profession we find most rewarding: the relational, intuitive, solution-providing and creative roles in real estate that are far beyond the capabilities of any computer,” he says. “It is enhancing our relationships and being able to bring even more value to the process.”

Hammond believes people will continue to want to work with human agents or brokers to facilitate their transactions, noting AI can help discover price and value and confidence in it, but those aren’t the only component of a transaction.

“It does not matter how sophisticated AI evolves, technology is not likely to master the very key characteristics producers seek in farmland agents, such as showing empathy, building relationships, the art of the negotiation, and storytelling,” says Hammond. “Our service is more about people than it is about farmland. I think any business tied to agriculture is.”

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Townsend is the chief market analyst for FarmLink Marketing Solutions, while Newton is the chief economist and head of marketing research for Nutrien. They discussed consolidation on Thursday during the Big Picture Outlook at the Grain World conference in Saskatoon.

“The reason why yields have grown and people focus on yields, it’s what you can control, depending on the weather,” Newton said.

“Get big or go home is definitely an attitude in a lot of industries. I think farmers are investing lots of money and prices haven’t co-operated,” Townsend said.

He cited one news report from Des Moines stating “44 per cent of Iowa farmers have significant debt concerns.”

Newton attributed that situation, which has burdened farmers across the U.S., to increasing land prices that have driven up debt levels.

Also, both speakers believe the U.S.-China trade war forced lower commodity prices on U.S. farmers. Another factor has been U.S. corn exports, which have dropped because major importers have turned to other sources, according to Townsend.

Townsend took note of improved yields in Ukraine and Russia. He said Ukraine’s corn yields are increasing four to five per cent per year and Russia’s wheat yield has climbed to 80 per cent of Canada’s.

Part of that, he said, was due to previous drought in the Black Sea region that resulted in the loss of numerous small to medium farms, which were consolidated into larger operations.

Also, Newton gave credit to the higher yields in both countries to efficient use of fertilizers, especially nitrogen.

China as well has seen a huge turnaround, Townsend commented. The country used to import 10 million to 25 million tonnes of wheat annually to feed its burgeoning population. Today, China still imports three million to six million tonnes, but to blend with other wheat to provide a taste that is otherwise absent in food production.

As for India, Newton said about 80 per cent of the farms there are less than five acres, with most passed down from generation to generation. That, together with farming and prices being highly regulated in India, consolidation will be a very long time coming.

“There’s reduced economic incentive to increase productivity,” Newton said of India, but stressed that consolidation in other countries has proven to be inevitable.

— Glen Hallick reports for MarketsFarm, a Glacier FarmMedia division specializing in grain and commodity market analysis and reporting.

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That’s according to the annual Farmland Values Report from Farm Credit Canada (FCC), in which the federal ag lending agency on Monday pegged the national average rate of increase for 2018 at 6.6 per cent, down from 8.4 per cent in 2017 and 7.9 per cent in 2016.

J.P. Gervais, FCC’s chief agricultural economist, described the activity in farmland purchases as farmers making more “strategic” investments.

Buying lower-valued land, he said, “can pay off if the operation is able to extract more from that land and improve its overall efficiency.”

Quebec saw the highest average increase in 2018 at 8.3 per cent, with Saskatchewan and Alberta both at 7.4 per cent and British Columbia at 6.7 per cent, FCC said.

Prince Edward Island booked an average increase of 4.2 per cent, Manitoba 3.7 per cent, Ontario 3.6 per cent and New Brunswick 1.8 per cent, FCC said. Nova Scotia saw average farmland values drop 4.9 per cent and Newfoundland and Labrador didn’t show enough publicly-reported land transactions to “fully assess” values.

Of the 51 regions on which the FCC study reported, eight saw an average annual farmland value increase of more than 10 per cent, while eight showed “little or no” annual change and four regions in Nova Scotia and New Brunswick recorded declines.

Fewer land transactions in 2018 track with a tight supply of land available for sale and a softening in demand, Gervais said, reflecting a “levelling off” in farm income, along with “variable” commodity prices and climbing interest rates.

Such factors usually weaken the demand for land “more than what we saw last year,” FCC said, and the relative strength in demand “may have been prompted by the need for efficiency gains made possible by adding acres, especially of less expensive farmland.”

Given the continuing climb in values, FCC said, “now is a good time for producers to review and adjust their business plans to reflect possible pressures on farm income and higher borrowing costs, assess their overall financial position and focus on increasing productivity.” — Glacier FarmMedia Network

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Land prices here in Manitoba, which have been rising steadily since 1992, on average gained 12 per cent in both 2015 and 2014. But after four years of annual double-digit percentage increases Manitoba farmland appreciated 8.1 per cent last year, just slightly higher than the Canadian average increase of 7.9 per cent, Farm Credit Canada (FCC) says in its 2016 Farmland Values Report.

“The rate of increase continues to slow down and we continue to think about that soft landing that we have been talking about for a number of years now,” FCC’s chief agricultural economist J.P. Gervais told reporters during a technical briefing April 6.

Farm cash receipts, the main factor driving farmland prices, have fallen from peaks set in 2012 and 2013, which corresponded with 19.5 and 14.3 per cent increases in the value of Canadian farmland and a jaw-dropping 25.6 per cent increases both years in Manitoba.

Although the final numbers aren’t in, FCC expects 2016 Canadian crop receipts to be up two per cent; Manitoba’s and Alberta’s are forecast to rise 14 and six per cent, respectively, despite challenging growing conditions.

Saskatchewan’s 2016 crop receipts are predicted to drop six per cent as bad weather downgraded crops and prevented farmers from harvesting some crop last fall.

Despite the less sanguine outlook for Saskatchewan, FCC has been doing a brisk business lending money for farmland purchases so far this year, said Scott Sahulka, FCC’s senior director of valuation and environmental risk. While he couldn’t say if Saskatchewan land values will rise as much in 2017, so far “things aren’t selling any cheaper.”

A year ago FCC predicted Canadian farmland values would rise two to four per cent in 2016. Gervais said while he was surprised they turned out to be twice that, it fits with the higher-than-forecast crop receipts farmers are expected to earn.

FCC predicts Canadian farmland values will, on average, rise three to four per cent in 2017, assuming stable crop receipts and interest rates and a 75-cent Canadian dollar.

FCC monitors farmland in 51 regions estimating market value using comparable, arm’s length sales. Because land prices vary significantly, FCC measures land value trends using a percentage instead price per acre.

In 2016 just seven regions didn’t see land values rise, Gervais said.

While FCC pegs the average increase in Manitoba farmland values at 8.1 per cent in 2016, it breaks down the province into five regions. The biggest increase — 11 per cent — was in Central Plains-Pembina Valley, despite weather challenges.

Manitoba’s farmland value increase was the fifth highest in Canada. The biggest jump — 13.4 per cent — was in Prince Edward Island, followed by Alberta, Nova Scotia and British Columbia with increases of 9.5, 9.1 and 8.2 per cent, respectively.

That was followed by Quebec, Saskatchewan, Ontario and New Brunswick at 7.7, 7.5, 4.4. and 1.9 per cent, respectively.

There wasn’t enough data to assess Newfoundland-Labrador land values.

Despite the slower increase in Canadian farmland values, Gervais is still upbeat about Canadian agriculture.

“I believe the demand for Canadian ag products remains really strong both at home and abroad.” he said. “That is supported by a low Canadian dollar, low interest rates as well. From a producer’s standpoint you don’t want to be overly confident about what the markets are going to bring.

“The bottom line is we also have realistic expectations… We’ve basically doubled cash receipts mostly across the country… but I think it would be a little bit unrealistic to expect the next 10 (years) are going to be like the last 10.”

That said, Gervais is “absolutely confident that we can sustain farmland values that we have seen and recorded in 2016 if indeed we are able to sustain farm income. That is the critical variable to monitor as we move forward.”

In contrast, farmland values in the U.S. have been falling. Gervais blames a 30 per cent drop in U.S. farm income in three years. And based on current price projections American farmers won’t be profitable in 2017, he said. Canada’s lower dollar has helped shield Canadian farmers, he said.

Although western Canadian farm income has been weakening, farmers are still generally financial strong, Gervais said. The debt-to-asset ratio is lower than the long-term average, which means farmers will have more flexibility with lenders should revenues fall more than expected.

“So I think we are still in a very strong financial position, liquidity position, if you look at working capital as the first line of defence, is very strong on the prairies given the amazing years we have had over the last five, six, seven years. I think that is reassuring from the standpoint if we do indeed see the Canadian dollar appreciate…  or a bit of a softening from an income standpoint given our strong financial position.”

FCC doesn’t expect a higher Canadian dollar or rise in interest rates in 2017, although borrowing costs could increase later this year, Gervais said.

ACROSS CANADA

Provincial farmland values, on average, were all up in 2016, except in Newfoundland-Labrador where there was insufficient data.

Prince Edward Island (P.E.I.) saw the largest jump at 13.4 per cent.

“The main reason for the increases was farming enterprises wanting to gain additional acres to supplement crop rotation cycles and for additional feed production,” Farm Credit Canada says in its 2016 Farmland Values Report.

“The large amount of land sold, as well as the prices these sales generated, placed continued pressure on farmland values. Increases were even seen in marginal or outlying areas, as well as parcels that were difficult to work or had an inferior soil type.”

FCC says some farmers from other provinces sold their operations to buy entire farm operations in P.E.I. to take advantage of less expensive land prices.

“This may be an indication that P.E.I. land prices were still relatively low compared to other Atlantic provinces, prior to the sharp 2016 increase.”

Although P.E.I. saw the biggest jump in land values provincially, the biggest regional jump was 17.7 per cent in B.C.’s south coast region, which includes the Fraser Valley.

The region saw an above average number of farmland sales in the first half of the year, the FCC report says.

“The 17.7 per cent increase was due to continued expansion by local producers, as well as some demand driven by increased interest in rural property. Moderate commodity yields and prices later in the season tempered the farmland market.”

Alberta saw the second highest increase in farmland values in 2016, driven mainly by sales in the northern region, which saw values increase by 11.8 per cent, the report says.

“Land sales took place mostly through auction sales or sealed bids, as grain producers continued to compete for less productive land,” the report says.

Land values in Alberta’s southern region jumped nine per cent.

“Larger farms continued to expand, creating strong demand for all types of land in all areas of the southern region,” the report says. “Irrigation in the southern region also provided contract opportunities for specialty crops and investment by non-typical buyers, who commonly lease back to area growers.”

The Peace region saw the province’s smallest average increase at 7.7 per cent.

“Some adverse weather, as well as depressed oil and gas prices, placed downward pressure on farmland values, while large farm expansion and competition between beef and grains sectors in some areas helped boost the value of marginal cultivated forage or pasture acres,” the report says.

While on average Saskatchewan farmland values rose 7.5 per cent, the southwest region saw land appreciate by 16.6 per cent, in the wake of steady demand.

“Although there were challenges with the lentil harvest, the resulting yields and quality ended up being better than expected,” the report says.

The northwest region continued to see strong demand and increased prices throughout the year, resulting in a 10.3 per cent increase in farmland values, the report says. “Areas with larger farm operations continued to compete for land that came up for sale, causing land values to increase.”

Land prices in the east-central and southeast regions didn’t change in 2016, the report says.

— Allan Dawson is a reporter for the Manitoba Co-operator at Miami, Man. Follow him on Twitter at @allanreporter.

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It was enough to make those sporadic reports of feedlots shutting down, U.S. crop farms going bankrupt, and Midwest farmland prices dropping seem all the more foreboding.

Compared to 2013, Chapter 12 bankruptcy filings across the top grain-producing states in the U.S. climbed 50 per cent in the 12-month period ending on June 30. In Iowa, the biggest corn producer of all, they jumped a massive 125 per cent. (These Chapter 12 bankruptcies involve farms with less than $4.03 million in debt.)

Then in August, the 2016 Purdue Farmland Value Survey revealed that Indiana farmland values had plunged another 8.2 to 8.7 per cent after having fallen five per cent in 2015.

Declines this big have not been seen since the mid-’80s, the university said. And now, farm surveys were also reporting similar drops across the Midwest in cash rents.

These ugly reports contrast wildly with the bullish news from Canada, where last year’s average net farm income set another record, and where land prices are still strong, and cash rent is still in the stratosphere, topping $300 an acre in eastern grain regions.

How can that be?

FCC economist J.P. Gervais is cautious. He says his team is monitoring land values very carefully, and he plows his way through a list of recent internal FCC reports, with land values in B.C. and Ontario stable and in Saskatchewan and Manitoba slightly up.

“Land values are generally fairly stable and up in some parts of the country,” Gervais repeats.

But why the disparity in land prices compared to south of the border?

Among other factors, Gervais says, the most significant is the drop in the loonie, which pushed our 2015 farm receipts to record levels and gave farmers here more ability and appetite to buy.

That drop in the Canadian dollar basically cushioned the fall from the bull market that has dominated grain farming for the last seven years.

Farmers south of the border didn’t have that cushion, and they fell hard, Gervais says.

It also helps, he adds, that we have a different lending structure, and that farms are generally a smaller scale here so they didn’t expand in the same size chunks as some of the U.S. mega farms.

However, this year the change in the dollar had already been assimilated into the market.

“Actually, we are in the beginning of a softening in the ag commodity cycle,” says Gervais. “Definitely, in the overall agriculture economy, we are seeing tighter margins.”

Gervais conservatively forecasts a potential five per cent decrease in farm receipts in 2016. Since land prices tend to follow trends in net farm income, appreciation will likely slow down with the expectation of lower crop prices over the next two to three years.

In Ontario, land prices this year were still well above the 20-year average, ranging from $5,000 to up to $25,000 per acre, says Ryan Parker, partner with the London, Ont.-based appraisal company Valco.

The value of farms in Ontario has stalled. But it definitely has not gone down.

Although the volume of trades shrank slightly from last year, there’s still a good number of trades going on, says Parker.

“Farmers are not being reactive to their change in incomes,” Parker says.

But there have been significant, trend-inspiring changes to the fundamentals. The disparity between good and bad land is becoming more normalized, with untiled and poor land getting discounted more heavily than during the market peak.

“There’s smarter buying now,” says Parker.

In southwestern Ontario (which has a reputation as a bellwether for the direction of national land markets), land prices have flatlined or in some cases are slightly higher. Parker says this demand is being driven by the intensive livestock operations in the area, including supply managed livestock, beef, and hog farms.

Livestock farms are also building and renovating barns at a record rate this year. “2016-17 is the year of construction,” says Parker.

Broiler barns are being built to accommodate continued allocation of additional quota, sow barns are being expanded, renovated or built from the ground up to accommodate sow loose housing, while beef farmers are reinvesting after a few years of good prices and dairy farmers are renovating or building to improve and prepare for potentially tighter margins in the future.

These livestock farmers say if they’re going to continue in business, they need to make improvements when their balance sheets are strong and interest rates are low, says Parker. “Between BSE and the sow buyout program, we are left with some very strong livestock farmers. They have good balance sheets now and along with the dairy and broiler business, they make it competitive for land.”

In Ontario, rental rates are tough to track as most are handshake deals and there’s no register or survey. When Parker does farm assessments, he asks what rents are in the area to get a general idea of rental trends. His anecdotal summary is that this year rents have not moved. “Cash rents here are just as inelastic as land values,” he says.

Parker chalks up both these buying and renting inelasticities to farmers who “cost-average” their land and other fixed assets, and who rely on land values continuing to increase, or at least not decrease.

Most farms have a part of their rented acres in long-term agreements. Often those agreements are at a lower rental rate because they have unwritten trade-offs for looking after the property, or they include provisions about managed inputs or farming practices, or things like cleaning out the driveway. Then, for the rest of their rented acres, some farmers are motivated to pay more, in some areas over that $300 per acre, says Parker.

Although most rental agreements are still cash deals, Parker is seeing a little more creativity so there’s some sharing of risk and reward. The number of farmers sharecropping, he thinks, hasn’t really changed.

Land “management”

Bruce Simpson, a founder and senior partner at Serecon, a large land appraisal and management company in Alberta, says flexible lease agreements are becoming more common there. However, cash rentals still dominate.

“Although some succession planners promote production-sharing joint ventures for tax advantages, most are still straight up cash rents for simplicity and less in-depth lease management requirements,” Simpson says. “Rental rates have not decreased this year as there has not been any softening in farmland values and commodity prices have remained decent throughout the year.”

Local competition, land values, soil types and increased productivity because of new technologies and crops are helping to sustain higher land rental rates.

Across the Prairies, the percentage of land that gets rented has increased significantly over the last 15 years. By 2011 about 45 per cent of farmland in Alberta was rented. This was an increase from 2001 of about four per cent, or more than two million acres. Similarly, the increase in Saskatchewan was about two per cent, the same as in Manitoba, where about 40 per cent of farmland is now rented.

About 25 years ago, Simpson and partner Don Hoover established Serecon as an agricultural appraisal and consulting practice in Edmonton, opening an office in Calgary in the early 2000s. Today, about half of their services are valuations, with 40 per cent in management consulting.

About 10 per cent of their portfolio is farm asset management, although this area is growing. Today, the joint venture company, FNC-Serecon Inc., “manages” land in Alberta and Saskatchewan, and the company plans to extend into Manitoba and Ontario in the future. In their first growing season they managed slightly less than 10,000 acres in Western Canada. However, with the large base their joint venture partners have south of the border, they feel they can take on the larger acreages when they become available.

In the U.S. companies manage millions of acres for absentee landowners, and demand for this service is spreading north. The trend to more non-farmer land ownership has spurred farm asset management services, like Serecon FNC. (In 2015 Edmonton-based appraisal business, Serecon, formed a joint venture with Farmers National Company [FNC], headquartered in Omaha, Nebraska, to give them additional experience and support tools and systems to work with in this field. FNC manages more than two million acres for about 5,000 landowners across the U.S. Numerous companies south of the border offer similar services (www.asfmra.org/farm-management/) but very few in Canada.)

In the Canadian west, Simpson says most rental arrangements have always been done between neighbours across the kitchen table. Yet management of farm assets for absentee owners is increasing through the Prairies because more land is being transferred, more land is being inherited by non-farming children, and more people are retaining the ownership of their land and having it as part of their investment/retirement income.

Besides, land values continue to increase, so there’s little incentive to divest.

“Our main customers are absentee landowners — sons and daughters who have inherited land but live remotely from the property and want to maintain the land as an investment,” says Simpson.

Part of the service Serecon provides is to match landowners to tenants and write lease agreements. Finding tenants is not an easy task, says Simpson. It boils down to three key factors — agronomic knowledge and land stewardship, financial competence, and technical skills. “We approach it by first talking to the previous owner or the vendor, neighbours and contacts we have across the Prairies.”

The appraisal part of Simpson’s business, he says, has become more complex with the level of technology involved with production agriculture. “The adverse effects, different easements, ever-changing market values, the lack of good solid information are all contributing to farming becoming a much more complex business,” Simpson says.

This fall Simpson said the price of land in central Alberta was at unprecedented levels, from $1,500 per acre to $7,500 per acre for dryland in the agricultural producing areas. By comparison, in 1991 these farms sold at $300 to $1,000 per acre.

And the demand does not seem to be abating, even though the Alberta economy is under duress.

This is due to some strong financial years on farms, but also to non-farm purchasers for acreage living, hobby farming and outside investors.

“The demand in 2016 is strong across the province for all forms of agricultural lands,” says Simpson, who expects land values to continue increasing, but at a slower rate.

A large part of Serecon’s appraisal business has been driven by the oil, hydro and gas industries. They use software called an Obstruction Mapper program which measures exactly how many acres are missed or how many multiple passes with equipment and inputs (seed, fertilizer, spray) are required when there’s an obstruction, like a hydro line or a oil pump, in a field. Then the software calculates how it’ll impact costs and revenue for the farm.

“This tool has many applications, from impact studies, to identifying the best field pattern to minimize impacts, to calculating the acres in fields and acres impacted by spray drift or animal intrusion onto crops,” says Simpson.

Go-go farmers

In the Midwest, they’re called “go-go farmers,” a group of farmers who borrowed heavily to expand their farms soon after grain markets began to boom in 2007, and then borrowed more to plant their way out of the following commodity price slump.

These are farms that tended to be driven by a younger generation that had not had previous exposure to the bottom of a commodity cycle, and many of them based their buying decisions on super-strong financial statements from 2008 to 2012.

However, when grain prices fell and cash flow tightened, they borrowed to rent land and also to buy equipment, seeds and pesticides, which meant that they were even more exposed to crop prices as they continued to fall.

According to the latest USDA data, the proportion of extremely leveraged grain and other row crop farmers in the U.S. (those with debts totaling more than 71 per cent of assets) doubled, to 2.4 per cent, between 2012 and 2015.

As well, delinquency rates on farmland and production loans are rising sharply.

Michael Langemier, Timothy Baker and Michael Boehje, agricultural economics professors at Purdue University, Indiana, further examined the worrying trends in farmland prices and cash rents, using data from surveys by Iowa State University (Ag Decision Maker), the Illinois Society of Professional Farm Managers and Rural Appraisers, and Purdue (Dobbins and Cook).

They compared declines in cash rents and farmland prices to what happened in the grain price bear market of the 1980s, which lasted six years after the initial crash.

Over the first year of the six-year decline back then, average cash rents in the three states increased two per cent, and average farmland prices declined 5.3 per cent.

This time, however, from 2014 to 2015, average cash rents and farmland prices for the three states both declined, falling 2.1 per cent and 2.2 per cent, respectively.

In the 1980s, earnings per acre were relatively low for five straight years (1982 to 1987) and similarly, earnings per acre have been relatively low in 2014, 2015, and 2016. Continued weak earnings currently appear likely, and will put further downward pressure on cash rents and farmland prices, say the reseachers.

One major difference between the two periods is interest rates, so there’s much more cash flow now. Also, they note that inflation is much lower, and they say the percentage declines in cash rents and farmland prices in Iowa, Illinois, and Indiana are not expected to be as large as those experienced in the 1980s, unless earnings per acre collapse even more, or inflation and interest rates increase dramatically.

When they analyzed farmland price per acre divided by cash rent per acre and then cyclically adjusted this P/rent ratio for interest and inflation, they found it continued to be substantially higher than historical values in the 1980s. This means that to maintain current high farmland values, cash rents would have to remain very high, or even move higher, while inflation and interest rates would have to remain very low.

However, rental rates have tracked land values at about three per cent of land values in the last three years. The survey in 2015 was the first since 1999 to report a statewide decline in cash rents across all land qualities. Statewide cash rents in 2015 declined 1.3 per cent to 2.4 per cent. Again this year, the survey found another statewide decline in cash rents. Cash rent dropped about 10 per cent in the last year, with average land renting for $204/acre.

More than half of the respondents expected cash rent to be lower in 2017, decreasing from one per cent to 35 per cent.

To read the full Purdue Agricultural Economics Report articles as a pdf, click here.

Property assessments multiply

It was a beautiful busy summer day when I received this year’s MPAC farm value assessment from Ontario’s Municipal Property Assessment Corporation. But when I opened the nondescript envelope on my way back from the mailbox, the birds seemed to stop singing.

I shook my head and closed my eyes, tight. Could this be right? My new MPAC assessment said my farm had more than doubled in value since buying it 10 years ago. This would likely mean a massive property tax hike.

Farmland assessments in Ontario and Manitoba took a huge jump this year. And usually when assessments go up, so do taxes.

The new MPAC assessments in Ontario are actually more accurate, closer to market value now, says Ryan Parker, partner in Valco, a company that focusses on real estate appraisals in southwestern Ontario. “Generally, they were undervalued before, and in 2012 the new assessments weren’t aggressive,” he says.

MPAC does the assessment for the province and individual municipalities set the net tax rate. So potential increases in property taxes will still have to be set by individual municipalities.

“The tax rate is a separate issue,” adds Parker.

So here’s to hoping for reasonable councils that keep a limit on tax rates, because now that the MPAC assessment is actually fairly accurate, assessment appeals are not likely to win except for the odd case with a standout situation.

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Knight Frank’s Farmland Index fell to 19,538 pounds (C$35,881) per hectare, the second consecutive quarter in which it has shown a decline.

“Agricultural commodity prices remain low with little prospect for a strong rebound in the short term, while the potential implications of a U.K. exit from the EU are adding further uncertainty,” Knight Frank said in a research note.

Farmers are currently heavily dependent on support payments they receive from Brussels. The three billion pounds (C$5.51 billion) a year they receive from the EU makes up about 55 per cent of total income from farming, according to government figures.

— Reporting for Reuters by Nigel Hunt.

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Predicting the evolution of Canadian agriculture is never easy, mainly because the evolution of agriculture is driven by the accumulation of countless decisions by countless farmers in an industry so vast, so complex and so varied, it’s impossible to take every critical factor into account.

But here’s a start, in the form of six numbers that reflect some of the important national trends in the last few years. Take them in, roll them around, and ask yourself: Where are these trends driving us?

In 2009, total Canadian net farm income was $2.8 billion. Four years later, it was $10 billion more, with Statistics Canada’s saying a $5.6-billion rise in the total value of farm-owned inventories from the year before accounted for almost all of the increase in total net income in 2013.

That inventory increase came from a record production of several field crops in Western Canada, coupled with greater on-farm storage capacity and a railway system that simply couldn’t keep up.

According to 2015 Canadian Agricultural Outlook produced by Agriculture and Agri-Food Canada, aggregate net cash income for 2014 is expected to reach $14 billion, 10 per cent above the 2013 record.

Farm-level average net operating income is forecast to be $78,139, also an all-time high. Although grain and oilseed prices fell, strength in livestock prices and margins has buoyed average farm income.

Alberta fed cattle prices reached $202 on May 1, points out Jerry Klassen, a commodity market analyst in Winnipeg who maintains an interest in the family feedlot in southern Alberta. That is up 40 per cent over last year, while feeder cattle prices are up 40 to 50 per cent on average over the past year.

Lower energy values have resulted in larger disposable income for the average consumer, Klassen explains. Lower crude oil prices have also contributed to a weaker Canadian dollar, enhancing the competitive edge for Canadian cattle producers.

Finally, the North American economy is firing on all cylinders, causing a rise in wages, lower unemployment levels, greater disposable income and pre-recession-type consumer confidence levels that are causing a demand shift toward beef products.

Now the fourth largest crop in Canada, soybeans are projected to keep growing. In 2014 Canadian farmers planted a record 5.5 million acres, up nearly two million from 2011. Notably, soybean acres in Western Canada have ballooned, with over one million acres in Manitoba alone. Better short-day bean varieties with herbicide tolerance have been the catalyst for the expanded acres, and this trend is expected to continue, thanks to more new varieties bred for Western Canada.

In response, a new national organization was formed last September replacing the Canadian Soybean Council and the Canadian Soybean Exporters Association. Members and directors of the board include representatives from each of the major soybean grower associations across Canada plus industry representing crushers, exporters and seed companies.

“Soy Canada will speak with a single voice for the industry and, working collectively, will develop and implement a strategic plan to grow the industry and maximize returns to all components of the value chain,” says newly hired executive director, Jim Everson.

According to Farm Credit Canada’s (FCC) farmland report, the average value of Canadian farmland increased 14.3 per cent in 2014, following increases of 22.1 per cent in 2013 and 19.5 per cent in 2012. Average land values have increased every year since 1993.

FCC’s chief agricultural economist, J.P. Gervais, has been predicting a soft landing for farmland values since crop prices began moving closer to the long-term average, following abnormally high prices due to the 2008 U.S. drought.

Gervais doesn’t anticipate a collapse of farmland values, but he does see slower increases in the coming years. The most likely drivers of increased values are crop receipts and interest rates.

The highest increase last year was in Saskatchewan at 18.7 per cent but this is slower than in 2013, when average value jumped a colossal 28.5 per cent following a 19.7 per cent jump in 2012.

However, farmland in Canada is not appreciating everywhere, with increases in the Maritimes being much slower.

Overall, average net worth per farm is expected to set new records of $2.0 million in 2014 and $2.1 million in 2015.

In agriculture, strong crop receipts have kept the debt-to-net-income ratio relatively flat for the decade. “It’s important to remember that even as farm debt is rising, land values continue to increase on average across Canada,” says Gervais. “Interest rates remain low, and asset value and farm size continue to grow.”

According to the Association of Equipment Manufacturers (AEM), year-to-date sales of self-propelled combines are very soft in Canada, dropping from 4,130 in March 2014 to 2,500 a year later. This big drop of 39.5 per cent follows a combine- and tractor-buying bump in October.

AEM, citing U.S. Department of Commerce data, sees similar 2014 trends around the world for all types of ag equipment. Exports of U.S.-made farm machinery ended 2014 down 29.2 per cent compared to 2013. Exports to Canada dropped 38.4 per cent.

All world regions recorded double-digit declines except Central America. Asia, Europe and Canada had the highest rates of decline.

AEM’s director of market intelligence Benjamin Duyck says the decline has continued into 2015. “We are currently experiencing a global ag downturn,” Duyck says. “The overall downturn is a combination of various factors, mainly economic, but some of it is also driven by legislation and issues regarding the strong dollar.”

Two farmers, 2,000 miles apart, are shaping Canada’s e-farm future, with their combined 22,000 social media followers.

Andrew Campbell, a young dairy farmer from near Strathroy, Ont., has about 18,000 followers between Twitter and Instagram. “Twitter makes up the bulk of that — but I do post the pictures to Instagram as well,” he says. You can check out his website at thefreshair.ca.

Nurse and mother, Sarah Schultz is also a farm wife to Jay Schultz who grows about 6,000 acres of wheat, canola and yellow peas in south central, Alberta. She also has a blog ‘Nurse Loves Farmer‘ and is on Facebook.

Schultz says the payback for being part of agriculture on social media includes all the connections she has made with people from all over the world, plus being able to have questions answered within minutes. “As a farm wife and mom who spends the majority of my time at home, social media has been a great way to still be social and have that human connection that sometimes gets lost living in a rural area,” Schultz says.

The downside includes getting pulled into arguments, and finding out how easy it is to be misunderstood. It’s extremely hard, if not impossible, to interpret someone’s tone on social media, she warns, and it’s far too easy to have your words taken out of context.

Schultz has learned to choose her words wisely, and to be kind and respectful. “It’s guaranteed that you won’t agree with everyone on everything, but we can at least respect each other’s differences,” says Schultz. “I also go by the rule: tweet as if Grandma is watching.”

Andrew Campbell knows the impact that negative feedback can have in the social media world. Earlier in the year, he achieved some notoriety when animal rights advocates targeted him and his livestock farming, yet he also received praise for how he handled being a lightning rod for activism. “It just shows the importance of opening up our industry,” says Campbell. “We do need to address the issues and conceptions that the majority of consumers have, so we can continue farming the way we know is best for our land and livestock rather than being told how to do it.”

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