Good times increase the need for financing

Good times increase the need for financing

Highlights

  • More financing will be needed because returns have been good for many producers
  • Dramatic increase of farmland values in most of the countries pushing up net worth
  • Retiring generation likely to keep some equity for themselves
  • Even though farm profitable and transfer intergenerational, outside capital needed

There will be a great need to backfill equity on many Canadian farms in the years ahead.

At first blush this seems counterintuitive, and I’d never really thought about it until I saw a presentation on the topic by Gord Nystuen of Input Capital Corp at the Canadian Global Grains Symposium in Winnipeg.

Diversity of capital options needed

Input Capital, which bills itself as the world’s first agricultural commodity streaming company, buys canola from Prairie farmers using multi-year contracts with the majority of the cash paid up front. In essence, they provide a form of financing for producers who may be short of equity for debt financing.

Farmland values have increased dramatically in most regions of the country, pushing up the net worth of farms.

Nystuen believes a great deal of financing in various forms will increasingly be needed, not because of tough financial conditions, but because returns have been good for many producers.

Farms increasingly worth more

Farmland values have increased dramatically in most regions of the country, pushing up the net worth of farms. And in the supply managed industries, quota values have not declined. With strong balance sheets on most farms and 75 per cent net equity being the norm, why would equity be a looming concern?

For farms being sold to third parties, purchase prices are typically the highest ever. For farms that operate with a significant portion of rented ground, paying rental rates also consumes capital.

Mom and dad need equity to retire

In many cases, farms are passed from one generation to the next, but the retiring generation is unlikely to pass the entire farm to their successors without keeping some equity for themselves. After all, they need money for their retirement and it’s money they’ve earned.

Dad and Mom may want to be paid in full for their equity by the next generation or they may settle for half to make the transfer more tenable. Perhaps because they have off-farm investments they can afford to be compensated for only 25 per cent of the farm’s value.

Outside financing a neccessity

Each farm and family situation is different, but a modest farm can easily have millions of dollars in equity. Even though the farm has been profitable and even though the transfer is intergenerational, there will be a big need for outside capital.

Profit contributes to land and quota values, and it’s a much healthier situation than meagre or non-existent profitability causing stagnant or falling asset values. However, profitability doesn’t reduce the need for financing. Instead, the need increases, even for many of the cases where the farm remains in the family.

Good times in agriculture do not decrease the need for outside capital and various financing options. In fact, the opposite is true.  

From an Sept/Oct Agrisuccess article by Kevin Hursh @kevinhursh

Did you know that we host learning events across Canada on topics just like this? Find an event near you.