Ownership is at the Heart of Canadian Farming
The scale and cost of modern operations are changing Canadian farming. Land, machinery, and inputs require such large capital investment that farmers are left asking fundamental questions: How will they purchase enough acres to give their children the farming opportunity that their parents provided? How can children ever accumulate enough equity to build a farm themselves? What will it mean for future generations of family farmers and their communities if institutional investors make a landlord tenant model the new norm in Canadian agriculture?
Ownership is at the heart of the problem, specifically the eroding ability of farmers to accumulate enough capital to own the land they farm.
Farmers hope to see a pathway to ownership and are struggling to put together enough equity. Bank debt is a limited and risky option. Farmland prices are soaring, and it is difficult to see how anyone can catch up by renting.
Absent these old ways of financing a farm, it is understandable that farmers across Canada are uneasy. In the short term, farmers’ inability to own farmland translates to losing the most stable and lucrative part of farming. In the long term, the lack of family farming opportunities means fewer of the next generation will chose or be able to farm, hollowing out the people and talent that keep farming communities vibrant. These underlying factors, more than anything else, help to explain concerns about large-scale institutional investment in Saskatchewan farmland.
1. Insufficient Equity
To say farming has become more expensive is an understatement. Farmland values in many regions across Canada have skyrocketed, appreciating year on year at a rate well above the historic average.
Combined with rising machinery costs and efficiency; the need for more acres to accommodate technologic change and justify equipment purchase; as well as the need for more and increasingly expensive inputs, it is unlikely that many farmers have enough capital of their own to buy a farm. Where a parent, uncle, or cousin may have helped out in the past, today’s financial pressures make the equity gap too large to bridge, especially if a family has more than one child looking to farm.
2. Limited and Risky Bank Debt
Without the needed equity on hand, a farmer’s first step is to go to the bank for a loan. There, he or she is likely to face two related problems. The first problem is simply that it is difficult to get enough funding. Banks analyze a farm looking backwards; they do not value a farm’s potential. A farmer may see the opportunity to buy land that needs improvement and bring it to its maximum profitability, but a bank values it only on appraisal. A bank cannot share or finance a farmer’s vision.
The second problem is that debt is by nature a risky option. Greater debt means greater risk, especially for farming, where weather and market fluctuations affect a farm’s stability. A few consecutive bad weather years or low crop prices can put even a great farmer’s farm at risk with the bank. Farmers who lived through the 80s saw first-hand the danger of high debt loads.
Ironically then, not only is securing enough bank debt to build a farm difficult to do, it is a very risky option that keeps good farmers from growing.
3. It is Difficult to Catch Up By Renting
Absent sufficient funds from friends, family, or the bank, many farmers rent land in the hopes of saving enough capital to buy or expand a farm in the future. Unfortunately, renting is unlikely to ever allow a farmer to catch up.
For one thing, renting is risky. A farmer will lose money renting in a bad year, and there are no guarantees of more good years than bad in the course of a rental term.
More importantly, farmland prices are rising faster than crop income. Therefore, because tenant farmers do not participate in the farm’s appreciation, they are perpetually behind. For example, if you rented $2,000 acres over the last five years, you could not have afforded to buy any more of those acres than you could have when you started even with your crop profit.
This problem is compounded by the fact that every farmland purchase builds the equity needed to fund the next purchase and grow a scalable farm. Without providing the basis to own, renting becomes a long-term cycle of instability.
Farmers need capital that understands their business and provides them an opportunity to own.