By “X” we don’t mean “formerly Twitter” — everybody has been writing “X (formerly Twitter)” so I thought I would do the opposite. In this case you’re welcome to fill in whatever you wish for X.

Salespeople often use the phrase to help sell products, especially new hot ones. Everybody uses the saying periodically, but of course we all know and accept that “everybody” is somewhat of an overstatement.

In the markets, when “everybody” is doing something, it often turns out to be the wrong thing, which raises the question: how could “everybody” be so wrong?

In recent articles I demonstrated the inaccuracy of analyst projections on specific stocks, and I compared Wall Street expert predictions to Calgary amateur predictions. Both were examples of “everybody” getting it wrong.

The stronger the consensus, the more wrong it usually becomes. The reason is simply that when “everybody” thinks the market is going down, they have already sold or at least trimmed their stock holdings and have higher levels of cash. Most market participants think, erroneously, they can predict market direction. If they have a negative view, they are busy selling, driving the market down. When pessimism reigns, “everybody” is out, and the market runs out of sellers.

The American Association of Individual Investors (AAII) publishes weekly investor sentiment data. On Sept. 22, 2022, the sentiment read 17.7 per cent bullish, 21.4 neutral, and 60.9 bearish, rivalling the worst sentiment of the great financial crisis of 2008-09. The 2022 bear market bottomed shortly thereafter.

At year-end, sentiment remained dour, with 20.3 per cent bullish, 27.4 neutral, and 52.3 bearish. Additionally, Wall Street experts were almost unanimously predicting a 2023 recession with declining stocks.

When “everybody” thinks the market is going down (and this was as close to everybody as “everybody” gets), it must go up. The reason is simple: few sellers remain. When investors like me, who plod along buying what looks like good value, continue to buy, the market starts to move up. Then, as it starts to move up, other investors become more optimistic and start to re-employ the cash they built while selling. The market moves up more; others see the boat they are missing and buy; then, speculators and fast-buck artists jump in, driving prices to a crescendo. Markets peak when there is strong positive sentiment and with “everybody” in, few new buyers remain.

This isn’t an exact science. It just so happens sentiment and the market both bottomed at the same time during the 2022 bear market and also the 2023 market correction. Sentiment was lowest on Nov. 2, 2023, with 24.3 per cent bullish, 25.4 neutral and 50.3 bearish, coincident with the beginning of one of the strongest November/December rallies ever. However, all-time highs in January 2022 were predated by a sentiment peak a full eight months earlier, when there were 56.9 per cent bullish, 22.7 neutral and 20.4 bearish. Bullish or bearish sentiment can stick around for quite a while. I think sentiment picks bottoms better than tops, but if there are more than 50 per cent bullish for a prolonged period, something bad is likely to happen.

Grating against ratings

Analyst ratings of stocks are more nuanced than overall market sentiment. Analysts generally give individual stocks a one to five rating titled Buy, Outperform, Hold, Underperform and Sell, providing target prices.

The same principles apply in that widely touted stocks can often fall, and vice versa. If an analyst recommends a stock, portfolio managers buy it. The more analysts with a buy rating, the more funds have the company in their portfolio. It’s not unusual to see a stock fall five to 10 per cent simply on the downgrade from a well-known analyst, and vice versa. If it’s rated a buy, there is only one way for the rating to go, and that’s down. The nuance is that different analysts cover different stocks, the number of analysts covering a stock varies widely, and strong stocks can have positive analyst ratings for a long time.

A clear example of going against analyst ratings was recently in buying office properties. Boston Properties is a large office real estate investment trust (REIT) in the U.S. It peaked at $147 before COVID, fell then recovered to $132 in March 2022, then fell again all the way to $50 in November 2022, as work-from-home and commercial real estate debt woes dominated the sound waves.

I sold a put option (a bullish move) on it immediately after a BNN commentator banged the table to “stay out of office properties.” I had completed my financial review and was going to make a move, but that was the trigger. I then quickly followed up buying a Canadian office REIT, Allied Properties, for my RRSP. Boston Properties is up 40 per cent and Allied 30 per cent in the last couple of months.

Clearly, I didn’t make these decisions on one commentator. His comment simply encapsulated the dour sentiment on office properties.

A real challenge is to read repeated negativity and act differently — and, once again, vice versa.

The post ‘Everybody’ is usually wrong — and why it must be so appeared first on Grainews.

Maurice Torr, a rural real estate expert with Century 21 Westman Realty in Brandon, says it’s important for families to consider how to present farm property in the best light before putting it up for sale.

“It’s a matter of making your property presentable, making it appealing. People buy something because they like what they see. That’s why the presentation factor is always so important. You only get that one chance to make a first impression,” he says.

“When a farmer is retiring, (the farm) is his biggest asset and that’s going to be his retirement and you naturally want to maximize it. Well, you’re not going to maximize it if it’s not presented right.”

One of the first things to think about is the approach to the farm, Torr says.

If it’s summer, make sure the approach is clean and tidy and nothing jumps out at the buyer. Cut the grass on both sides of the road, get a junk dealer to remove any old machinery, remove oil or chemical pails, and give old buildings a fresh coat of paint and some new shingles.

“I remember many years ago I was going to a property and as I was driving up the road and there was a bunch of shingles missing off the roof. I thought, if the person isn’t on top of things to repair something like that, what else has he left?” Torr recalls.

“Whether it’s farmers or whether it’s people buying a house, it’s probably one of the biggest investments they ever make in their life. You want to feel good about that investment.

“If it’s untidy, the person coming in is going to say, ‘I don’t feel good about this.’ Consequently, unless they can get the farm cheap, they’re probably not going to bother.”

The right time

Tim Hammond, founder and CEO of Hammond Reality at Biggar, Sask., suggests to start planning for sale of a farm at least three years before listing it. That will provide enough time to complete repairs or upgrades and maximize potential tax strategies.

He says spring or summer are the best times to list a farm property, when the growing season is well underway.

“That’s absolutely the best time to showcase your farm,” says Hammond, who estimates farms comprise more than 90 per cent of the properties his company lists.

You may want to consider collecting video footage of the property to show prospective buyers. That means buying a drone for $500 to $1,000 to shoot the footage yourself, or hiring a reputable company to do it for you.

Hammond says video footage can help sell a farm, especially in the wintertime when it might be under a couple of feet of snow.

“Do the drone video in the summer. Take all kinds of video or pictures when it’s green, clean and shiny. That’s absolutely the best time to showcase your farm.”

To build or not to build

Torr recommends delaying any new building construction if you’re planning to put the farm up for sale.

“You may decide it’d be nice to have a workshop, so you’ll put up a heated 40- by 80-foot shop, but the guy who comes in after you may say that ain’t big enough for my combine,” he says.

“Everybody’s got their quirks. That can be a problem if you try and perceive what somebody else wants.”

A farmer may be better off applying a fresh coat of paint to existing buildings or replacing sections that may be damaged or missing to make them more presentable.

Infrastructure

Another priority is to make sure basic infrastructure is in proper working order before prospective buyers tour the property. Torr says that includes everything from grain handling machinery to the lift in the maintenance shop.

Along the same vein, make sure any on-farm facilities are relatively clean and organized in case someone wants to inspect their interior.

“Again, presentation is the key element if you want to maximize your price,” he says.

“It doesn’t have to be perfect. A working farm is an operational farm and you can never get everything perfect.

“If there’s a workshop, you want to be able to see the floor. You don’t want to go into a workshop where everything’s scattered all over the floor. Aesthetically, it creates a negative mindset.”

Farmland focus

Of course, no aspect of a farm operation is more important to a potential buyer than the farmland itself.

That’s why it’s so important it is as presentable as possible, Hammond says. You may want to look at underproductive or underutilized patches of land and consider how they can be made to look better or put back into service.

In the case of areas with highly salinized soil, there are two options: convert them to grasslands or install tile drainage. Grasslands are more aesthetically pleasing and can become a source of additional revenue if what is grown there is sold for feed. Tile drainage helps lower the water table, which draws salt from the surface.

While tile drainage is a far more expensive option, Hammond says more farmers are considering it.

“Once upon a time, it was the same value as farmland so people were hesitant to do that. But now, relative to the cost of farmland, it’s pretty affordable and the returns are there.”

Hammond also recommends burying rock piles and clearing bush to make it easier for the next person to farm and boost the price they are willing to pay.

For those who run a mixed farm with livestock and want to sell it as a grain farm, Torr suggests starting that transition while still farming the land. That will save time for the purchaser and show evidence of land productivity.

“People want to see action,” he says. “If it’s produced and there’s a good stubble, they know it’s OK, whereas if you’ve just worked it up, who knows? It’s kind of a crapshoot then.”

Farm machinery

Perhaps one of the most valuable assets of any farm is its machinery, from tractors and combines to sprayers and grain carts. But what should be done with that fleet when it’s time to sell the farm?

Torr’s advice is to not include it in the sale price. He recommends giving the buyer the option to buy machinery at separately negotiated prices, put it up for sale at an auction, or sell it yourself.

Prospective buyers may prefer a different manufacturer. Adding machinery to the sale will also substantially increase the price.

“If you can bring the price down by $1.2 million because you’re not including any equipment, it’s going to appeal to more people than it will if you leave it all in.”

Farmhouse

At one time, the house was almost an afterthought when a buyer was looking to purchase a farm. That’s no longer the case, says Torr.

“When I first moved here in 1987, there was a lot of those older, run-down, aging properties that people were making do with. They’d never known anything different.

“But we’ve gone through quite a transition in that respect with regard to living accommodations. It is now an important factor. The younger generation… are wanting almost as good a house as they would have if they lived in town.”

That’s why Torr says farm owners may want to consider home upgrades that enhance curb appeal. That can include a new roof or windows.

Renters

Farmers frequently put their property up for rent when they retire rather than immediately selling it.

Torr says that makes sense for many farm owners, but it can pose a challenge if the renter looks to buy it down the road and seeks a discount on the selling price.

If the renter is interested in buying the farm and has the financial capacity to do so, Torr recommends the current owner get an independent evaluation of the property. That way both parties know the fair market value.

He also suggests the two sides use a mediator to avoid potential disputes.

Keep records handy

Hammond says it’s often a good idea to keep farm records handy when a farm is put up for sale and make them available to prospective buyers if asked. Those can include data on farm yields, crop rotations and inputs used.

“Buyers always want to know, what did you grow out here for crops and what were the yields and the input history, what kind of chemicals and fertilizer did you put on it? To have that information prepared for a buyer, that’s really going to go a long ways with them,” he says.

Peace of mind

Hammond says upgrades made to a farm before sale may not always pay off.

“It’s the kind of thing that you don’t always know that you’ll get dollar for dollar back for your investment. But what it does is, it makes it more attractive to a buyer, which can facilitate a quicker transaction … and there’s the peace of mind just knowing this deal is going to happen.”

Still, Torr cautions that families must be patient when selling. It can sometimes take years for a transaction to be completed, which is why families plan for a sale while they are still farming.

The post Up for sale: First impressions count when selling farms appeared first on Grainews.

The farm is comprised of five quarters of land and some machinery held personally by Ron and Cindy. The land is owned clear of any mortgages or liens. All of the land is cultivated cropland. Its book value is $800,000 and its market value today, they estimate, is $4,800,000.

Although the farming operation has been successful, Ron and Cindy have no off-farm assets aside from their principal residence and their tax-free savings accounts (TFSAs), both of which are fully utilized. They are both healthy and active and want to stay on the homestead as long as they can.

Ron and Cindy know if they were to stop farming today, they would not have enough personal assets to maintain their current lifestyle spending of $6,000 per month.

Ron and Cindy approached Nathan Heppner, a certified financial planner, and Erik Forbes, a registered financial planner, both with Forbes Wealth Management in Carberry, Man., to devise a plan on how to maintain their current lifestyle and exit the farming operation.

Personally held land

Their main task, Forbes clarifies, is to develop a plan that will support their desired lifestyle needs of $6,000 per month. Within that task there are issues. What do they do with personally held land? What do they do with corporate assets and their corporation? Moreover, how can they provide a legacy for their children?

When it comes to the personally held land there are several options including the following:

1. Ron and Cindy could sell the land to a third party. Their children are not interested in farming, thus they are not interested in purchasing the land.
2. They could keep the land and rent it out.
3. They could keep the land and devise a crop sharing agreement with someone who would be an active farmer.

If Ron and Cindy sell the land to a third party, it should provide assets to sustain their lifestyle. Selling to a third party will ensure they can utilize the lifetime capital gains exemption and apply the alternative minimum tax (AMT) in the year of sale. Therefore, they should view AMT as a prepayment of future tax, as they will be able to recoup this in future years by applying it against taxable income.

The following is a potential calculation.

Book value ($1,000 per acre) $800,000
Market value ($6,000 per acre) $4,800,000
Capital gain $4,000,000
Lifetime capital gains exemption $2,000,000
Net capital gain $2,000,000
Capital gains inclusion 50 per cent
Taxable capital gain $1,000,000
Personal tax rate 51 per cent
Tax payable $510,000

After the sale and taxes are paid, Ron and Cindy will be left with $4,290,000. The couple could further reduce the tax bill by contributing to their RRSP with any unused contribution room.

Combining the $4,290,000 with their fully utilized TFSAs (each with a market value of $100,000), will give the couple investable assets of $4,490,000. Assuming a modest return of three per cent net of fees and inflation, investable assets of this level would support a monthly income of more than $17,150 gross until the younger spouse reaches the age of 100, Heppner estimates.

Emotional ties

However, the land has been in the family a long time, and there are some emotional ties. Ron and Cindy aren’t opposed to selling the land but have expressed a hesitation to give away their family’s legacy.

If Ron and Cindy don’t want to sell the land, an alternative would be to keep the land and rent it out. Some of the benefits to this strategy are the land stays in the family. The land can be passed down to the next generation. It gives the next generation the opportunity to give farming a try, if they so wish.

There are potential downfalls.

Depending on the rental rate, the income generated by the land may not be sufficient to meet the couple’s lifestyle needs.

Ron and Cindy may also lose access to the lifetime capital gains exemption (LCGE). Loss of the LCGE could happen for several reasons. There is a risk the government abolishes that provision from the Income Tax Act before Ron and Cindy can utilize it.

Another risk is if the land is rented out for an extended period before the parents can utilize their two lifetime capital gains exemptions, Ron and Cindy may no longer qualify for the LCGE because they are not “actively farming” as tax law specifies.

The rule of thumb is you can rent it out for as long as you farmed it and still qualify for the exemption, Forbes explains. This means if they farmed for 20 years, they could rent it out for 20 years or less and still qualify. However, the Canada Revenue Agency (CRA) could easily change their presently tolerant rule and time horizon. Sooner is less risky given the possibility of tax law change.

The couple could also devise a crop sharing arrangement to allow them to maintain ownership of the land. The land will still provide some cash flow to sustain their lifestyle. CRA generally looks more favourably on crop sharing arrangements than on rental agreements when considering qualifying for the lifetime capital gains exemption.

Using a crop share arrangement would mean that Ron and Cindy are less likely to lose access to the lifetime capital gains exemption based on the active farming criteria.

Furthermore, they could lose access to the LCGE in the future if the government abolishes that provision before Ron and Cindy are able to utilize it.

Going the crop share route potentially exposes Ron and Cindy to additional risk. Although there is the potential to earn more with crop sharing versus renting, there is also the potential to earn less because income is based on how well the crops do.

In the end, Ron and Cindy have a tough decision to make. The best option to support their lifestyle needs would be to sell at least a portion of the land. This would also ensure they are able to utilize the lifetime capital gains exemption.

The post What to do when capital is short and needs are long appeared first on Grainews.

Ralph has total net worth of $7,537,357, almost all of which is his farm and personal land plus a house and cottage worth a combined $340,000. His financial assets total a modest $218,000. The farm and its inventory are Ralph’s financial life.

Selling land would generate a hefty capital gain. Ralph wants to minimize the tax. To that end, he approached Winnipeg-based certified financial planner and farm advisor Colin Sabourin for advice.

The issues in the potential sale of pasture to the interested buyer, the City of Winnipeg, are complex. Ralph wants a good price and a way to reduce capital gains tax on the potential sale. Price is an issue, but so is the bidder’s right of expropriation. This is a transaction that is going to happen. Only how it happens is an issue.

The City of Winnipeg wants to build a new development on some of Ralph’s land. The City has offered $25,000 per acre for 40 acres. That’s $1 million. Ralph paid $60,000 for the land, so his potential gain is $940,000. Ralph has $700,000 of capital gains exemption. He previously used $300,000 of the $1 million allowed under the Qualified Farm Property Lifetime Capital Gains Exemption.

Ralph’s remaining land has an adjusted cost base of $1,000 with a fair market value of $3,108,000. Ralph’s corporation is valued at $3,061,357 and it qualifies for the capital gains exemption because it has more than 90 per cent of its assets in the farm.

A Cinderella issue

Ralph’s four adult children have their full $1 million capital gains exemptions remaining. One child, a daughter who does not want to farm, can receive 40 acres. If the daughter owns the land for at least three years, she can use her own $1 million exemption, Sabourin notes.

The adjusted cost base of the land is $60,000, so upon sale, the gain of $940,000 could be sheltered by using the daughter’s capital gains exemption. The proceeds could then be gifted to Ralph free of tax. Canada, of course, has no gift tax. A non-farming daughter is the best recipient of the gift because the son, Herb, will farm and will want to use his own exemption at some time in the future.

The question of which daughter should get the gift of 40 acres resembles a Cinderella issue. Tax exemption is the glass slipper in this case.

Daughter No. 1 may want to use her exemption some time in the future for her own business. But she has distinct creditor risk. If her business were to fail while she owns the farmland, a creditor could reach to the land.

Daughter No. 2 is married with children. If she were to own the land and rent it back to her dad, her income would be taxable and would reduce the Canada Child Benefit.

Daughter No. 3 is not married and has no children. She cannot lose land in a divorce settlement. She does not receive the Canada Child Benefit. She is the best candidate to inherit the land.

Tax savings

Four years from now, when daughter No. 3 can sell and apply the Qualified Farm Property Exemption, the City of Winnipeg will, we assume, have written a cheque for $1 million to the daughter. She can claim a $940,000 gain and offset it with her own exemption. She can gift the money back to Ralph. He will still have $700,000 of his own exemption remaining. She will have to pay the Alternative Minimum Tax (AMT) of about $50,000 for the transaction. Daughter No. 3 can cover this by gifting $890,000 and leaving $50,000 to pay the tax. The AMT, a tax equalization that functions as a tax deferral, can be applied for the next seven years to reduce her taxes.

This plan is a lot of paperwork, but it will save Ralph approximately $20,000 in taxes, Sabourin estimates.

There is a caution we have to mention. The four-year hurdle should work, but the capital gains exclusion rate of 50 per cent could change as the Government of Canada seeks tax revenue to compensate for its huge expenses coping with the COVID-19 pandemic. Among the changes that could be made are a cut in the 50 per cent capital gain exclusion to 45 or 40 per cent or less. Base tax rates could rise. Ralph will be 67 and presumably in receipt of Old Age Security (OAS) and Canada Pension Plan benefits.

Assuming that Ralph gets a three per cent return after three per cent inflation from his $7,387,575 of assets, $221,630 before tax, he can retire in comfort. At 65, he will qualify for Old Age Security, $615 per month at 2021 rates, but lose all of it to the clawback that starts in 2021 at $79,054.

The clawback takes all OAS at yearly income of $128,149. He will be able to add $14,000 per year from the Canada Pension Plan. That’s a total income of $235,630 post 100 per cent clawback. After regular income tax at 39 per cent and clawback, he would have $143,734. When he gets the $940,000 from his daughter, its income, also at three per cent after inflation, $28,200 per year before tax and $17,200 per year or $1,433 per month after 39 per cent tax, would push Ralph’s after-tax income to $13,411 per month.

That’s without realization of any capital gains on farm property. He is an ideal candidate for making charitable donations given that his tax rate is high and what he gives is effectively eliminated by tax deductions.

Ralph’s legacy to his children can be the farm, a lot of cash and perhaps a connection to a community benefactor.

The post How to manage the tax consequences of a city takeover of farmland appeared first on Grainews.

While the overriding purpose of this column is to discuss stocks as an off-farm investing avenue, I also have extensive real estate experience. That experience includes all types of real estate including houses for rental, multi-family, commercial, farmland, recreational and hotel-condos. I have sold all my real estate with the exception of the hotel-condos, and the farmland housing my seed business.

What has always baffled me is the belief that a house is the best and most important investment a person can make, the value of which never goes down. But is a house for personal use really an investment? Here are three simple qualifications for an investment:

• Interest paid to finance the purchase must be tax deductible (if financing isn’t used, it would be tax-deductible if used);
• The purchase provides, or has the potential to provide, a steady stream of cash flow; and,
• The asset has the potential to change in value.

An owner-occupied dwelling only meets one of these criteria. Interest in Canada isn’t generally tax-deductible (although it can be), and it will only ever have negative cash flows. In many cases renting is cheaper than owning when all costs are considered. My position is that a house purchase decision is a lifestyle decision, not an investment decision. I’m not suggesting buying a home is a poor decision, simply attempting to re-position the decision, stepping away from conventional wisdom.

Real estate values

The second part of the misperception is that house values never go down. Real estate values are based on local market conditions and often go down. The home we own in Calgary is worth about 15 per cent less than it was a dozen years ago. From a bigger picture perspective, Canadian house values peaked about 1990, declined for a number of years, then took until 2002-04 to recover. While most areas in Canada have gone up for the past two decades, it doesn’t mean they will continue doing so.

Many also believe that farmland values can’t go down. They certainly can. Those of us with some grey in our hair will recall farmland dropping in half between about 1980 and 1990. While it has been trending upwards for the past three decades this trend is not guaranteed.

Land, housing and stocks have a couple things in common. First, they tend to take the stairs up and the elevator down. Second, prices recover after declines. Stocks exhibit more rapid decline and recovery; real estate cycles are longer.

Now for some data that will blow your mind. From 1900 to 2017, U.S. equities provided 6.5 per cent annualized after inflation returns, whereas U.S. housing returned a paltry 0.3 per cent. Canadian stocks returned 5.8 per cent, but unfortunately Canadian housing wasn’t included in the report. The best housing market in the world was Australia with 2.2 per cent annualized after-inflation returns. Those are huge differences. One reason real estate is favoured is that large amounts of leverage are allowed. However, leverage is a two-way street that can cause serious financial stress in down markets.

Why did I turn my back on real estate? While generally deriving good returns, real estate entails a lot of work, and I was absolutely nuts taking care of real estate investments. I was delighted to say good-bye to my tenant and toilet days. A well-selected stock portfolio is much easier to manage, significantly less stressful and delivers better returns.

The post Thoughts on investing in real estate appeared first on Grainews.

Green Party leader Andrew Weaver on Thursday introduced the Property Law Amendment Act as a private member’s bill, which he said “would prohibit foreign entities from purchasing ALR land over five acres.”

The new bill is a reintroduction of a bill which Weaver proposed, and which died after first reading, in February last year. With three MLAs, the Greens are now supporting an NDP government tied with the opposition Liberals at 41 seats.

“One of the key reasons why young people are unable to pursue farming is due to the cost of land,” Weaver said in a release. “By allowing ALR land to be subject to international real estate speculation, we are limiting their opportunities to get into this vital, sustainable industry.”

Furthermore, he said, the province today imports about 70 per cent of its vegetables from the U.S., particularly from California, and “with these regions increasingly experiencing extreme weather events such as droughts and floods, it is more important than ever that B.C. take the future of our food security seriously.”

Alberta, Manitoba, Saskatchewan, Quebec and Prince Edward Island have set up similar laws to protect agricultural land, leaving B.C. as “the only western province without such a law,” he added.

In Alberta, a foreign entity can’t own or control more than two parcels of more than 20 acres in total, while in Saskatchewan, non-Canadian citizens can own no more than 10 acres. Manitoba’s rule limits foreign interest at 40 acres.

In B.C., meanwhile, Vancouver commercial real estate newspaper Western Investor on Thursday quoted Weaver as saying foreign buyers have been looking elsewhere, including farms, for investment properties since the previous Liberal government set up a tax on foreign investment in Metro Vancouver property last year.

The paper cited a survey last year, conducted by credit union Vancity, which showed farmland in B.C.’s Lower Mainland running for between $150,000 and $350,000 per acre on parcels of less than five acres.

The same survey showed Metro Vancouver farmland running around $110,000-$120,000 per acre for farms around 20 acres, and $50,000-$80,000 per acre for parcels over 40 acres. It also showed almost a third of actively farmed Metro Vancouver ALR farmland is leased by farmers from non-farmer landowners.

While ALR land’s usage is limited to farming, each property is entitled to a single-family dwelling and owners can apply for exemptions to building and land-use restrictions, Western Investor noted, citing an application submitted in 2016 in Richmond to build a nearly 40,000-square-foot house.

Weaver told the newspaper his bill’s restrictions wouldn’t apply to anyone who pays taxes in Canada.

“We want to encourage people to come live here, work here, pay taxes here. What we don’t want is third-party, offshore interests using our land, our homes, as tools for speculative investment,” he said. — AGCanada.com Network

The post B.C. Greens seek limits on foreign ownership of farmland appeared first on Grainews.

You may wonder why I would call this a risk. I would respond by saying that the lack of farm transition planning likely one of the biggest risks many farms face.

I recently attended a local chapter meeting of the Canadian Association of Farm Advisors (CAFA) and sat around a table with accountants, financial advisors, realtors, estate and retirement planners, insurance agents, lenders and transition specialists.

The main takeaways I got from this meeting are:

1. The vast majority of farm families do not have any kind of a formal written transition plan for their farm.
2. Too many farmers believe including a transition plan in their will is sufficient, not realizing the potential tax implications and added family stress this can create.
3. To build a complete and effective farm transition plan, you need a collaborative team approach. Include your family and some professionals, including an accountant, a financial advisor, a life insurance representative, a realtor and a lawyer.

We hear often that “farming is big business.” That is true, especially when it comes to the details of transferring or selling property, which can involve taxation law, inheritance law, capital gains or losses, tax credits, divorce and death. It is highly unlikely that any one person has the capacity to understand all of these aspects.

It’s also important to start the process several years in advance of when you anticipate you will need it. At the CAFA meeting, we discussed the importance of getting all generations of the farm family together to discuss the future of the farm. This meeting should include all spouses and siblings, even those that do not live or work on the farm.

Many farm families have meetings and start to discuss transition, but unless they actually write things down and commit to a next meeting, the topic is often left, and eventually dropped all together. It’s easy to do this when you’re busy with the day-to-day operations of a farm.

Make the plan

Transition planning takes commitment and time. That’s why it’s usually best to bring in a transition facilitator who can move the process forward and make sure everyone is engaged and has a say in the outcome. Advisors suggests starting the process at least three to five years before you intend to implement it so there is time to cover off all aspects of the plan and get everyone’s feedback. This way the transition will happen as seamlessly as possible with little disruption to the farm business and few hard feelings between any family members.

One specialist said that 90 per cent of the farm transition plans he works on are done in the hospital at someone’s bedside, which is the worst time to do it. From his experience last minute decisions made under severe stress are not likely to take in to consideration all of the aspects or people the decision might affect. These hospital decisions end up being made with too much emotion and not enough pragmatic thinking.

If you don’t have a transition plan in place and something happens, the farm may need to be sold.

If your plan is to sell your farm at retirement you need to ensure you are transitioning properly to minimize taxes and maximize what you can keep for your retirement and pass on to your family.

I suggest that you start the process for your farm operation now to ensure that you don’t leave it until you are in the hospital. Starting the conversation may not be the easiest thing to do, but it needs to be done now to prevent worse things happening later.

Farming is and always will be a long-term business, a labour of love. For most Prairie farms, that means it’s multi-generational, and the intent is to pass it on to the next generation.

So if you want to ensure the continued success of your family farm get your plan done!

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There are various ways to calculate land rental costs, says Roy Arnott, farm management specialist with Manitoba Agriculture. “There are a number of methods that producers and landowners can use to calculate rates,” he says. “There is the usual cash rental calculations, to crop shares, to some flexible methods that try to share for the risk and reward of land rental between a producer and the land owner.”

In the past, fair market land rental has often been slated somewhere in the range of 18 to 22 per cent of gross revenue (yield per acres times price per bushel), but with some land values having risen in the region of 14 to 22 per cent across Canada in the last few years, is this still a reasonable number to base rental rates on?

“I think 18 to 22 per cent is probably still the range of average land rental rates across Western Canada,” says Arnott. “For the landowner the check and balance is going to be to look at land value multiplied by an investment rate of return. You have to be careful with the numbers because they can push around, but that rate of return is somewhere between two and two-and-a-quarter per cent of the land value plus land taxes. That should be a pretty good approximation of land rental as well. That’s not necessarily what the coffee shop says land is worth but is really its productive value.”

Worth getting creative

Cash rental agreements are still the most common across most of Western Canada, but there are also some effective, non-traditional ways of approaching land rental that are more flexible and offer additional advantages for both parties, especially if they are both prepared to share in the rewards, and also the risk.

“One effective arrangement I have seen in recent years is where you’ve got a base rental rate that is determined, even if it’s determined arbitrarily, and a maximum rate which, again could be determined through calculation or arbitrarily and then the land rental rate is applied based on what happens during the year,” says Arnott. “If it’s a really good year, the producer is going to pay more rent because he can share more with the landowner and everyone benefits. If it’s a particularly tough year, the producer might only have to pay the base rate. The landowner is going to get less rent but the producer gets the benefit of some protection. When you have that agreement going in both directions for both parties, they are attractive and you tend to end up with very satisfied people on both sides of the equation.”

Use long-term averages

Any calculations should definitely use long-term averages, not just a couple of years’ production records. “Well I think when you take a longer-term viewpoint on gross revenues, on productive values, you tend to find a little bit more stability in your offering and your expectations,” says Arnott.

Making a short-term rental agreement based on your last one or two years of gross revenue, where a producer had an above production year, and above-average prices, might put him or her in a situation of offering and paying too much land rent than might be warranted with what the long-term production value has been or could be.

“That can flip around too,” says Arnott. “Just because one good year comes out of the woodwork doesn’t necessarily mean that land rent has to immediately increase. So both sides need to take into account, what is the longer-term average gross revenue, average yield, average prices, and what is the expected price trend of those commodities moving forward. In a rising market and rising land values, it’s very easy to keep cranking up land rentals or offering more, or expecting more, but when you’ve got flat or declining markets it gets very hard to figure out an appropriate way of stabilizing or even decreasing some of those values to be truly fair and reasonable.”

Long-term averages will also help producers build in some protection against factors beyond their control such as currency fluctuations, trade disruptions or market volatility. Arnott suggests taking a step back to look at what is going on in the bigger picture to get a better perspective from both the landowner and renter point of view.

“If you look at gross revenue times five to equal land value, that is a fairly cheap land value number, whereas if you look at gross revenue times 10, that’s probably expensive land or where insanity is set in on land values,” says Arnott. “Six to eight times the gross revenue is likely a more realistic figure. If you take a short-term viewpoint of gross revenue, and you apply those kind of parameters, you can crank out some very interesting land values and they can be, at times, very different if you apply a longer-term metric to gross revenue, or even projected gross revenue to give you a sense of where land values should be”

These numbers, says Arnott, come into play when you’re doing that landowner check and balance related back to land rents. “If you take this back full circle to where we started talking about 18 to 22 per cent of gross revenue, that’s probably going to be somewhere in the range of six to eight times gross revenue as a land value as well. That calculation is going to give you land rents that are based on the investment rate of return, so it’s sort of a double check producers can do.”

Transparency a problem

Calculating land rental rates that makes sense for the producer and the landowner definitely begins with assessing production costs yield potential and should take into consideration the marketing strategy the producer wants to employ. For example does he or she have sufficient grain storage capability to hang on for better prices in the market? And what is the associated cost or risk of doing that? These things all factor into the bottom line and help make sense — or not — of the land rental figure. That said, it’s not always easy to get a handle on what land in a specific area is really renting for. It’s often information that both landowners and renters want to keep close to their chest.

Lyndon Lisitza, who owns Renterra, an online service that matches up producers seeking land to rent and landowners looking for renters, says he sees more and more clients signing up for his service because it helps to encourage transparency in pricing, which they can’t get by simply talking to their neighbours or going to live auctions.

“Landowners if they are disconnected from the land, they are not always sure what the land rental values are, and there are so many variables that go in to determining what the value is — like commodity prices, or how much competition there is in a particular area,” says Lisitza. “They’ll put it up on my site and we can either do an electronic tender or they can hold an online auction. The online auctions are probably the most efficient way of determining and discovering what the value of something is. I’m finding when I do set up an auction, I might have anywhere from 50 to 60 people in a 50 kilometre radius that are looking to rent land. Assuming it’s decent land, there’ll be good competition and you very quickly determine what the value of that land is.”

For the producer it’s also an efficient way to have all the information in one place that he or she needs about a parcel of land, such as cultivated acres, soil class, assessment value, and often pictures and mapping of where the land is. “They can download all the information so that they can at least determine if they’re interested,” says Lisitza. “Quite often then they will take a drive by and look at the land. It definitely gives everyone an equal opportunity to figure out if there’s land available and an equal chance in the bidding process.”

Maintain perspective

No one wants to end up in an untenable position when it comes to renting land, but if people are too conservative and cautious they can end up on the underside of the land rental value, says Arnott. “If people are too aggressive, and too willing to gamble, they can be on the overside of the value very quickly and put things at risk. Both the conservative and the gambler can create challenges for the business on both sides. So it’s very important to keep perspective and balance with your thinking and planning.”

Find out more about Renterra at renterra.ca.

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One such conversation was around farm transition. I spoke with a couple in the process of taking over the family farm.

The issue was two other siblings who worked off the farm. These two siblings weren’t interested in farming, but their parents had always told them they would get a share of the farm. The couple weren’t sure if the siblings would chose to keep any land they inherited, or if they would sell it for cash. The couple isn’t currently able to buy it; losing the land could jeopardize their small farm operation.

Mom and Dad incorporated the farm 10 years ago, but they hadn’t really done anything more than that. The couple needed more information.

This brought me back to last year’s Alberta Canola Producer’s Commission’s Leading Edge Farm Management series. I was part of this speaker series. Other speakers were experts on farm management, tax planning and farm transitioning: Dr. Dany Klinefelter, Dean Gallimore, Merle Good and Joel Bokenfohr.

I remember listening to their presentations intently. The thing that really got me was the level of complexity in today’s world of taxation. Farmers must start planning something like a farm transition several years in advance so everything is in place to make it happen as efficiently and cost effectively as possible, so you can keep the farm as a viable functioning business even with outside siblings involved.

It was a good that we did three similar meetings so that I had the opportunity to hear them talk three times on the same subjects. I needed three times to get my head wrapped around all of the details involved in a farm transition or a farm financial health checkup. I can see why many do not want to tackle these issues, so they put it off — not the best strategy.

All I could suggest to this couple was that, before they make any decisions, they talk to their accountant and lawyer and/or someone like Dean Gallimore who specializes in farm transition strategies. Bringing in someone like Merle Good to sit down with everyone involved (including siblings) to discuss the realities of a farm transition can also help. An outsider can outline everyone’s expectations and help develop a solution everyone can live with.

Fair or equal?

I remember Merle Good saying that siblings may want their fair share, but “fair” does not mean they will get an equal share of the assets or land. Often, they need to see it as getting their “fair share” based on their involvement and input to the farm over the past number of years. If they have been working elsewhere for 10 years while their farming sibling has been working on the farm, they should take into account who has been building the equity in the farm during that time. Off-farm siblings should not expect to get an equal percentage of the overall farm and assets compared to the sibling who has been working on the farm. And that’s where the fighting begins. It takes a long time for everyone to come to the reality of the situation and to be fair minded about what is best to allow the family and the farm to remain intact.

I have talked to too many farm families that tried to do a transition the good old fashioned way — on their own. By the time they were done, the farm was either broke or sold to pay taxes and fees, and to give a little piece of the pie to everyone who wanted a piece. If someone in the family wanted to farm, they couldn’t afford to after the transition process.

Too many families have been torn apart over a farm transition. That can be avoided with some pre-planning done well in advance. With a little help, farmers can ensure that the proper steps are taken to transfer a viable farming operation over to the next generation and still give everyone else involved their “fair share” and maintain family harmony for the future.

Depending on the complexity of the situation — factors like the number of interested parties involved in the transition, the size of the operation, who owns what assets — the process can take a while. Bringing in outside experts may not be cheap, but from what I remember from the after hours discussions I had with the other speakers on the tour last year, the head aches and tax savings from properly setting up the transition from the beginning will far outweigh the cost and time you spent to do it. And it’s hard to put a price on keeping your farm viable and your family united.

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There are several ways to read the past. Some investors like to examine the income a company may earn. That means looking at sales, costs of production, profit margins, competitors’ products, industry trends, ratios of price to earnings, price to sales, etc. This is the fundamental analysis most often practiced by investment analysts. It gets a lot of respect.

Another form of fundamental analysis ignores sales and costs and instead looks at the balance sheet of a company to determine its present worth. The basic measure is share price to book value with variations that include price to various measures of assets and debt to equity ratios. Ben Graham, the founder of fundamental analysis and the teacher of famed investor Warren Buffet, focused on balance sheet analysis to show what an investor would get for his or her money.

An alternative school of investing is so-called technical analysis. Its practitioners claim that everything that is known about a stock or bond is already contained in the stock price. They plot daily prices and look for patterns such as “head and shoulders” to identify trends. Academic analysis of technical analysis has found that it gives useful trading signals. However trading costs wipe out the small advantage, studies show.

The problem in each of these three schools of investment analysis is to identify the right measurement period. Where you set the start and stop markers predetermines much of the gain or loss. In fundamental analysis, analysts tend to look at quarters of a year and years. In technical analysis, analysts use daily price moves to find trend lines. A daily plot that rises over a longer-term average is seen as a buy signal. If the plot goes below the moving average, it’s sell signal. Persistence of trend is supposed to rule out randomness.

The problem with each school is to find the true trend. Let me illustrate the point. If one studies stock prices minute by minute, statistical noise obscures direction. Hourly data has the same problem. Just as a matter of interest, many investors like to look at daily moves. It means little. Weekly and monthly and quarterly data is also interesting. It means more. The longer the period, the smoother the data becomes. If you use a moving average such as 52 weeks to that each successive week you divide share price by the price average of the preceding 52 weeks (the sum of 52 average weekly prices divided by 52) to smooth out the wobbles, noise and clutter disappear and the trend becomes evident. If you carry the smoothing process out to 10 years, 520 weeks, or 20 years, 1,040 weeks, all that is left is a straight, upward sloping line. A price above or below the line will be sucked into the trend or, if an outlier, ignored. History takes over and short-term trading signals from fundamental or technical analysis no longer matter.

Long-run returns

Using long run returns, Wharton School of Finance Professor Jeremy Siegel has shown in his book, Stocks for the Long Run (McGraw-Hill; 5th ed.; 2014), that in the period 1926 to 2012, U.S. stocks had a 6.4 per cent average annual return after inflation. In the same period, bonds had an average annual real return after inflation of 2.6 per cent. In periods shorter than these 86 years, returns deviated from the long run average. In the period 2000 to 2012, starting from before the dot com bubble broke to a time during the recovery from the 2008 recession, stocks had a real return of just 0.3 per cent and bonds of an astounding 6.5 per cent. If we move to still shorter periods, there will be more deviation from long run values.

It comes down to trying to beat the averages and that takes more than an MBA. The largest gains and losses happen when investors are unprepared for an event or a change of trend. Very few people predicted the 2008 crisis driven by a meltdown of the U.S. subprime mortgage market. Almost no one would have predicted the extraordinary and unprecedented period of bond price gains that started in 1983 and is still running. There has not been such a bond bull market since the end of the Napoleonic Wars in the early 19th century.

It follows that looking backward at lines traced by wobbly stock or bond prices or trying to divine from income statements what the future will bring is not enough to predict the future. Sure, some trends do emerge when you see a stock’s price line swan diving toward zero or, the reverse case, a stock price rocketing upward without any apparent limit. The investor who wants to avoid risk will not jump onto a stock that seems near death at a zero value. It could deserve to die Nor will the risk-avoiding investor buy into stocks trading on momentum on the theory that what goes up continues to go up. If it did, the company would own the world one day. Yet there are exceptions such as Apple Inc., the most valuable company in the S&P 500 Composite. And a few companies periodically have near death experiences and then recover, especially in mining. Teck Resources Inc. was at $50 in 2011 and is trading near $5 today. Beaten is not dead and this coal and copper miner will probably rise again. But it’s risky and owning it is no way to get a good night’s sleep.

It comes down to a problem of observing volatility and then having the fortitude to do nothing. French geophysicist Didier Sornette, whose book, Why Stock Markets Crash (Princeton University Press, 2004) made major contributions to understanding investment trends, points out that huge selloffs in stocks that should happen once in a hundred thousand years if they are viewed merely as statistical probabilities actually happen a few times a decade. Major market corrections occurred Oct. 19, 1987 when the Dow Jones Industrial Average dropped 22.6 per cent in a day. Other big corrections happened in 1991 when interest rates spiked, 1998 when hedge fund Long-Term Capital Management failed threatening to wipe out a few investment banks, 2000 when the dot com mania collapsed, 2001 when the twin towers were destroyed, and 2008 in the subprime mortgage meltdown. The words “stock” and “crisis” are almost inseparable.

What to do? Spread your money into many asset classes from stocks to bonds, domestic urban real estate, farmland, foreign stocks and foreign real estate. There are low fee exchange traded funds for every strategy and every market. Do not chase winners. If anything, short-term data show that this year’s losers are often next year’s winners and vice versa. It’s not that industries’ prospects change so drastically year to year, it’s rather that winners get overpriced and crash while losers appear to be bargains and get bought up. It does not always work, but for an investor, the right balance of faith in the long run and cynicism for the short run is the basis for survival and profit in capital markets.

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