In January, Farm Credit Canada (FCC) issued an economic outlook for the agriculture industry. Des Sobool, FCC’s grains and oilseeds economist, stated market prices should be the main focus of farmers this year — in other words, trying to get the best possible prices for these commodities in another year of low returns. At that time, Des forecasted a glut of corn and soy on the international market would drive down prices, and reduced demand would exacerbate prices further. Fortunately, our low Canadian dollar will help support grain growers somewhat. What effect the present trade wars will have is anyone’s guess, so we’ll leave that variable alone.

So, let’s have a look at those prices and see what impact they might have on producers’ bottom lines.

First, some history. Here we see two updated graphs from Alberta Agriculture and Irrigation’s statistics section, showing prices for wheat and canola over the last four years up to Jan. 1, 2025.

As you can see in those graphs, the trend has been down since the highs of 2022 and at the time of this writing (March 15, 2025), wheat is in the $9/bu. ($330/tonne) range and canola is in the $13.50/bu. ($600/tonne) range. Those are the forward prices that are available at this time and the values we will use in this analysis.

Also, we’ll assume that input costs will be a little higher in 2025 ($400 per acre) versus 2024 ($380 per acre). We’ll use six per cent interest for this year.

To illustrate the situation for 2025, we have attached a scenario for a hypothetical 5,000-acre farm (see the tables). We have kept the expected 2025 gross income at $500 per acre, the same as in our 2024 article. The only other changes were the interest rates on the loans. Variable costs are also assumed to be the same as 2024, at $60 per acre.

For 2025, the interest rates used are six per cent on the current debt, intermediate and long-term debts. For 2024, the interest rates used were seven per cent for all the debt. The bottom line shows 2024 had a $483,000 deficit and 2025 could be even worse, with a projected $547,500 deficit.

Here are some qualifying factors and steps you could consider to alleviate a possible financial dilemma.

Sharpen your pencil

Calculate your own costs and returns for 2025. Hopefully you can do better than our projections. One way to project costs is to look at the history for each line item for the past three to five years and use that as a base to do your 2025 projection. Try to reduce your own expenses as much as possible and watch for market price rallies. When rallies occur, lock a portion of your crop in at the higher prices.

It’s unlikely that you will be at the maximum of $500,000 for your operating loan for the whole year. Also, all your loans will probably not be at six per cent. Hopefully you will have some from lower-interest years in the four to five per cent range.

Cash advances

Last year the federal government announced the interest-free portion of the cash advance program was up to $250,000, which may be available if you qualify under certain conditions. Also, farmers were eligible for cash advances for another $750,000 (on top of the $250,000 interest-free portion) at preferred rates, which will likely be considerably less than our projected six per cent.

Input loans

Some crop inputs suppliers are offering loans for crop inputs at preferential rates until February 2026. This may reduce your current interest charges.

Negotiate

Depending on your financial situation and credit rating, you may be able to negotiate better interest rates than those posted by the lenders. Usually, their first offer is not their best offer.

All this information is intended for you to be very cautious about your expenditures for this year. Try to save on expenses wherever you can. Be extra-careful about new capital expenditures such as machinery, buildings, land and major equipment. We regularly see situations where people have made capital expenditures they couldn’t pay for (or make the payments) and they wind up in the Farm Debt Mediation Program. So, please do cash flow projections for your operation this year to see if you will be able to make your payments on time.

If you foresee problems, talk to your creditors before the problems become serious. If you have to replace equipment this year, consider alternatives such as sharing with a neighbour, buying used, or arranging short-term rentals.

To do cash flow projections we use a farm financial spreadsheet called the Agricultural Business Analyzer (ABA), which does all the calculations mentioned above and many more. It is a really good tool to analyze your present situation and do forward projections for new purchases before you buy them. ABA is a free download from the Farm Management Canada website.

If you would like some help with doing financial projections, please contact either of us.

The post Shifts in the cash crop economics outlook for 2025 appeared first on Grainews.

“When coupled with high inflation, interest rates and a price on carbon for essential farming activities for which farmers have no viable alternatives, Canadian producers are facing tremendous pressure on their farm financials and mental health.”

In addition to increasing input costs, commodity prices for grains and oilseeds have dropped over the last couple of years. Below you’ll see two graphs showing Alberta cash prices for hard red spring (HRS) wheat and canola over the last five years. The data are from the statistics section at Alberta Agriculture and Irrigation.

So, we have a double whammy facing the grains sector: rising costs and falling commodity prices. This means grain farmers must be very astute business managers in 2024, since the implications for their financial and mental well-being are huge. One factor is that careful management of cash flows is required to have money available to pay for inputs, debt servicing and living expenses at the required times during the year. This is especially important in the face of rising costs and decreasing returns, as well as increased debt servicing costs resulting from higher interest rates. I wrote an article about that in the April 2, 2024 edition of Grainews.

To illustrate the situation for 2024, I’ve attached a scenario for a hypothetical 5,000-acre farm (see Tables 1 and 2 below). Following the present reduced market prices, I have dropped the expected 2024 gross income to $500 per acre, from $686 in 2022. The only other changes were the interest rates on the loans. Variable costs are assumed to be similar to what they were in 2022. For 2022 the interest rates used are as follows: three per cent on the current debt, and four per cent for the intermediate and long-term debt. For 2024, the interest rates used are seven per cent for all the debt — current, intermediate and long-term.

The bottom line shows that the 2022 scenario had an estimated $455,500 surplus and the 2024 scenario has a $483,000 deficit. So that could be quite a shock to your finances this year and maybe next.

Here are some qualifying factors — and some steps you could take to alleviate this financial dilemma:

• If you have an operating farm, it’s unlikely all your loans will come up for renewal this year, so you won’t be facing a seven per cent interest rate for all your loans. You will likely be somewhere between the two scenarios. If you are on annual payments, the real crunch will come at this time next year, when loan payments at the higher interest rate start.
• The federal government has announced the interest-free portion of the cash advance program for 2024 is now up to $250,000 which may be available if you qualify under certain conditions. Also, farmers may be eligible for cash advances for another $750,000 (on top of the $250,000 interest-free portion) at preferred rates, which will likely be considerably less than seven per cent.
• Some suppliers are offering loans for crop inputs at preferential rates till February 2025. This could also help reduce your current interest charges.
• Depending on your financial situation and credit rating, you may be able to negotiate a better interest rate than those posted by the lenders. Usually, their first offer is not their best offer.

I have done several projections for farmers for 2024 at the present high interest rates for new purchases and in all cases the farmers have decided to not make those new purchases. So, I really want to caution new or expanding farmers to carefully do projections before they enter into new purchases. Do detailed projections for your existing debt servicing ability — with the current input costs and lower commodity prices — and then add your anticipated new purchase on top of that. Are you still in a comfortable place financially? If not, please delay your new purchase until interest rates come down.

I use a farm financial spreadsheet called the Agricultural Business Analyzer (ABA) that does all the calculations mentioned above and many more. It is a really good tool to use to analyze your present situation and new purchases before you buy. ABA is a free download from the Farm Management Canada website.

If you would like some help with doing financial projections, please contact me.

The post Challenges for 2024 cash crop economics appeared first on Grainews.

I submit what “cash is king” really means is to have money available to pay ongoing farm expenses such as crop inputs, wages, loan payments et cetera as they become due, and also to pay yourself and your farm family/team a monthly income that (at least) covers living expenses. I’ll only focus on actual cash flow in this article; I’ll have a brief comment about accrual adjustments at the end.

Where do you start to get a handle on cash flow requirements? A good place to start is to chart farm expenses by line items over the past three to five years. The table here shows a chart from 2023 that I recently prepared based on a real farm. Once you know your average historical expense for each line item, you can make some realistic predictions for the upcoming year.

Of course you have to adjust for increases in costs, changes in acres farmed, different crop rotations et cetera; then you have to do the same for the farm’s fixed costs, loan payments and personal living expenses. This example includes $120,000 for family living expenses, which is for two families.

You will notice in several cells there is no data. That’s quite common and you will likely have the same problem. I suggest you don’t worry about the missing details; work with what you have and make the best projections based on that.

On the income side, we can look at the historical income and calculate an average over the last three to five years. Since those are actuals, they should be a good guide for the upcoming year, but you should make detailed income projections for each crop you plan to grow. Then, multiply the acres of each crop by the estimated yield and market price to get the estimated dollar value. Once you have that, add the dollar values for each crop and calculate the total expected crop income.

Once you have total expected crop income and input expenses, you can calculate net cash income. From that, you deduct fixed costs, as listed in the table, and loan payments. On the income side are items to add as well: other farm income (such as gas and oil leases, program payments, patronage dividends, investment income) and off-farm income (if any). So, we finally come to the overall expected net income number, based on cash, for your projected year.

At the beginning I mentioned accrual adjustments — changes in the values of inventory from the beginning of your fiscal year to the end of it. In the case of the farm in the table, the farmer had $1,031,060 of crops in bins at the beginning of the year and was anticipated to have $1,503,262 at the end of the year. That’s an increase of $472,202, added to the net income for the year. It’s not cash, but it’s “money in the bins” which could be turned into cash. Bankers want projections based on accrual accounting since it gives them a more detailed picture of your financial situation, especially if you are decreasing inventories to maintain cash flow.

The next step would be to do a month-by-month breakdown for your projected income and expense items, so you can see your expected net position at the end of each month. I’ll leave that for another article, since that is a comprehensive topic on its own.

I have a spreadsheet program that does all the above and a lot more, called ABA (Agricultural Business Analyzer). It’s a really comprehensive farm financial analysis tool bankers really like; it’s good for your own information and for your lenders as well.

I also have access to a simple cash flow spreadsheet that does the basic month-end calculations mentioned above. You can use it once you know the total for each line item, then break them down into the monthly columns for income and expenses.

The important point is that you plan for the spring and summer, when you will most likely be in a deficit position and will have to make arrangements for that shortfall ahead of time; it’s likely to be higher in 2024, due to higher input costs and higher interest rates. Lenders do not like to be approached month after month for more credit. It’s a signal to them of inadequate financial planning.

Feel free to contact me for more information and I’ll explain how you can get free access to ABA or the simple cash-flow analyzer from Farm Management Canada.

The post ‘Cash is king:’ what does that really mean? appeared first on Grainews.

I attend conferences like this as part of my legal obligations of being a professional agrologist (PAg), whereby I have to perform 35 hours of continuing professional development each year at my own expense. I also find these meetings are a great way to network with other advisors, share information and gain new insights. I urge all farmers to take the time, effort and expense to include continuing education as part of their annual personal development plans by reading articles, attending conferences and doing online study.

At both of these conferences there were bank personnel speaking about achieving and maintaining good relationships with lenders. The following are some of their recommendations along with some of my own that I have gleaned in my 19 years of doing farm business consulting.

Before you consider a new loan, I recommend that you discuss the proposed purchase thoroughly with your family and team members. Are the other family members on side and does it appear you will be able to repay the new loan without undue stress on your cash flow?

A well-prepared business plan, which includes all of the information provided below, should first give you, your family and/or team the assurance they need to progress with the new purchase (or not). If they are not in agreement at this vital first stage, then it’s probably best to delay the purchase. The business plan, if favourable, will also provide your lenders with the information they need to assess your proposal.

The five C’s

The five C’s of small business lending is a simple, yet useful, evaluation tool for a loan. In a future article, I’ll examine a more comprehensive evaluation method.

1. Character: Questions to consider include the following: What’s the history of your farm? What’s your experience and education? Have you met your financial commitments in the past, which is mainly shown by your credit score?

2. Capacity: Does it look like you will be able to repay the loan (on top of existing loans, if any) with undue stress? This is mainly shown by your debt service ratio or EBITDA (earnings before interest, taxes, depreciation and amortization). Also, a favourable business plan will provide this information plus add impetus to your application.

3. Capital: How much of your own money are you prepared to put “up front” for the loan (the down payment, that is), which could be in the form of equity in other assets?

4. Collateral: What assets do you have to back the loan in case of default? This is usually the land or machinery you are purchasing and other assets you own that are “free and clear.”

5. Conditions: These are the interest rate, repayment term, payment amounts and frequency and other conditions that the lender usually stipulates. Remember these conditions may be negotiable to some extent depending on your overall financial situation.

Partnerships and communications

Lenders want to be, and will be, partners in your business, so they want to know all about your farm, its history, who is involved and your successes and challenges (everyone has some).

A current and accurate financial statement is absolutely necessary for the lender. If your farm is incorporated, a partnership or a joint venture, a financial statement, prepared by an accountant, should have at a minimum a balance sheet, an accrued income statement and notes explaining the numbers therein. This financial statement should be done within three months of your fiscal year end so the information is current.

If you are a sole proprietor, a balance sheet accompanied by your tax returns for the last couple of years may be adequate for the lender if your accountant is not preparing a financial statement. Also, a personal net worth statement listing all of your assets and liabilities at current market values will be helpful. Whatever your legal structure is, a three- to five-year history of income and expenses will give the lender a good picture of the profitability of your farm. In all of your dealings with lenders, be prepared to respond quickly and openly.

Your current financial situation (as per your most recent financial statement) will be the starting point for your new purchase justification. Then describe how your purchase will enhance your operation and how you intend to cash flow the loan (i.e. capacity). Can you achieve a debt service ratio (EBITDA) of at least 1.2 to 1 and preferably 1.5:1 or better in combination with all of your other loans?

The other factors that lenders want to know is liquidity (current ratio, working capital and debt structure), solvency (debt to equity, equity ratio) and financial ratios (debt servicing, return on investment and equity). Other items to include in your business plan are the management (people), materials, labour and machinery, marketing, risk management, SWOT analysis (strengths, weaknesses, opportunities and threats) and an industry outlook.

READ more: Investment advice with Grainews columnist Herman VanGenderen

As you can see, lenders want to know a lot of information, which is really no more than you should ask yourself, your family and/or team before you make a new purchase.

Distress situations

The problems with lenders usually start when there is some sort of financial distress. We all tend to hide our problems from our families and lenders. That is a huge mistake. At the first indication there is likely to be a delay in making your loan payments, contact your lender(s) and explain what’s about to or has gone wrong.

For example, if the upcoming crop looks like it’s going to be smaller than anticipated and you will not be able to make your debt service payments, then early communication with your lenders is vital to maintaining a good relationship. It’s better to communicate with the lender during the summer rather than waiting until the fall or winter when the input invoices are finally due.

Distress situations usually require a new business plan that outlines the problem and ways and means to address the situation. Some alternatives could be to sell assets such as surplus machinery, off-farm employment and/or loan consolidation. In some of these situations that I’ve been involved with, the farmer has had to sell some land to reduce the debt load to a manageable level. In most of these cases, the farmer was able to rent the land so the productive value was not lost.

I’ve also worked with some farmers where the relationship with the existing lender(s) has deteriorated to such an extent that the affiliation had to be severed and we had to find a new lender. In those situations, I prepared a new business plan that incorporated some of the alternatives mentioned above and was then circulated to other lenders in the industry. Fortunately, in all of those cases we were able to find a new lender, although the terms were somewhat harsh and the conditions were strict.

Remember that “cash is king” in the financial world. Managing your cash flow so you have money available to pay your routine bills and make loan payments when they are due will go a long way to help you achieve financial harmony with your lenders.

The post Tips to achieve financial harmony with family and lenders appeared first on Grainews.

Short- and long-term plans

How does this proposed purchase fit into the short- and long-term plans for your farm? For example, if you are 40 years old, it may make sense to buy another quarter section coming up for sale nearby. On the other hand, if you are 60 years old, are you sure you really need another quarter section and the resulting payments for the next 20 to 25 years (unless you have a succession plan)?

Have you discussed the proposed purchase with the rest of your family or farm team? Are they onside? This is so important. I cannot overemphasize this point. We’ve all heard stories about the farmer going into town to buy parts for his combine and coming home with a new $1-million unit. What do you think the reaction is going to be from his or her partner?

In the part of Alberta where I live, good arable land is selling for $1 million and up per quarter section. One million dollars at six per cent interest amortized over 20 years means annual payments of $87,184. At seven per cent interest, the annual payments are $94,392, which is an increase of $7,208 per year. Are you sure your cash flow can handle those extra payments?

These are simplifications, since you will likely have a down payment or trade-in, which will reduce the loan principal. However, your lender may use your existing equity as collateral for the down payment and so might be able to finance the full amount in the case of land purchases.

Prepare a net worth statement

To determine if the new purchase is feasible, I recommend you first prepare a net worth statement. Net worth means listing all of your assets at an estimated fair market value and then listing all of your liabilities. It’s best to do this at the beginning of your fiscal year (for incorporated farms) or January 1 for sole proprietors or partnerships. Your net worth is the difference between the two.

For example, if you have $10 million in total assets and total debt of $2 million, you have $8 million of equity or net worth (that you own free and clear). That is a net worth ratio of 0.80:1 (or 80 per cent), and lenders will usually look favourably on you if you can cash flow the proposed new purchase.

On the other hand, if you have $10 million in assets and $4 million in debt you have a 0.60:1 (60 per cent) net worth ratio and it’s going to be harder for you to get financing, or if you do it will be at a higher interest rate.

“All of your liabilities” includes all of the money you owe to lenders plus current liabilities (money you owe in the next 12 months), such as the bulk fuel agent, the tire shop, the fertilizer dealer, the farm supply store, the implement dealers for parts, your neighbour who sold you some supplies, etc.

I remember a situation early in my career (about 19 years ago) when I prepared a net worth statement for a farmer. I listed all of his assets and liabilities in my analysis program, and then I handed him his net worth statement — and it wasn’t pretty. I remember him saying, “I don’t owe that much money.” I said, “This is everything you’ve told me. Show me where the mistakes are.” There weren’t any mistakes. So don’t be surprised like this farmer.

Be sure to list all of your loans with the amount outstanding on each one as of your evaluation date. There are some farmers who have loans at several banks, at several implement dealers, loans from family members, vendor financing with another farmer who they have bought things from, loans from FCC, etc.

Shareholder loans are a liability and must be listed even if you don’t intend to repay them. Zero interest can be very enticing when buying new equipment but remember you still have to make principal payments.

Cash flow projection

Next, do a cash flow projection for your fiscal year on a month-by-month basis to determine what your net position is at the end of each month.

Cash flow means calculating your total anticipated income and expenses by line items for the year (usually based on your historical performance over the last three to five years). Break that down on a month-by-month basis. Do this first with no changes for your farm (which I call the base model). Then do another scenario with the new purchase included (which I call pro 1). Then compare the two scenarios and discuss the data with the rest of your farm family or team. Can you comfortably handle the new payments?

I mentioned my analysis program. I use ABA (Agricultural Business Analyzer), which was developed by Ron Lyons (an ex-banker) when he worked for Alberta Agriculture about 20 years ago.

Recently it was moved to Farm Management Canada but is not publicly available at this time. I have it and if you wish to use it, send me an email. It’s a bit complicated and I can help you with it.

Don’t overreach your, your partner’s or your team’s comfort zones. Even if you can cash flow the new purchase, it may not be in your best interest to proceed if the rest of your family or team do not agree.

Do you really need that new tractor or combine or is it just a “nice to have” item. Remember, machinery is a depreciating asset, and a new piece of machinery is probably depreciating faster than you can pay for it.

If you’ve taken all of the above points into consideration and you have satisfactorily answered every one of them, then, yes, go ahead and make that purchase and pride yourself on having done your due diligence.

The post Look before you leap… into new purchases for the farm appeared first on Grainews.

In Alberta, there was an excess of moisture in many areas in 2020, which lead to late or no seeding, and what finally grew produced poor yields. In 2021, there was drought in much of Western Canada, which, once again, led to greatly reduced yields. Fortunately, commodity prices increased significantly that year. However, the net result was a break-even situation for many. As one farmer told me, “Half of the crop at double the price is the same as a normal yield at the normal price.”

Now, in 2022, we have rampant inflation with seed and fertilizer prices and fuel and crop insurance premiums, the main inputs in a grain operation. All of this on top of COVID-19 — it really can affect one’s mental health.

As a result of these and other factors, some farmers are finding themselves in financial difficulty. Pressure like this often causes mental stress, which can permeate the whole family, and then everyone suffers. As a farm business consultant for 18 years, I have helped farmers deal with financial distress situations many times, and I have some ideas that may help.

The first thing I recommend is to analyze your overall financial situation. That starts with preparing a net worth statement as of the farm’s last fiscal year-end. To do this, list all assets (at fair market values) and all liabilities. The difference is your net worth. If you have 75 per cent or higher net worth you should be in reasonable financial shape. On the other hand, if you are down around 50 per cent (or lower) you are probably in financial difficulty.

Next, look at your income and expenses over the last five years. This will show you what the income trend is for your farm. Combining these two factors will tell you if there is a financial issue and how serious it is.

Next, discuss with your family/team what your personal and business goals are for the short term (one to five years) and long term (five to 10 years). Take the above financial situation and your goals and see if there is any way to combine the two. If there is a financial problem, there are basically three ways to deal with it, alone or in combination:

• Sell assets to reduce debt load
• Off-farm employment
• Restructure debt

Sell assets to reduce debt load

On many farms, there can be an excessive amount of machinery, some of which I call toys (specifically, items that are not absolutely necessary). My rule of thumb is if you haven’t used it in the past two years, why do you need it? Remember, machinery is a depreciating asset. The more you can reduce unnecessary equipment, the better off you will be. For smaller farms, I suggest sharing equipment or getting the work done by a custom operator, so you won’t need a seeder, sprayer or combine.

If selling excess machinery doesn’t solve your debt load problem, you may have to consider selling some land. This is not a popular suggestion but is the logical next step. I’ve had some cases where I’ve recommended clients sell one or more quarters and then rent them back, so the productive value of the land is retained. A couple of times, we were even able to include a buy-back clause in the sales agreement, whereby the seller had first option to buy the land back at an agreed price within five years.

Off-farm employment

Depending on the location of your farm, its size and your time availability this may or may not be possible. Some grain farmers have time over the winter when they can work off of the farm.

Restructure debt

This is usually done in conjunction with selling assets to reduce debt load. This can be achieved by taking some or even all of your total debt (current, intermediate and long term) and amortize it over a longer period of time. This allows you to reduce your cash flow requirements to meet your income stream.

Some other suggestions for managing debt include the following:

• Try to keep current with all of your payables. If you fall behind with your loan payments, it adversely affects your credit score. It also makes for difficult relations with your lenders or can make it harder to find new ones.
• At the very least, always try to make the minimum monthly payments on your credit cards. Failing to do so will, again, cause your credit score to suffer.
• Be open with your creditors. If you have financial challenges, discuss the situation with them, sooner rather than later. Hopefully they will work with you to make some adjustments to your payment schedules.
• Sometimes the financial situation has deteriorated so much your existing lender will not work with you. Then it’s time to find a new one. However, before you do that, prepare a business plan that outlines your situation and how you intend to work through it using some of the above tools. Also, it’s helpful to include a section on how you plan to avoid your present predicament in the future. Once you have a business plan, present it to all of the lenders you know of, you never know who will bite. If you can’t find a new, conventional lender and want to continue farming, an equity lender may be an option. These types of lenders typically have higher interest rates and higher application fees but are usually willing to work with farmers if they have adequate equity.
• Bankers like business ratios, so it’s important to try to include those in your business plan (specifically, before and after scenarios). The debt servicing ratio is an important one. Alberta Agriculture, Forestry and Rural Economic Development has a program called Agricultural Business Analyzer to help farmers calculate business ratios, which can be found at agriculture.alberta.ca.

I hope by exploring these suggestions you can see that it is possible to work through financial challenges. It’s better to start sooner rather than later. If you must find a new lender, it can take from six weeks to six months to get it all arranged. The farmers I have worked with who have participated in this exercise say they have experienced an immense reduction in mental stress and family life has also greatly improved.

The post Get your farm finances on track to reduce stress appeared first on Grainews.

A team with a common understanding of the intent and direction of the business will have a much better chance of achieving its combined objectives. Once all of the team members are around a table and conversing harmoniously, it’s time to get down to business. One of the first items to focus on should be the farm business plan.

A farm business plan consists of three main parts:

• A history of the farm — when and who started it and how it grew over the years.
• The present status of the farm — the size, the enterprises (grains and oilseeds, cow-calf, etc.), the people involved and their responsibilities and financial details.
• The goals of the team members and their combined objectives for the farm in the short term (one to five years) and the long term (10-plus years).

As implied above, the farm business plan should be an extension of the goals and aspirations of the individual team members. Once each person feels their own goals are being met (to some degree) they are much more likely to become motivated team members who will help drive the farm to its overall goals. They will also feel they have some “skin in the game” and are responsible for achieving the stated objectives. In the last issue, I likened the farm team to a team of horses pulling a plow, where each member was pulling hard to achieve the objectives.

Preparing a business plan is especially important before changing some part of the operation, such as buying more land, diversifying, adding a new enterprise (e.g. a cow-calf component) or buying new(er) machinery. As the saying goes, “guys love their iron,” and sometimes they just can’t resist the shiny new units on a dealer’s lot. I’ve had to help many farmers who expanded their land base or bought new machinery and did not do the necessary financial projections before buying. Subsequently, they encountered cash flow difficulties when they could not meet their loan payments on time.

When preparing a business plan, your whole family or team should be involved to gain their input and support. Remember, they are all a vital part of your operation and must be on side as part of the functioning team. The business plan will involve much more than just the financial aspects (outlined below). Some of the overlooked items are doing due diligence (background information) acquiring new knowledge (if necessary), looking for possible new challenges and finding solutions for them and any possible risk management issues.

Cash flow

We’ve all heard the phrase “cash is king.” It will be important for you to look at cash flow for your operation before making any changes to determine if you can make additional financial commitments on time. There are programs that can help with this; for example, I have one called the Agricultural Business Analyzer (ABA), which is a month-by-month cash flow projection to determine if you can work within your operating loan limit and/or trade credit. Remember to include adequate money for family living expenses in your projections. I recommend at least $50,000 per year (about $4,166 per month).

Lenders also like to see sensitivity analyses, which means running your base scenario with 10 per cent lower market prices, 10 per cent higher input costs and a third analysis with both combined. Can you achieve at least a 1.2:1 debt servicing ratio with all of these scenarios, and preferably a 1.5:1 ratio?

If you’re going to require financing, remember you don’t get a second chance to make a first impression with your lender, so make it a good one with a detailed business plan. The lender will be more likely to view your request favourably if you present them with a detailed plan and they will also be more ready to negotiate rates and terms.

The business plan outline I use is as follows:

• Executive summary
• Background and purpose
• Strategic plan
• Goals — both personal (for each member) and business (for the whole farm)
• Option(s) to achieve goals
• Action plan — option chosen, implementation plan, steps and dates
• Marketing plan
• Risk management plan
• Financial highlights — selected data from ABA program (before and after scenarios)
• Closing comments (about overall viability)
• Professional advisors

Review the year, revisit the plan

After you have completed the first year of your new business plan, take the time to reflect on the past year — what worked and what didn’t? Did you at least meet some of your projections? The 2021 crop year was a very difficult one on the Prairies due to widespread drought (along with the COVID-19 pandemic). So many goals were not met through nobody’s fault.

The important point is to review the year and revisit the business plan. Most likely it will need some revisions. Were you able to meet your loan payments on time? If not, you may need some loan consolidations and/or reamortizations. It’s better to speak with your lender as soon as possible so you don’t fall into arrears with your payments. Once you’re in arrears, it’s very difficult to get refinancing.

There are a couple of aspects of farm business plans that are not emphasized enough in my experience. It’s important to celebrate the successes each year even if they are small. I encourage all families or teams to take some time to treat themselves to a special occasion at least once a month, which can even be an evening out at a restaurant. Then, at the end of the year, there should be an extra-special event or outing.

Annual family vacations or team outings are another aspect of farm life that is underappreciated. In the plans I write, I make it a point to include a section that emphasizes these. Ask yourself, “Am I living to farm, or farming to live?” I hope you can identify with the latter part of that phrase. After all, what will your children remember about their lives on the farm? Will it be the laborious work, or will it be the family times at the lake and on vacation? Again, I hope it’s the latter.

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Farm teams can come in many different forms — a farming couple, a family unit, or even an extended family with aunts, uncles, cousins and in-laws.

To achieve a cohesive working unit in all of these situations, it is imperative all team members know what the goals for the farm are, and how their individual needs are going to be, at least partially, met. I liken the situation to a team of horses that are all pulling in the same direction. The team can be a small group of two (as stated above) or as many as 12 to 15. The larger the team, the more important it is that all members are “on board” and pulling their weight. Team building should be one of the basic techniques on the farm.

The first principle of team building is this — people will support what they help to build. If you have input on a plan and have developed and fine-tuned it with the input of others, you will feel you have contributed, have been heard and feel responsible for the success of the plan.

The second principle is people will resent what is forced upon them. For example, if someone tells you how to do a certain part of a project in which you have had no input, you will likely feel disinterested in the overall plan — you might even have some resentment toward it and not do your best to make it successful. Therefore, rather than “bossing” your team members around, listen to them and do your best to address their ideas and concerns.

How should team building start? It all starts with good communication, as we’ve heard many times. A good way to begin is to have a family meal first, ideally one that Mom doesn’t have to cook (i.e. one that is catered) to make everyone comfortable. I often get questions about who should be on the farm team. Of course, it should be adult family members and older teens, if they are showing some responsibility and are interested in the business.

In fact, involving older teens might be a stepping stone to succession. My suggestion regarding daughters- or sons-in-law is they be invited to the table since they are members of the extended family and, thus, should be included. I’m afraid if they are not included, marital problems might ensue. Everyone should understand these discussions are completely confidential and not to be shared outside of the people at the table. And the people at the table should understand if anyone breaks that trust, they will be excluded from future meetings.

Before the meeting begins, ask all farm members to bring answers to the following questions to the table:

• What do you like about living and working on this farm?
• What would you change if you could, and how?
• What will you contribute to this farm and help to make it successful?
• What income and perks (e.g. free farm fuel) do you expect?
• What vacation time and other time off do you expect?
• What annual commitment will you make for self-improvement, such as taking courses, attending seminars, etc., at the farm’s expense?

At the meeting, have each person read out their responses to the questions one at a time, then start sharing the various responses. Compromises will almost certainly have to be made to arrive at a total farm plan. That, in turn, can lead to developing values, missions and goals statements for the farm.

Here is an example of a consensus-building scenario:

• Dad would like a new combine costing about $800,000, and with his trade-in would require $500,000 to be financed.
• Mom is tired of living in the 75-year-old farmhouse, which is cold and drafty and doesn’t have modern fixtures and finishes. A rough cost estimate is $400,000.
• The kids want a trip to the mountains to go skiing in the winter for a week during spring break. The cost estimate for new equipment and other associated expenses is $5,000.

It’s not likely that all of these desires can be accommodated in one year, so the following are suggested compromises:

• Could Dad make do with the existing combine for a few more years? The team could examine the feasibility of a newer one in, perhaps, three years’ time.
• Could Mom be somewhat happy with new kitchen cupboards and new windows for an estimated cost of $50,000?
• Will the kids settle for used ski equipment and day trips to a local ski hill for an estimated cost of $1,000?

As we see in the above example, each team member has had input and has had to curb their original wants to achieve an overall consensus that, hopefully, all involved can accept. That is the true value and result of team building.

In the next article, I will show how team building can be a stepping stone to developing farm business plans.

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I believe there are two basic reasons why some people think farm succession is difficult. The first reason is it’s hard to start the process when one or more people of the farm family don’t want to do it or don’t feel it’s important enough to address at a certain time, even though other members urgently want the process to proceed ASAP. The second reason is once the process is started, difficulties arise and the process is stuck for various reasons.

The problem of not wanting to address the issue usually originates with the “older” generation, which I will call the founders (even though they may not be the actual founders of the farm). They are comfortable with their lives and see no reason to change.

On the other hand, the “younger” generation, which I will call the successors, urgently want to plan and build a future for both themselves and their young families. Another reason may be the founders are afraid of any divisive issues (e.g. on-farm children and off-farm children, fair versus equal, etc.) so they avoid addressing the topic. It’s natural for the founders to pause the farm succession.

Let’s take a deeper look at some of the founders’ issues. The following examples explore those concerns as well as my responses to them.

Issue: The founders feel they will lose control of their operation.

My response: The founders will have to face this fact sooner or later — that they have to relinquish control of their farm. Elaine Froese, a farm family coach from Manitoba and Grainews contributor, said, “The founders have a choice. They can either pass control of the farm with a warm hand or with a cold one.” This means founders have the option to either hand over control while they are alive or after they have passed away.

Transferring control is best done in stages while the founders are alive. For example, I have a fillable table that tracks how this can be done along with target completion dates to highlight when one stage has been completed and it’s time to move onto the next.

The real danger of waiting until after the death of the last founder is the lack of completing a succession plan, leaving it to be addressed by a standard will which could state that all assets are to be divided equally among all of the children. In this case, the farm would probably have to be sold and proceeds split equally among the children, as the on-farm child will likely not have the financial ability to buy out the other siblings. This is a real trap for the on-farm child, who has likely put many years of sweat equity into the farm. More about that later.

Another issue related to this for the founders is a loss of identity. That means, “If I’m not a farmer, who am I?” Or, “What’s my reason for getting up each morning?” It’s desirable to develop some off-farm interests early in life, such as involvement in community groups (e.g. ag societies, churches, service clubs, etc.).

These organizations are always looking for help and mature adults have a lot to offer them. Ask yourself, are you farming to live or living to farm. I recommend the former. In the book The Third Pillar, Raghuram Rajan states that the third pillar, meaning community, is being left behind the other two, which are the government and businesses.

Issue: The founders feel their livelihoods are threatened if they sign over assets to the successors. They worry the successors might mismanage the farm and thus erode their retirement income.

My response: Founders do not have to sign over all assets at once. They can sign over assets in stages as successors show promise and responsibility similar to what was suggested above. A colleague, Allan Sawiak, a farm tax expert with KRP Group in Edmonton, suggests the founders (in a family) keep the land in their names until they both pass away, as a way to protect the farm. It can then be willed to the on-farm child (assuming the land is privately held). It’s a different scenario if the land is owned by a corporation, but I won’t go into those details here.

The above suggestion may not work in some cases where the on-farm child needs access to equity to help finance and grow the operation. Another idea is to give or sell (at a favourable price) some of the land to the on-farm child. At the same time, the siblings could also be given or sold (again at a favourable price) some land to help keep peace in the family. This should come with an option for the on-farm child to buy land owned by their siblings for an agreed price, with the option expiring after an agreed number of years.

The important point here is the founders retain ownership of a sizeable portion of the land for their retirement and security. If the land base for the farm is small, other alternatives will need to be considered.

Issue: The founders feel the successors do not have adequate skills or training to assume control of the farm, which again threatens the founders’ retirement income.

My response: Another business succession expert I follow is John Fast, who is the author of The Family Business Doctor. He recommends the successor get a post-secondary education (fallback occupation) and work for someone other than the family farm. This is to broaden successors’ educations, to give them the freedom to choose to join the family farm or not, to open their minds to other career possibilities and to learn how other businesses operate. At the same time, successors will get a valuable education on other types of farms and day-to-day business skills.

If required, founders should also encourage successors to take additional courses, which are now widely available via the internet and Zoom, for example, to complement their educations.

Issue: The founders fear the process will create family arguments and too much friction. They don’t want to be part of it and take the attitude of “It’s not my problem and the kids can sort it out after we’re gone.”

My response: Again, I return to the two options mentioned above — do you want to give the assets to the next generation with a warm hand or cold one? Also, do you want the farm to continue or not? If you want the farm to continue and keep the legacy going, then the farm succession process must begin while you are still alive, with a sound mind and body.

If that doesn’t matter to you then, yes, let the kids fight it out after you pass. However, be forewarned, the lawyers will be the real beneficiaries of your farm since it’s an invitation for legal battles amongst the children. The estate laws are very complex and I have seen family farms easily fall into the firm grasp of a very slow, disappointing court and negotiation process.

It’s an awful situation to witness. More fuel is added to the fire when there are complex family matters. Every farming business is complex and is filled with past promises and shared equipment. Without succession planning, the family farm is certainly destined to be in a real mess — and a story for the neighbours to talk about for many years.

Note to founders: Don’t delay the start to the succession discussion or updating your will. If your will hasn’t been updated for five years, it needs to be revisited. Make an appointment with your lawyer now. I was involved in one situation where the farmer went to sign his updated will and the lawyer said to him, “I can’t let you sign this, you’re not of sound mind.”

That created stressful and expensive problems for the family, since the old will was the only valid one when the farmer passed away a few years later and it did not take into consideration the latest changes in the family situation.

Note to on-farm children: Do not resign yourselves to the latter scenario. You will get the same portion of the farm as your non-farming siblings (minus legal fees, if applicable) and your sweat equity will have been all for naught.

If your parents have not started the farm succession discussion by the time you are 35 (at the latest), you should seriously consider if you want to stay on the farm or not. Educate yourselves by reading John Fast’s book (mentioned above) and Necessary Endings by Henry Cloud.

Issue: You have started the succession discussion but it degenerated into arguments and animosity and you don’t know how to fix the situation.

My response: You probably need a mediator/facilitator to help you get the process unstuck. I belong to the Canadian Association of Farm Advisors (CAFA), where good, qualified people are listed and can help (see online at cafanet.ca). Now that we have Zoom, it’s so easy to work with qualified advisors no matter where you live.

Of course, there are many other reasons why founders or successors may not want to engage in discussions. My point in this article is most objections can be addressed, as long as the parties will start the discussion. Several times I have had moms call me because they are tired of the negative talk and/or inaction around this topic, and, above all, they want peace in the family. So, to all the founding or succession moms, please take the initiative if nobody else will.

In conclusion, I suggest that all concerned start the process with warm hands. You do not want the pitfalls of transition inaction to control your future. The following are the five Ds that create immediate problems and will cause knee-jerk responses that will not be optimum:

• Death of a family member
• Divorce
• New, unfavourable diagnosis
• Sudden decline in health
• Reaching a new decade

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Sell machinery you’re not using, watch out for too much farm diversification and make sure your operation is generating enough profit to afford the “toys.”

In Part 2, I examined higher machinery payments on new equipment and how they are a profit robber. In this case, I’m referring to the interest portion of the payment. The principal portion of the payment builds equity, however (unfortunately), depreciation is greater than the equity you are building, so you are in a net loss position. If we take the first two profit robbers together (depreciation and interest), they are a double whammy to your profitability.

Now, let’s look at some other possible profit robbers that may be lurking on your farm. Ask yourself, “Do I really need all the machinery in my yard and how often do I use some of the pieces?”

I’ve visited farms and seen machinery that looked like it hadn’t been used for quite a while (or even a long time). I am usually told, “We don’t use it anymore, but it’s paid for, so it doesn’t cost us anything.” Then, when I talk about depreciation, they reply, “Aw, it’s not that much.” I suggest they sell these pieces and get some money for them. That will be much better than keeping them until they’re not worth anything.

Small- to medium-sized farms are at a real disadvantage when it comes to buying new machinery for a couple of reasons. First, new machinery is usually sized for large amounts of acres, so it’s too large and expensive for these farms. Second, as equipment is becoming more computerized, it’s difficult, if not impossible, for farmers to fix it themselves. What can farmers in these situations do? The following are some suggestions:

• Renting equipment for short-term jobs is a much better alternative to owning it (if possible).
• Share equipment with close friends and neighbours. While this can create problems, for those people who can make it work, it’s a great cost reducer.
• Hire a custom operator, which is already popular for spraying crops and is expanding to other areas of farming as well.

Another example of a depreciation robber on small- to medium-mixed farms is too much diversification. These farms usually have specialized equipment for every enterprise. For crops they will have one or more tractors, harrows, a seeder, sprayer, swather, combine, trucks and maybe even a grain bagger and unbagger.

For forages, they will have a haybine, rake, baler and a tractor with a front-end loader. For cattle, a grinder-mixer, bale busters and other specialized equipment. These farms have lots of items, all of which are depreciating. In addition, most items will be sitting idle for most of the year and not generating any profit for the farm.

I suggest farmers in this situation consider specializing in one or two enterprises and sell the surplus machinery. That makes sense from a depreciation reduction standpoint as well as a business management standpoint. It’s much easier to be really good at one or two enterprises rather than four.

Pay cash for toys or scale down expectations

There is a popular adage that goes like this, “The main difference between men and boys is the price of their toys.” I think we can also include women and girls in this, but unfortunately that doesn’t rhyme.

Some years ago, I heard a farm business consultant talk about farms that were experiencing financial challenges and how to address them. One comment from that time really stuck in my mind. He said when he drove onto the yard at one of these farms and could see a motorhome, boat, ATVs, one or more fancy half-ton (or even three-quarter- or one-ton) trucks and other “toys,” he knew pretty well what one of the major causes for the situation was. Toys are fun to have and enjoy, but only if your farm is generating enough profit so you can readily afford them.

Another situation from my own experience went like this. As part of my farm financial analysis, I use a program called ABA or Agricultural Business Analyzer. The farmer was away, so I was working with his wife entering their loan details. We came to one item, a brand new fifth-wheel holiday trailer/toy hauler (triple axle), which was the largest I had ever seen.

She said they had just bought it and she had to get the loan agreement. They owed $78,000 and the payments were $640 per month at 7.75 per cent interest, but she couldn’t find the term (length) of the loan. I entered the available information into ABA and it calculated it would take 20 years to retire (pay out) the loan. She was totally flabbergasted as she thought there would be a maximum of 10 years.

When the farmer came home he confirmed he knew the term was 20 years and he was fine with that. I just checked the price of a 20-year-old fifth-wheel trailer and it’s about $20,000. Depreciation over 20 years, in this case, is about $60,000. They would have had to make a total of $153,600 in loan payments over that time, which is close to double the original purchase price.

Again, toys are nice to have but only if your farm is generating enough profit to pay for them. For items like this, saving your farm profits for a few years and paying cash saves a lot of interest costs. Another alternative is scaling down your expectations and buying used as I suggested in the first article in this series.

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