In the tale of the ant and the grasshopper, only the forward-thinking ant survived — and the same may be true for Canadian farmers as they head into the next downward cycle.
“This next business cycle could potentially do to grain farmers like BSE did to cattle operators,” said Kim Gerencser, president of Growing Farm Profits, a farm advisory firm in Saskatchewan.
“BSE forced the marginal cattle producers out of the industry, and I think that if the downward cycle extends for as long as some of the economists believe it could — they’re saying upwards of 10 years — that has the potential to have the same effect on grain farmers.”
Canadian producers have been in the middle of a ‘commodity super-cycle’ since 2007, said Gerencser. But that “bull run” is at an end, and producers who were more ‘grasshopper’ than ‘ant’ during the good years could be in trouble now.
“The funny thing about prosperity and successive years of prosperity is it allows people to form some really bad habits,” he said. “Those bad habits have been keeping a lot of equipment that’s newer than they’ve ever had and buying land at prices they’ve never paid.”
That’s created an “extremely heavy draw” on available cash flow for the farm.
“Very few producers out there took the last number of years of prosperity and socked away piles of cash,” said Gerencser. “Most of them reinvested in their business with equipment and land.”
After “tough times” in the late 1990s and early 2000s, producers needed to reinvest in their businesses, he conceded, but “it went a little too far in some cases.”
“It’s got some people painting themselves into a pretty tight corner,” he said.
And for those producers, being ‘asset rich and cash poor’ isn’t going to cut it anymore.
“When you look back over the last two generations, it seems like the mantra has been that farmers are ‘asset rich and cash poor.’ It’s almost worn like a badge of honour,” said Gerencser.
“The mindset has been, ‘Let’s pay down the debt as fast as we can. Let’s build up the equity. Let’s have that big strong balance sheet. We own most of our farm, and we don’t owe a whole lot of money. But jeez it’s hard to operate, and we always have no cash.’
“It’s been a point of pride.”
But heading into this next downward cycle, it’s time for a “gut check,” he said.
“Cash is critically important, and access to cash is going to be the greatest restriction on business operation and profitability in the next few years,” said Gerencser. “Is holding onto that pride in the equity you’ve got more important than being able to operate comfortably over the next few years?”
Historically, credit has been easy to get and interest rates have been low, but producers can’t continue to rely on borrowed money for operating expenses.
“There’s a very real chance that the creditors can and will tighten up their lending policies, making it so that high-risk credit — like for operating — will be much harder to get,” said Gerencser.
“Farms that are relying heavily on financing for operating cash flow are going to be in a real tough time unless they can start to provide their own working capital internally, from operations.”
Right now, paying down debts quicker “isn’t a good business decision” for most farmers.
“What pays the bills — equity or cash?” asked Gerencser. “Equity does not pay bills, so why would you burn up your cash to create some equity? That’s going to make it awfully hard to operate next year when you’re out of cash.
“There’s no need to urgently pay down debt if it’s going to bring a detriment to your cash position.”
Gerencser also recommends holding off on any equipment purchases “unless it’s absolutely necessary.” But there are some exceptions to the rule.
“I’ve got some clients who are making decisions to upgrade equipment, but the upgrade is allowing them to be more efficient on their farm and lower their operating costs, and it’s managing to lower the cash required to service the debt on the equipment,” said Gerencser, adding that the upgrade will save his client around $15,000 a year.
“He’s preserving his cash flow in 2016 and 2017 by another $15,000 a year, on top of the efficiency in operating. It’s not a big number, but every little bit helps.”
Those decisions take “analysis and understanding,” though.
“For too long, decisions have been made based on a hunch or emotion,” said Gerencser.
“Informed decisions need to rule the day going forward. Decisions need to be analyzed and reanalyzed and critically thought out to make sure that they are in the best interest of the farm and meeting the goals of the business.”