THE FUTURE OF AGRICULTURE According to Michael Hoffort, President and Ceo, Farm Credit Canada
Modern agriculture requires massive amounts of capital. Therefore, it’s critical to make well-informed decisions when purchasing the new technologies on which profitability depends. Michael Hoffort gives his viewpoint in 9 chapters.
The Bank of Canada's quarterly report provides insights into expectations and projections for the next few years. The current stability will likely continue at least until the end of 2016. If the forecasts provided by our team of experts are accurate, any future increase in the key interest rate will probably be very gradual. Therefore, I do not think it would benefit producers to finance anything at a fixed rate for longer than five years. A balance between floating-rate and fixed-rate borrowing is the best way to manage the risk of key interest rate increases. Again, when it does happen, I do believe it will be very gradual.
In the unlikely event of a sudden two or three percent increase, many farms would certainly feel significant pressure on their finances. On the other hand, if the same increase occurred over a few years, Canadian producers would be able to adjust and react and work with their partners, like Farm Credit Canada.
The Canadian dollar is currently trading at $0.75 U.S. The behaviour of the loonie has had an impact on our revenue from the sale of all commodities priced in U.S. dollars, like grains, oilseeds, corn, soybeans, pork, beef, etc. A weak Canadian dollar has benefited Canadian exporters. However, the currencies of some of the world’s other large exporters of farm products, such as Australia, Russia and Ukraine, are also weak. This makes them our competitors. As such, it is better for Canadian producers to focus their energy on maintaining efficiency and improving productivity. The value of the Canadian dollar, while important, should not be their main focus. On this point, amongst others, FCC has just released its report A 2015 Look at Global Trade, which is available on its website.
Every producer needs to clearly understand his or her costs of production. It’s the only way to assess a business’s profitability. Documenting and rating the cost of production for each of the operation’s activities can certainly be time consuming, but it’s well worth it. Certain farms with multiple activities are good at ensuring synergy between these activities. Whether it be shared labour or shared management, as in the case of a field crop/hog operation, without a true understanding of the costs of production, the producer could unknowingly be subsidizing one of the two areas of production with the profits of the other. In the long run, producers could miss opportunities to be more competitive in their most profitable area, if they don’t know which one it is. Furthermore, they may have capital tied up in an activity yielding little or no profit. It is crucial for producers to do their homework to be able to identify the costs of production and then establish a financial strategy for each part of their business. This will allow them to focus their energy and their money on the business or activities that give them a competitive edge.
PURCHASING OR LEASING
Any purchase is first and foremost a business decision. That means that the decision to purchase new equipment or upgrade must be based on the value it adds to the farming operation. Producers must also consider the impact of such purchases on their farming operation. Is the equipment the right size for the business? Does it meet the farm’s needs? Equipment purchases have to meet the real needs of the business and be consistent with the producer’s long-term vision and management style.
In certain cases, FCC and other lenders in the industry provide a 10-year loan for equipment purchases, based on depreciation, which means that the equipment purchased is considered to be useful and valuable for that period of time. Equipment does provide real value to a business, but only if the business actually needs the equipment. That's why it's important for producers to clearly identify current and future needs and then assess whether they have the financial means to fit the purchase into their finances.
We often notice that large pieces of new or virtually new equipment are purchased to do a few years of custom work. Once the work is done, the owner returns the equipment. This helps increase the availability of good-quality used equipment, often still under warranty. Used equipment is an attractive pricing option for producers interested in adding virtually new high-tech equipment to their machinery fleet. Furthermore, this equipment is often traded between American and Canadian producers.
NEW TECHNOLOGY: THE RIGHT CHOICE
Agriculture is a unique industry. Many trade and farm shows are held across the country in the winter months, providing an opportunity for agricultural producer to keep abreast of new developments and the latest information. Farm producers are also able to see machinery in action at spring and summer farm shows. In this way, producers can make a more informed decision on whether the technology is appropriate for their farm and reduce the risk of making misguided purchases.
As for whether or not technology allows producers to be more competitive, I think it does, as long as producers ask themselves the following questions first: Will it reduce my workload? Will it improve my health and the health of my employees (fatigue, posture, safety, etc.)? Will it benefit my herd? Will my production be more profitable? In short, from a profitability perspective, technology – if used correctly – will turn some of the producer’s objectives into sustainable practices.
However, for less experienced producers, it is better to wait a bit once new technology comes out. After a few years, they can consider acquiring the technology without the problems and cost of being one of the first to use it.
EXPORTATION AND THE CANADIAN PRODUCERS
The availability of credit for Canadian producers depends on the financial health of the industry. Most of our businesses are now very strong or stable, which increases the availability of capital. Organizations like FCC, the chartered banks, the credit union system and Quebec’s Desjardins Group are very interested in supporting the growth and prosperity of Canada’s agriculture industry. The growing world population and the increasing wealth of middle-class consumers are generating strong demand for first-rate food products; this trend will continue over the next decade. Despite the foreseeable price volatility, the long-term trend looks positive. Canadian agriculture is strong and, as such, is well placed to capitalize on the long-term future of the global agriculture and agri-food industry.
Canada should invest more in research in order to enhance its numerous resources and produce more products for export. Our country has the potential to do more with its assets as a northern country with abundant farmland and a winter climate that makes it easier to manage diseases and pests. Water is one of Canada’s richest resources. Canadian producers do not usually use groundwater for their crops but rather runoff from snowmelt. Together, all of these points help position our producers favourably to meet the world’s long-term needs. Agriculture research is therefore critical. Universities continue to set up research teams to develop technologies to help Canadian producers.
DEVELOPMENTS IN CHINA
China is a major importer of Canadian food products, and the country is going through a massive social and economic transition. Over the last decade, China has built infrastructure and made huge investments. It has become an industrial nation and is developing into a modern economy. It is estimated that, each year in China, the equivalent of Canada’s entire population is added to its middle class. Among other things, this substantially increases demand for Canadian products. China is not the only large developing trading partner. India, with its population of 1.2 billion people, also has a vibrant economy and a demand for Canadian products that will only increase.
PRICE OF FARMLAND
The increase in farmland values across the country in the last five years is a reflection of the strength of the Canadian agriculture economy. Its key drivers are cash inflow, low interest rate stability and a very positive outlook for the agriculture community. All these factors have driven land values up. It is an indication that Canadian agriculture is thriving, but it makes it more difficult for those who want to purchase farmland.
Agriculture has always been a capital-intensive sector, which is challenging for young producers. It is therefore ironic to see a rise in the number of young producers compared to the last 10 years. The success of the industry is a definite incentive. Many farms are well established, with parents transferring their experience to the next generation. The successors are generally the most qualified to take over. We also hear wonderful success stories of some small specialty operations. This model of farm operation, albeit smaller in terms of land mass, is becoming increasingly popular and serves a local customer base.
It is estimated that 40% of farmland in Canada is leased by operators. This is one way for owner-producers and tenants to share the risk. A developing operation can often have more land by leasing than by buying, even once it matures.
WHERE TO INVEST
A well-established producer can invest in various levels of the value chain, which can mean being a retailer or a supplier for other producers. The investor can also get involved in the processing side or sales and distribution of farm inputs or products. Before making this type of investment, producers really need to know the impact of their investment and understand the risks and opportunities.
It occurs more rarely, but sometimes farm producers invest in sectors other than agriculture. My only advice for those producers would be to understand all the risks and opportunities that the transaction entails for their own farm, before they invest.
ECONOMIC FACTORS TO WATCH FOR
For at least two years, the weak Canadian dollar will help producers sell their products. On the flip side, it will hurt purchases of equipment from the U.S. We send many of our products to the U.S., and the U.S. economy seems to be showing some forward momentum.
Next, China's economic performance and its foreseeable impact on food trade, in which Canada is involved, are definite things to watch.
For the next few years, we will need to keep an eye on whether the trade agreements that were recently signed by Canada are approved and implemented. Will they be ratified as is? What will the impact of their implementation be and what opportunities do they hold for us as a country in terms of agriculture and agri-food?
Finally, I think we should all take note of changing consumer expectations. How do these changes impact our industry? Consumers are increasingly concerned about what they eat and how their food is produced. How can the agri-food industry respond to the new expectations of the public? When analyzing the way agriculture is developing in Canada, be it in the production, processing or distribution sector, it is obvious that Canada is part of the world elite, a small handful of countries capable of producing more than they eat. This reality gives us a competitive advantage in most global markets. Faced with a burgeoning global population, Canadian agriculture promises to be one of the world’s key suppliers of food, but also expertise. This is a huge responsibility for all of us, but also an incredible opportunity.