It took awhile, but here is Post#2

A recent article by Catherine Swift, the president and CEO of the Canadian Federation of Independent Business (CFIB) got my attention yesterday when a former Aggie and good friend Kyle Maw posted it on his Facebook page.  The article, entitled “Taxes and Red Tape Stunt Agriculture’s Growth” highlighted some important concerns but I’m going to focus on issues surrounding the succession of farm businesses to the next generation.

An internal survey conducted by the CFIB found that 27% of agribusinesses planned to exit the business in the next 5 years.  This statistic shouldn’t be surprising; the 2006 census found that the average age of farmers had reached 51.9 and while some may refuse to admit it, most farmers do look forward to retiring and taking care of a lawn instead of 500 acres.  An even more alarming statistic from the 2006 census found that of all farmers, only 9.1% of farmers were under the age of 35.

One of the biggest hurdles for young people who want to carve out a life farming is the initial capital required to start a farm.  Consider the following example: There is a farm listed just down the road from us, it has 92 acres that is suitable for crops and has an old hog facility with capacity for 1600 finishing pigs and a very old farmhouse.   Listed at 850’000, it would take almost 89’000 to service the debt if it were amortized over 15 years using a fixed rate of 6.6% interest.  In a best case scenario where the barns lasted for the life of the mortgage (I’d be surprised if they last another 5 years) that farm could generate approximately 76’000 of revenue if the barns are utilized and the land is rented.  If you remove 25’000 for living expenses for the farmer it leaves a shortfall of 38’000 to cover the mortgage payment that must be made up by an off farm job.

This example provides some good insight into why there are so few young people farming but we also need to recognize that tomorrows farmer will need to be different then farmers of the past.  In today’s Globe and Mail, an article by David Ebner profiled a young farmer from British Columbia that returned to the family farm at the age of 24 with a Master’s degree from Michigan State in 1993. Bill Vanderkooi, now 41 has turned his family farm into a vertically integrated company that focuses on providing functional food products that are produced in an environmentally responsible manner.

I think that the next generation of farmers will need to harness a new kind of entrepreneurial sprit that will capitalize on consumer that spends a lot more time thinking about food then they used too.  I don’t necessarily mean that we all need to go out and create our own vertically integrated businesses; but we do need to work with people in our supply chains to make sure we are meeting the needs our the end customer.

While Ms. Swift did an excellent job of highlighting some key issues that could hamper the growth of agriculture in Canada, I try to focus on individuals like Mr. Vanderkooi who have defied statistics and created profitable farm businesses.  There are lots of bumps in the road for young people in agriculture today but I have a feeling that with some hard work and a healthy dose of optimism we will be able build successful businesses that we can worry about passing on 25 years from now.

Ms. Swifts article can be found at:

http://www.theglobeandmail.com/report-on-business/your-business/start/financing/taxes-and-red-tape-stunt-agricultures-growth/article1681960/

Mr. Ebner’s article can be found at:

http://www.theglobeandmail.com/report-on-business/your-business/grow/new-product-development/farmer-rips-page-from-corporate-strategy-handbook/article1683924/

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2 thoughts on “It took awhile, but here is Post#2

  1. Blain K says:

    So why do farms sell for significantly greater than the value that can be derived from operating them as a farm? I don’t have an economics degree but that seems a little out of whack. Or are the farms being purchased and used for something else that creates a greater return on capital? Seems like something that can’t be sustainable long term. Thoughts?

    • modernfarmer says:

      The problem of overpriced land is not a new one, last night I was talking with a neighbour about this subject and back in the late 80s they considered buying the farm that we are on now but in the end didn’t because they felt it was overpriced. In the end we bought the farm in 1994 and it is now worth twice as much as the purchase price.

      The term “live poor, die rich” when describing the life of a farmer says alot when answering your question. If a farmer buys the seemingly overpriced land they are betting that they can scrape by to cover the mortgage and then retire on the proceeds of land inflation. Furthermore, banks are usually willing to extend credit to farmers in times of tight cash flow to ensure the payments keep getting made because depreciation of land prices hurts lenders along with the landowner.

      These are all generalizations; there are always farms that through good operation and sound financial management will create business models that provide a return to the shareholders (I’m hoping that I can fall into this category)

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