In Saskatchewan we love our Pil. Maybe it’s the taste, maybe it’s the bright-green label, maybe it’s because it’s local and fills us with a bit of regional pride. Whatever the reason this is Pil country. Other parts of Canada have their own preferences beer-wise, but if you asked an out-of-province beer drinker to tell the difference between Pil and another brand I doubt he could. He’d probably say beer is beer.
It’s likely most Canadians have the same opinion of lentils. A lentil tastes like a lentil, right? In regions of the world that consume lentils as a main protein source however, a lentil is not just a lentil. There are distinct cultural preferences throughout the Middle East and North Africa region, a market area known as the MENA region.
Knowing what your customers want and being able to deliver it gives you a marketing edge. For example, large green lentils typically end up in Algeria, which is largely a No. 2 Canada market and Iran which is largely a No. 1 Canada (X2) market. When sending Estons to the MENA region importers are typically found in Morocco. The balance of the region is red lentil consumers, primarily split red lentils consumers. While there will always be crossover, these are the general importing trends.
The MENA region is large and very diverse. It’s also incredibly important for Canadian farmers. The annual imported food value for the region is more than US$30 billion.
Consuming on average five kilograms of pulses per capita per year, the third-largest consumption behind Latin America and the Indian Subcontinent, these nations import 18 percent of the world’s pulses. In addition to pulses, the region imports over 18 percent of the total exports for Canadian wheat and durum second only to the EU. MENA countries also buy barley, canola and a variety of other Canadian-grown products.
What does that mean in real value to Canadian growers? In terms of Canadian durum and wheat exports, the 10-year average is over 2.8 million tonnes. From Saskatchewan alone, the total dollar value of all grains, pulses, oilseeds and cereals into the MENA region was well over $2 billion. A significant market to say the least that relies heavily on Canadian production.
There are many ways to find qualified buyers in the MENA countries. The Government of Canada aids exporters, and by extension farmers, by establishing Trade Commission offices throughout the world. These act as a liaison between Canadians and the world markets helping the grain that you have worked hard to produce find its way to those who need it.
Additionally, every February there is the Gulfood Show in Dubai, UAE. This is the largest food expo in the region, and is a meeting place for buyers and suppliers from all over the globe. The federal government creates the opportunity for Canadian companies to exhibit in a cost-effective
We were recently out to the Don Dividemup farm to discuss a recent land purchase opportunity. Don has farmed together with his wife Daisy for over 30 years. Recently their son Junior and daughter-in-law, Julie, moved back to the farm and began renting some of their own land. Junior and Julie used Don’s equipment in year one but have been rapidly expanding their land base and purchasing their own equipment along the way. Currently, Don and Junior work very closely, sharing equipment and managing the entire land base as one but continue to file their own income and expenses as two sole proprietorships.
Junior and Julie have the opportunity to purchase a 2,000 acre parcel of land which Don has been renting. Don is 63 years old and although he wishes to continue to be involved in the farm, he doesn’t care to expand his farm at this point. He wants Junior to succeed and would like to see him purchase the land, however, it would decrease the acres that Don currently farms significantly and he is unclear of the implications that has for either farm. Don and Daisy plan to leave all farming assets to Junior upon their death and want to see the farming operation continue as a whole unit. Don and Junior approached us to discuss the purchase and options for business structure going forward.
Initial financial analysis indicated that both farms were operating from a position of strength with reasonably adequate financials. The operation as a whole could comfortably handle the additional debt load associated with the purchase. The issue quickly became who should complete the purchase. If Junior purchased the land, he would need to increase his operating line of credit significantly to cash flow the additional inputs. Don on the other hand, would be left with a significant tax liability given that he is selling production from the 2,000 acres that he is no longer purchasing inputs for. In addition to this, Don has a suitable line of equipment for his present acres, but which would be considered excessive if he retained all equipment as is with 2,000 fewer acres. Junior is unable to afford to purchase the land and the additional equipment. The following four options were discussed:
1. Land purchased by Junior but rented back to Don
2. Land purchased and farmed by Junior
3. Land purchased by Don and Junior and whole farm operated as a joint venture going forward
4. Land purchased by Junior, whole farm incorporated.
Option 1: If the land was purchased by Junior, it could be rented back to Don at an agreed upon rental rate with consideration given to machinery investment and fixed charges of each individual operation. This provides a shorter benefit to Don in that he continues to farm the land and a longer term benefit to Junior given that he has secured ownership and is building equity.
Option 2: If land is purchased and farmed by Junior, he would be required to finance the inputs required to farm the additional acres, increasing his risk. Don would face a sizeable income tax liability given that he is selling production from the 2,000 acres that he is no longer purchasing inputs for. Given that Don’s equipment line is then excessive and Junior cannot afford to purchase the additional equipment, Junior could pay Don an agreed upon custom or rental rate to compensate for Don’s equipment investment. This scenario is seen as the riskiest given that it stretches Junior’s equity and liquidity while making poor use of Don’s equity and capital combined with a significant tax liability.
Option 3: Land could be purchased by Don and Junior with either joint names on title or else individual names on individual titles. They could agree to operate the farm through a joint venture with income and operating expenses of the entire farm split on a percentage basis. Consideration would also be given to machinery investment and fixed charges with any discrepancies calculated here compensated through a custom work or rental charge. Given that long term the farm is to continue as a whole unit, this results in a structure that will encourage the most efficient use of resources to operate and allow Don to decrease his farming activities gradually, thus managing tax efficiently. A potential disadvantage to this approach is that both Agristability and provincial production insurance may combine the existing farms which may decrease the likelihood of a claim.
Option 4: Junior could purchase this land personally. Junior and Don use a section 85 rollover to roll existing inventory and equipment into one corporation. This corporation would then rent the personally owned land from the individuals. This option would again provide the benefit of a single farm management approach. This option decreases the risk that tax implications will dictate management decisions. Disadvantages include additional accounting and costs associated with incorporating.
Don and Junior elected to proceed with the joint venture and commit time to further understanding the process, benefits, and drawbacks to incorporating. They firmly believe that this is where their operation is heading, however they want to make this decision from an informed position. The message moving forward in any ownership structure focuses on the health of the relationships among the principals. Written agreements can clarify understanding and prevent problems however the success going forward will depend on the ability of the individuals to comfortably and openly discuss plans, goals, intentions, and conflict. Relying on written agreements to fix relationship problems is a bit like drying heat damaged canola.
Andrew DeRuyck and Mark Sloane manage two farming operations in southern Manitoba and are partners in Right Choice Management Consulting. With over 25 years of cumulative experience, they offer support in farm management, financial management, strategic planning and mediation services. They can be reached at [email protected]and [email protected]or 204-825-7392 and 204-825-8443