The world economy, and Canada’s part in it, turns out to be vulnerable to COVID-19, a microscopic particle wrecking industries, supply chains, and, in particular, the financial health of many farming families.
The causes of distress range from loan payments due for farm equipment and real estate, which lenders may postpone — depending on the lender and farm prices. Other financial victims include the prices of city and town property, the stock market and the value of the Canadian petrodollar.
Farmers won’t escape the carnage. The reasons are both in supply chains of things going to the farm and from the farm to food processors, food wholesalers and consumers.
A rolling crisis is the big picture: CIBC Economics forecasts a 10.2 per cent annualized decline in real gross domestic product growth for the second quarter of 2020 followed by a 40.5 per cent further decline in GDP growth in the second quarter of 2020. The unemployment rate, which Government of Canada aid programs do not change (they only provide monetary relief to the unemployed and to some businesses), is expected to soar to 12.0 per cent in the second quarter of 2020, then to decline to ordinary recession levels of 8.7 per cent in the third quarter and down to 8.1 per cent for 2020 as a whole.
The effect on farms and farm families will be a perfect storm of declining sales of certain types of food, especially hand-harvested crops like strawberries, caused by interference, including quarantining of foreign workers brought in to help with planting and harvesting, reluctance of lenders to help children of present owners buy out parents, and transport links made slower and, therefore, more costly as a result of border closings, hindered interprovincial movements of people and goods, and lenders evermore cautious when the interest they get on loans is less likely to cover risks and defaults.
Farms organized as corporations
These financial conditions impact farmers who want to keep the family business going. And that is a problem for which farm organization matters a great deal.
Farms organized as corporations can transfer ownership by shuffling shares. That’s pencil-work aided, of course, by accountants to get the numbers right. Taxes on intergenerational transfer can be controlled by how one sets land and equipment prices. If it is share capital, valuations can take advantage of what are reported to be slowing real estate sales. Moreover, the lifetime capital gains exemption of $1 million per farm owner will cover more land and equipment if their prices have fallen. That means, quite literally, the next generation can take advantage of the present crisis to get more farm for a given sum.
The market price of land and labour is a different matter. If the COVID-19 virus sickens or kills more workers and so reduces the supply of available labour, including seasonal crews of city dwellers who come to farms to help with grape harvests in British Columbia and Ontario, for example, prices of whatever does get picked will rise. If fewer people are available to help with harvests, there will be less food harvested but harvesters will be able to command higher pay. Either way, there will be less profit for farm owners.
Less profitable land is worthless. There will be fewer bidders if the virus kills or incapacitates more potential owners. There are precedents for these massive changes in land and labour prices. In the 14th century, for example, bubonic plague cut down the number of persons available to farm, allowed fewer hands to command higher wages, made for smaller harvests, higher prices of what food did get to towns, and encouraged a reallocation of land from previous owners who were often the titled gentry and religious foundations to survivors.
That’s part of the economic background of the Protestant Reformation. To be sure, there were other issues both doctrinal and financial. The latter included the vast holdings of land by the established churches that were heirs of last resort when owners and families died off.
We don’t know how devastating the present plague will be. As I write this, social distancing is reducing new infections in major cities around the world, but a second wave of infection or mutation of the virus so that new vaccines do not work could happen. Farmers have the intrinsic value of being well distanced in contrast to city dwellers, who may have to jump into elevators just to get to their apartments.
In these conditions, fluidity of farm ownership via shares in family corporations is very desirable in contrast to direct ownership of land that may take visits to land registrars, meetings with bankers and lawyers, and the time and expense of it all. There would still be a need for probate and tax preparation, but with shares structured for shifts of ownership, usually by the process of the present generation getting preferred shares of farm corporations and the succeeding generation getting common shares, there is less time needed and less personal contact required.
The social and economic changes wrought by the COVID-19 virus are not likely to be as grave as what happened after indigenous populations were devastated in the Americas by conquistadores in the 15th century, whose colds and flus killed as much as 95 per cent of people, who had no biological resistance to them.
What is likely is an acceleration of intergenerational transfer of farms, of some farms falling into open markets or worse, into the hands of provincial trustees who just want to dump them at any price, and of farms made uneconomic by lack of employees to help run them.
COVID-19 is about as serious an economic force as one can imagine short of open warfare or, perhaps, a comet doing to us what an earlier comet did to the dinosaurs. Farmers can prepare for it by raising financial capital before there are fewer bidders for farmland, likely lower farmland prices. And, most of all, by adept use of farm corporations as fluid structures for shifting generational ownership.
– Andrew Allentuck’s book, Cherished Fortune: Make Your Wealth Your Business, written with co-author Benoit Poliquin, was published by Dundurn Press in 2019.