Policy changes needed to help Canadian farms remain financially competitive – RealAgriculture

This editorial was first published on Breaking the Box blog by Kristjan Hebert. 

I call myself a recovering accountant. I joke about it, but I do love numbers.

Numbers don’t lie.

As much as I have a soft spot for a family farm and building a legacy for my children, it always comes down to the financial statements. If your operation is not profitable, it isn’t very sustainable, and it won’t be around for the next generation. Getting clear on your costs, revenue, borrowing and taxes (figuring out your actual burn rate!) will make things easier. And, you don’t have to do it alone. Many farms are now hiring or contracting Chief Financial Officers for this very reason.

When I think about helping agricultural businesses grow and trying to ensure their long-term viability, I see a few financial stumbling blocks that are impeding growth in the industry.

Revamp crop insurance

I’m not a huge fan of government getting involved in private business, but if it’s going to subsidize crop insurance, let’s do it the right way — a way that allows farmers to pick what is actually best for their farm.

There are a wide variety of insurance products available. Most farmers choose government crop insurance because, at face value, it appears cheaper than the other options, even though there might be different products that suit your farm better. There are products that allow you to operate how you want to, independent of how the insurance coverage has an effect on your decision-making.

I think a voucher system would work well in Canada. It would allow a producer to pick what product he wants up front and then get reimbursed by the government on the back end.  Currently, the government is discounting a basic insurance policy but making you pay full price for one that could better protect your farm. The options such as margin, hail, parametrics, and weather insurance may be a better fit for certain operations. If they have a certified risk management plan, and choose the best fit, they should be eligible for the voucher (discount).

Not only would this be a win for the producer, but it would also allow the government to have a known line item for crop insurance vouchers, versus large swings in liability and costs as seen in 2021.

Another change would be allowing farms to provide data for years they aren’t in crop insurance, so they can get a discounted rate for the years they do go in and have a claims-free year. This, I believe, would drastically increase uptake.

The last time I reviewed the federal agriculture budget, approximately 80 per cent was spent on BRM programming…if we want to continue to lead the world in Agriculture, the majority of our budget can’t be spent on insurance programs.

Interest rates

Why can’t we lock in interest rates for longer terms? This makes it extremely difficult to plan for growth, which is something we want for Canadian farms. In the United States and other countries, interest rate swap products can be used to lock rates in for 10-20-30 years, as well as longer amortization on land. This has a positive effect on cash flow and presents a large opportunity for EBITDA (earnings before interest, taxes, depreciation, and amortization) lending versus asset lending. The amount of farms in Canada utilizing interest rate swaps is less than 5 per cent, and currently, the feasible timeline is a 10-year lock.  In the US, 20-30 year is utilized more often than not.

At many farms, operating lines are backed by land and machinery equity, significantly reducing the borrowing base for farms, and lowering cash flow which in turn increases risk and slows progressiveness.

While some farms may shy away from borrowing and debt, at HGV we like to think of it as smart or healthy debt — our equipment backs equipment, our land backs our land and our insurance policy backs our operating credit. So, every asset we have can be leveraged, opening up additional opportunities for growth or diversification.

This allows us to be agile, to pivot and capture opportunities – if a land purchase comes up, we’ve got the ability to borrow and expand.

The #1 thing we want is a return on investment. If we’re locked in at low-interest rates of 2-3 per cent, we don’t ever plan on being debt-free.  If you knew you could make 20 per cent every year and never have a loss, would you go borrow at 3 per cent? Yes! 17 per cent with no risk.

Government Advisory Circles

Over the years, I’ve learned the most about business from non-farmers.

I remember sitting next to a Mexican resort owner on a plane. I was lamenting how rainy weather completely stalled our operations, whether it be during seeding or harvest. He looked at me and said, “What’s your rainy day plan?” I didn’t know what he meant.

He explained that if it rains at the resort, they implement their plan for extra activities, shows, classes, or dance lessons for guests. After that, we never lost a day due to rain on our farm. There are always jobs to be done, regardless of the weather, to make our operation better and more profitable.

Getting ideas from other people, entrepreneurs and, yes, even “coaches”, can help bring diverse perspectives to your business. I work with Dan Sullivan at Strategic Coach several times a year. I learn so much from this interesting mix of high-growth entrepreneurs. Talking with these people helps me look at things in a whole new way, giving us a greater understanding of our business challenges and allowing us to think differently about how to solve them.

In the same way we recommend a farm’s advisory board should be a mix of family and other business people, I would urge the government to diversify the voices it hears from.

My current worry is, more often than not, grower groups are asking for more money and more handouts. Government tends to be playing politics, finding ways to lock up seats, and play chess with the provincial-federal relationship.  As a progressive grower, I don’t want a handout. Heck, I don’t even want a hand up! I want to collaborate to have a damn trampoline and bounce the agriculture industry to new HEIGHTS!

The government can’t just listen to individual grower groups which only present their individual perspective. It needs to hear from the industry as a whole and bring all of these different groups together. We need our groups to find ways to collaborate more, unite the agriculture voice and build the trampoline to get us to the future. Grower groups can’t just focus on their own industry, niche, or current subsidy or program. The more time we spend arguing, and having an “us versus them” discussion, the less time we spend encouraging international investment, increasing trade deals, and investing in research and development.

I’d like to see government advisory circles made up of grower groups AND multinationals such as Cargill, Nutrien, John Deere, etc.  I think, together, we could influence policies that would benefit the entire industry – from the farm right down to the value add chain.

At HGV our legacy statement is to leave the land, the financial statement, the community, and the industry in a better state for the next generation. I know we’re not alone — this is what we all want, so let’s get there together.