“If you’re not a top performer, you’re likely not consistently profitable, you’re going to be susceptible to those market fluctuations, and you’re probably unable to consistently invest in your business,” said Connie Adam, associate partner at MNP in Lacombe.

“You’re not thriving. You’re probably just surviving.”

In a recent presentation at a Canadian Association of Farm Advisors event, Adam spoke of a 2018 benchmarking study done by her company — and the stark difference in profitability between those in the top and the average producer.

The average return on investment was slim — 1.7 per cent for crop producers, 2.1 per cent in poultry, 1.8 per cent in dairy, and -4.4 per cent for hog producers.

But returns were more than double for the top 25 per cent of farmers — with cropping at 3.9 per cent, poultry at 4.2 per cent, dairy at 3.8 per cent, and hogs at 1.7 per cent.

“Top performers are profitable, they’re better able to manage market fluctuations, and they’re more likely to be leaders in the industry,” said Adam.

“The average producer is making money — it’s just not as much. If you’re in the middle 50 per cent, you’re holding your own, whereas the top 25 per cent are probably more set up for growth.”

So what sets them apart?

In her presentation and a subsequent interview, Adam cited five key practices: Maintaining solid fundamentals, challenging the way you think, benchmarking, managing expenses, and having effective risk management strategies.

Solid fundamentals

The first thing top farmers look at are financial ratios — such as current (current assets divided by current liabilities), debt service coverage (net operating income divided by debt servicing costs), debt/asset, and equity/asset.

Take for example, the debt service coverage ratio (debt service is interest costs, principal repayments and lease payments).

“If we have a debt service capacity of 1.5:1, we’re looking at a really healthy operation,” said Adam.

“If Farmer A has a 2:1 ratio and Farmer B has a 0.5:1 ratio, which business is going to grow with less risk? Which one can take advantage of land that comes up for rent or land that comes up for sale? And can they get better rates with their bankers?”

But there’s no single magic number. For example, a farmer who hates having debt and tries to pay it off too quickly can have cash flow issues, she said, citing a client who had termed their debt out over seven to 10 years.

“They were trying to repay it really quickly, and though it was saving them interest costs, it was really strapping their cash flow,” said Adam, adding that producer arranged to lengthen the term of their debt.

“The more access to cash they had, the better able they were to manage their ups and downs without relying on the operating line of credit as much.”

Cognitive bias and benchmarking

Ratios are a way to overcome a natural tendency to rely on your gut or what experts call ‘cognitive bias,’ she said.

“It’s making a decision based on our personal experiences and emotions,” said Adam. “We can make decisions faster that way, but on the negative side, it can also lead to errors because we’re not considering all the information that’s available to us.”

Top performers set emotion aside when determining what worked well and what didn’t. Owning up to decisions that didn’t work out is tough — so you should have advisers and use them, she said.

That’s also why benchmarking can be so effective.

“It helps to identify their strengths, weaknesses, and the opportunities for them to maximize their profits.”

Benchmarking is generally simple and the results are easy to interpret, allowing producers to make decisions with real-time information.

“You can drill down into performance gaps to figure out where slight changes could make a difference,” said Adam.

Often benchmarking will reveal areas where expenses are out of whack.

Another client — this one a livestock producer — found that his gross margin was below the industry benchmark as a result of higher-than-average feed costs. So the producer went to the feed company and worked with their animal nutritionist to adjust the feed rations.

“By doing that, he got his feed costs down close to the industry standard and increased his profitability.”

But the concept of ‘garbage in, garbage out’ applies here.

“If the right things aren’t being recorded consistently, doing any benchmarking and looking at those ratios can be somewhat futile.”

Expense and risk management

Benchmarking should also help with expense management, another thing that sets top performers apart.

They typically spend about 48 per cent of their revenue on production expenses, 24 per cent on labour, power and machinery, and eight per cent on their land, buildings, and finance costs. That leaves a 20 per cent gross profit.

And the bottom 25 per cent?

It’s closer to 64 per cent on production expenses, 36 per cent on labour, power, and machinery, and a small percentage on land, buildings, and finance, leading to a loss of 13 per cent.

“There’s quite a large spread between being a top performer and a bottom performer,” said Adam.

Despite their higher profits, top performers also cover off their risks through production and income insurance.

However, risk management needs to be regularly evaluated, she said.

“No two farms can have the same risk management strategy, so while coffee shop talk is a great way to spend your time, we can’t make our decisions by it.”

Bottom line

Real-time information is key because so many important decisions require knowing where things are at right now.

Every farmer has access to this information — it’s just a matter of pulling it all together into something you can use, said Adam.

Ideally, farmers would have done this over the winter months before they settled on their production plans for this year.

But now is the time to make a start because the biggest hurdle is accepting that you need to change things.

“We get into the habit of doing things because it’s the way it’s always been done, and with the industry changing so much, we can’t afford to do that anymore,” she said.

The post When times get tough, toughing it out may not be the answer appeared first on Alberta Farmer Express.

“When the tide goes out, everybody can see who’s swimming naked,” said MNP agricultural tax specialist Rob Strilchuk (quoting Warren Buffett).

“We had a lot of good years, but when the tide turns in the other direction, we can see situations where it’s going to expose your farm operation to see what’s really happening.”

After a decade of generally strong prices and yields, back-to-back poor harvests and lower prices coupled with high expenses are squeezing many producers, Strilchuk said at a Powering Your Profits event earlier this winter.

“Really what this means is there’s no hiding place when things change,” he said. “But you can protect yourself against situations like this by trying to make sure you’re on top of things ahead of time.”

In order to build a profitable farm that can weather these storms, farmers must focus on strong finances, strong production, and efficient marketing.

“If you improve each one of these things by five per cent, it makes a dramatic impact on your bottom line,” he said.

But fine tuning your finances can be tricky. The first step is to look at your financial statements and determine if you are, in fact, making a profit. That starts with an estimate of gross revenue.

“If you end up only getting $9 a bushel on a 50-bushel-an-acre yield, you’re going to have $450 an acre,” he said. “It’s pretty tight these days at that $450 an acre. We usually have our farmers target $500 an acre gross revenue.”

Excess working capital is critical, he said.

Current Ratio = Current Assets/Current Liabilities

What are current assets?
Cash, savings, prepaid expenses, crops in the bin, growing crops, marketable livestock, accounts receivable, supplies on hand (such as seed, feed, and fertilizer).

What are current liabilities?
Obligations due and payable in the next 12 months such as bills, credit card balances, operating lines of credit, accrued interest, and principal payments due on intermediate and long-term loans.

“If you have decent working capital, it means you’re prepared to make sure you can take on a crop failure or a delayed harvest,” said Strilchuk, who advises using a current ratio (current assets divided by current liabilities).

“If you’ve got a 2:1 ratio, you’re in good shape. But you’ve got to have at least 1.25 times the current assets as compared to the current liabilities,” said Strilchuk. “In other words, you have to have $1.25 in current assets for every $1 of current liability. That’s the minimum.”

Adequate working capital also allows you to take advantage of early sales on seed, chemical, and fertilizer while giving you some flexibility in your marketing.

“If it’s on sale in the month of August and you’ve got great working capital, you’re in a position to take that on,” he said. “When there’s a lot of supply and the price is low, I sure hope that you don’t need the cash to do other things.”

When payments need to be made, then you basically have to sell “no matter what the price,” he said.

Strilchuk said he likes to see farmers have enough working capital to cover half of their operating expenses in the coming year.

And having a buffer zone will be increasingly important as ‘black swan events’ — those unprecedented and unexpected situations such as China’s ban on canola or a once-in-100-years flood.

“Can you weather the storm? The banks watch these types of events in order to determine whether or not your operation can sustain something that’s negative,” said Strilchuk. “As times get tougher, their appetite for risk might go down.”

If you’re feeling more financial strain, you might want to read through your loan agreement.

“Banks aren’t trying to pull a fast one on you,” he said. “Ag is big business, and high dollars of leverage are required to operate these businesses. Do you think they’re just going to have a loose legal agreement for that? You need to read through those agreements and make sure you understand what you’re signing.”

The other thing to do is talk to your lender.

“Banks are looking for information on a regular business if things are tight,” said Strilchuk. “They want to know where you’re at so you can meet your obligations. They want to know if you have that repayment capacity and if you’re leveraged over the right period of time.

“It takes all parties working together to make sure you can meet your operation’s needs.”

The post Are you prepared to deal with tougher times on your farm? appeared first on Alberta Farmer Express.

“Putting the plan to paper will show you how much startup cash you’ll need in order to generate income,” said new venture specialist Jan Warren. “If you don’t know the startup costs of your venture, you can easily get yourself into financial trouble.”

In addition to startup cost estimates, the business plan should also project when the venture will be cash positive.

“Once you identify the significant initiatives that are in the plan, you can prioritize what you will do to get the cash flow rolling,” said Warren. “You want to ensure you are spending time doing what’s important, and not getting sidetracked by what seems to be ‘urgent.’”

A written business plan is also an excellent communication tool when meeting with investors or lenders.

“Having a short summary of the highlights in a thorough business plan will help others to quickly see how their investments will make a difference, and is also useful when explaining to a management team or employees exactly what has to be done to succeed.”

The plan should be regularly reviewed. Monitoring actions and results allows you to alter course if something isn’t working or if one part of the business is bringing in more money than others.

“The business plan basically tells you who is going to do what by when. You’ll never know if you meet or exceed your targets if you didn’t write down what those are.”

To obtain templates and fact sheets on business planning, call 310-FARM (3276) and ask to speak with a new-venture coach, said Warren.

The post How a business plan helps get ‘cash flow rolling’ appeared first on Alberta Farmer Express.

But there are “a lot of other tax strategies” that farmers can use, say financial planning experts.

In July, federal finance officials announced proposed changes to the Income Tax Act that, if passed, will change the regulations around lifetime capital gains deductions, income splitting, and incorporating farms, among other things.

Critics — including a growing number of farm groups — have decried the changes as well as the 75-day public consultation process, which ends Oct. 2 while most farmers are busy with harvest or fall work.

Both Finance Minister Bill Morneau and Prime Minister Justin Trudeau have vowed to push ahead, saying the changes are about levelling the playing field for all taxpayers. But although the two politicians say the target is high-income earners, federal finance officials are also concerned about farm corporations.

“The government doesn’t like it when farmers are using their farming corporation as a pension plan as a way to defer taxation — it doesn’t see that as what it was designed for,” said Jean-Pierre Laporte, CEO of Integris Pension Management Corporation in Toronto.

“The government realized it’s losing a lot of tax revenue because that’s exactly how a lot of farmers have structured their affairs.”

That’s made the government keen on closing “what it perceived to be a loophole” and if the proposed changes go ahead, farmers will be affected, he said.

“Most of the time, farmers operate through a private corporation, and the tax changes are designed to impact how those private corporations are taxed in an adverse fashion,” said Laporte.

“Almost all of the farmers who have businesses that are incorporated will be impacted by these changes.”

But these changes are also “a good wake-up call” for producers, said financial planner David Derwin.

“This type of planning is all extremely important, but it’s not necessarily urgent,” said Derwin, an investment adviser at PI Financial. “Regardless of what happens, this process is going to be a good way to get people to think about what they should do for retirement planning.”

And in some cases, these changes will be the push producers need to “ask what else is out there” when it comes to their retirement planning.

“They can’t necessarily do what they did in the past going forward,” said Derwin. “There have been a lot of other tax strategies that have been made available for farmers that an RRSP or pension plan wasn’t necessarily the best tool to look at.

“There have been some opportunities that have been overlooked, but this is the time to look at the bigger picture and say, ‘How do these other tools fill a lot of those gaps?’”

Personal pension plans

And one of the most valuable — and underutilized — tools is a personal pension plan.

“If the idea is to shelter as much corporate tax as possible, there’s really no better way than a personal pension plan,” said Laporte.

A personal pension plan is a registered plan with fewer limitations and greater benefits than RRSPs or their company and government counterparts, he said. Those benefits include larger tax-deductible contributions, credit protection, tax-free intergenerational transfers, and tax-deductible corporate funding, said Laporte.

“Personal pension plans offer seven additional tax deductions at a corporate level that don’t exist when farmers use an RRSP to save for their retirement,” he said.

“The personal pension plan is a tool that addresses a lot of those issues with the potential tax changes,” Derwin added. “It addresses so many things — diversification, generating income, protecting your assets, transitioning from one generation to the next.

“There are some tax benefits, but even over and above that, these other things make them so flexible in longer-term planning.”

Despite the added benefits of personal pension plans, most farmers don’t currently use them, said Laporte.

Most people view pensions as something only available from the public sector and larger private sector companies, so the rules can seem overly complicated for small businesses such as farms.

“The path of least resistance means keeping it simple,” said Laporte. “A lot of farmers prefer the simplicity of just paying dividends to family members with no fuss, rather than going through the bother of setting up a pension plan.

“Now, though, they won’t have a choice. They’ll need to at least look at the pension solution if they want to avoid paying all this extra tax.”

It’s too soon to say whether the federal Liberal government will persevere or back down in the face of the growing backlash from farmers, doctors, and other small-business owners.

But ultimately, “the trend is toward more taxation,” said Derwin.

“Whether these tax changes happen this year or down the road, these pension plans are a good investment and a good planning tool in and of themselves,” he said.

“Even if the government doesn’t make dramatic changes, I think it’s a smart planning tool to look at.”

The post Worried about federal tax changes? There’s an alternative, say experts appeared first on Alberta Farmer Express.

“Since 1975, the majority of the time the variable interest rate has been the better option and has saved producers money,” said provincial farm financial specialist Rick Dehod.

However, the Bank of Canada recently increased its prime rate by a quarter of a percentage point to 0.75 per cent, prompting charter banks to hike their prime rates to 2.95 per cent. Bank prime rates have not exceeded 3.0 per cent since Jan. 22, 2009, and posted five-year mortgage rates have not exceeded 5.0 per cent since March 2014, said Dehod.

“We’re seeing that the world’s central banks are reviewing their interest rate policies,” he said. “Economists feel that the Bank of Canada’s move signals a turning point to a longer-term trend in rising interest rates, and we could see a slow climb in interest rates over the next 18 months.”

Overall, Alberta farmers have a strong balance sheet, he said.

“In 2016, an average Alberta farm had assets of $3,988,598 with total liabilities of $507,003 for a net worth of $3,481,595 or 87.2 per cent,” said Dehod. “However, equity doesn’t make interest payments — profits do. A one-quarter of a per cent interest change — if all interest was based on prime — would see an additional $1,267 cost to that farm. But not all debt is variable.”

Outstanding farm debt in Alberta has grown from $15.890 million in 2012 to $21.322 million last year, he noted.

“Many beginning farmers have incurred debt to finance entrance into the business of farming or expansion. Their debt loads are much larger than the average Alberta farmer and are subject to some financial risk should interest rates rise. The increase in debt has followed the increase in farmland values.”

The majority of farm managers have chosen the variable-rate term on their mortgages or a one-year fixed term in the past.

“Going forward, as mortgages are reviewed, a five-year fixed term should be part of the discussion. Mind you, peace of mind comes at a price as five-year fixed mortgages are presently posted at 2.0 per cent higher than prime.”

However, that could change quickly, said Dehod.

“Changes in Canada’s and the world’s economies will drive variable rates higher. A fixed rate will give the borrower certainty in their interest costs, and that certainly is worth something to those who have a higher debt load. A small premium on fixed rate mortgages could represent inexpensive protection to an interest rate increase into the future.”

The post With interest rates on the rise, is it time to lock in? appeared first on Alberta Farmer Express.

“Financial risk can be broken down into three main financial management parameters — solvency, liquidity, and profitability,” said provincial farm finance specialist Rick Dehod. “Once the measure within each of these three financial parameters has been assessed, the overall financial health and exposure to financial risk in a farming operation can be determined.”

Solvency is defined as having enough value in the form of assets in a business to cover all of its liabilities. The financial equation is: Assets = liabilities + equity.

“A business with positive equity is said to be solvent,” said Dehod. “When a business’s equity becomes negative it’s said to be insolvent. Bankruptcy is just around the corner for an insolvent business if it doesn’t generate enough cash flow income to meet its debt requirements in a timely manner.”

The larger the amount of equity (assets minus liabilities), the more financially secure a business is.

• Read more: Online tool gives snapshot of farm’s fiscal health

“But everything is relative. Larger businesses need more equity to remain viable than smaller businesses do,” said Dehod.

Solvency ratios depend on the type of farm enterprise.

“Supply-managed industries can carry higher financial risk and survive in the long term as their income is secure and frequent. Thus, they have less profitability risk, and can carry greater solvency risk.”

Solvency takes on added importance during “lean years,” he added.

“A farm with strong equity can absorb a loss and continue to operate,” he said. “A farm that has leveraged its equity through debt can provide greater returns on equity when times are good but can quickly be at risk when the farm runs into difficulties.

“Knowing your solvency and your farm’s ability to manage risk will provide you with the information to manage your business and protect or grow your equity.”

The post Can your farm operation withstand ‘lean years?’ appeared first on Alberta Farmer Express.

Start with your year-end net worth statement (the balance sheet for 2016), which is also your opening net worth statement for 2017, said farm finance specialist Rick Dehod.

“With this current information in hand, it’s a good time to look at your farm’s business financial health and how it compares to your opening net worth statement for 2017,” said Dehod. “This comparison will give you great insight on how your business has performed and what parts of your business may need some attention. Using your own information will provide ratios you can compare to previous years and also to industry benchmarks.”

The ratio analyzer is an Excel program that takes just eight key financial entries and calculates 11 financial ratios for a farm or ranch and colour codes them in comparison to industry benchmarks.

“The eight key financial numbers can be taken from your accountant-prepared financial statements for the past year and can be entered into the various open cells in the one-page spreadsheet,” said Dehod. “It’s very important you use accrued revenue and expense information and assets at fair market value to enter into these spaces.”

• Read more: Can your farm operation withstand ‘lean years?’

The eight entries are: farm gross revenue, farm gross expenses, depreciation, debt servicing payments, current assets, long-term assets, current debt, and long-term debt. Long-term assets and debts include intermediate assets and debts in these entries. The ratios will tell you how the operation is doing and “where your farm is strong and where it’s weak,” he said.

“You can then consult with your accountant or an agricultural finance specialist to come up with plans to mitigate and improve those areas where your financial ratios are weak.”

Each ratio has a bullet that opens and provides the formula used to calculate the ratio. The ratio is colour coded and compared with industry benchmarks.

This information can also be used for income and expense projection, cash flow for the year, and to project closing net worth statement for the year,” said Dehod.

“Once you have your projected 2017 closing net worth statement, you can generate the year-end financial ratios, and compare them to the ratios you generated from your beginning net worth statement. This will give an indication of whether or not your 2017 operating plan will progress the financial viability and health of your farming operation.

“It may seem like a lot of work, but using this decision-making tool will help give producers an awareness that’ll help them make better decisions to increase the viability and success of their farm business.”

The ratio analyzer can be found at www.agriculture.alberta.ca.

The post Online tool gives snapshot of farm’s fiscal health appeared first on Alberta Farmer Express.

But we’re not there yet, said farm business expert Merle Good.

“In 1980, we had huge inflation and huge interest rates,” said Good, a longtime tax specialist with the provincial government who now runs a private consulting business.

“In the ’80s, people were selling their entire farm base and leaving agriculture. The balance sheets today are much better than they were back then.”

As of Dec. 31, 2015, Canadian farmers had $86.8 billion in total debt, Statistics Canada figures show. In a report released earlier this month, Farm Credit Canada (FCC) projected that farm debt will increase by five per cent in 2016 and another three per cent 2017, hitting $93.2 billion this year and $95.4 billion next year.

But farm income has been keeping pace with farm debt, making the increased level of debt affordable, said J.P. Gervais, FCC’s chief agricultural economist.

“We say with confidence that farmers are in a strong position to meet their financial obligations,” said Gervais. “We think that we are going to be able to ride the wave of strong income a number of additional years. We know agriculture is a cyclical business. The thing is though, we have been surfing this wave of really strong net income increases reaching a record again last year.

“I think we are going to be able to surf the top of the wave a little bit longer, but producers should be absolutely aware of the fact that there is a bit of downside risk because we are really at the top of the market.”

Last year was the first in many years when farm debt climbed faster than farm asset values, he said. As a result the 2015 farm debt-to-asset ratio rose slightly to 15.5 per cent. But that’s still lower than the five-year average (15.9 per cent) and 15-year average (16.7 per cent), Gervais said.

Good and bad debt

For Good, the debt-to-asset ratio “isn’t the scary thing.” What concerns him is how producers are using their operating loans.

“Capital debt is fine — we have to have debt in a capital (intensive) industry,” he said. “There’s not a farmer I meet who doesn’t have debt if they’re still actively farming. But a lot of people are making their capital payments on equipment and land with operating loans.”

Those producers could be in trouble, Good added.

“The farm is using operating capital to make payments, but the farm wasn’t making the earnings to make up those payments,” he said. “I can look at some people’s books and say, ‘You didn’t make the payment. Your operating loans made your payment.’”

Producers can head off problems by doing a quick “blood pressure test,” said Good. At the end of this year, add up your operating loan, accounts payable, and cash advances. Then divide that number by the total of any unsold inventory, accounts receivable, and pre-purchased inputs. If the result is greater than 50 per cent, “you have high blood pressure.”

“If you’re over that number, it starts to get concerning, because then your operating loan is not being used only for timing. It’s being used to make payments,” said Good.

“If someone says to me, ‘My debt payments are pretty high this year, and I don’t have the greatest crop because of the moisture,’ but their operating loan is lower than 50 per cent, I’m going to say, ‘Don’t panic.’ But if it’s higher than that, we have to look at other things.

“It’s like blood pressure. As long as your blood pressure is below what it’s supposed to be, you can eat hamburgers and not work out. Once you break that number, the doctor says you’ve got to make some changes.”

Do you need to refinance?

Once you break that 50 per cent mark, you should start thinking about approaching your lender to refinance your loans, said Good.

“Make sure you’re not robbing Peter to pay Paul. That’s really important with these operating loans,” said Good.

“If you’re looking at the cycle of commodity prices and thinking you’re going to be lower than you were the last four years — which we are — then you’ve got to say to yourself, ‘OK, if my operating loan is up too high when I’ve had four years of good revenue, I’d better refinance my operating loan if I’ve broken that 50 per cent level.’”

Producers also need to look at how much of their gross revenue goes to debt payments.

“Once you’re greater than 15 per cent, your warning signs have got to come on,” said Good. “If that’s more than 15 per cent of your gross revenue averaged over three years, I get nervous. If it breaks 20, we’ve got to restructure the balance sheet, which really means refinancing.”

If your books don’t pass those two tests, “wake up, but don’t panic,” said Good.

“Just look at what you could do with your balance sheet and look at what you can restructure,” he said.

“It’s kind of like the doc tells us. If you have high blood pressure, it doesn’t mean you’re dead. It means you’ve got something you’ve got to get under control. It’s not a death sentence.”

– With files from Allan Dawson

The post Farm debt at record highs — but top lender not worried appeared first on Alberta Farmer Express.

“Cash flow projections are critical, especially in the summer months,” said Rick Dehod. “There isn’t much revenue coming in until harvest, but the farm’s operating expenses continue to accumulate and the bills have to be paid. A properly developed cash flow projection can help a business to both foresee and prepare for potential shortages, and to maintain a good relationship with suppliers and creditors.”

Cash is the lifeblood of a business, but with so much emphasis usually put on profitability, this can be easily overlooked, said Dehod.

“Of course, the bottom line is important, but poor cash flow management can drive a growing and/or profitable company out of business.”

With profitability margins tightening due to decreasing commodity prices and increasing costs, the risk to the farm’s viability and its ability to meet all of its commitments as they come due has increased.

“The risk is especially great for those expanding farms and those individuals in the beginning of their careers who levered their equity to grow,” said Dehod.

Cash flow management can also help:

• Maintain adequate cash reserves to pay bills and payments on time or invest in expanding the business should an opportunity arise;
• Reduce interest costs through managed borrowing;
• Increase interest income by transferring surplus funds into interest-bearing accounts temporarily, if appropriate;
• Control costs by having the cash available to take advantage of buying inputs at favourable prices;
• Improve relations with lenders and creditors;
• Plan for the next crop year.

“Businesses that prepare cash flow projections often learn something about their systems, and the dynamics of their business,” added Dehod. “The process often has other positive outcomes as well. For example, you might discover that you need to pay more attention to markets to obtain the right price. Or, you might get a better understanding of your costs of production to help determine what a profitable price may be, and can then develop your 2016-17 marketing plan. For livestock producers, knowing your costs can help you access livestock price insurance to help protect your profit.”

For help with financial analysis, visit Alberta Agriculture’s website and search for ‘cash flow analyzer.’

The post It’s time to slip back into the office and review cash flow appeared first on Alberta Farmer Express.

“With interest rates remaining low and the majority of Alberta farms continuing to have a strong balance sheet, the demand for farmland purchase in Alberta remains robust,” said Rick Dehod. “With farm land prices continuing to appreciate, a well-researched financial and ownership plan will guard against ill-prepared land purchases, so do your homework before making a final decision.”

Alberta Agriculture has three documents designed to help producers make the decision on a land purchase. These documents are:

16 Questions to Consider before Buying Farmland

Why do you want to buy farmland?

Land purchases should fit with your business plan and factors such as a planned expansion, bringing in a new partner, or ensure control of productive acres. Is it a business decision or an emotional one?

What is the farm business’s financial condition?

Consider needed investments, expected expenditures, and crop conditions to determine if buying land is the best use for your cash, or if other opportunities would provide a better return. Be sure that the farm is financially healthy enough to handle more debt and a decrease in cash.

Have you created a pro forma cash flow?

It is important to confirm that the potential return will meet your goals and objectives, and that the farm can service the additional debt. Know the risk this purchase will put on your current equity.

Given your revenue forecast, are you overpaying?

Calculate how long it will be until you recoup your investment. Determine how much debt your farm can prudently service, and the total revenue required to service that debt. Be sure to stay within your limits.

A Legal Guide to Plan Farm Land Ownership and Sale in Alberta

This documents looks at forms of ownership, landowner rights, restrictions, purchase and sale contracts, methods of selling, who to consult about buying or selling, and tax considerations.

It also looks at the sale process, including determining a price and the terms, listing with a real estate agent, understanding the purchase and sale contract, the requirements of a valid sale contract, and understanding the roles and responsibilities of all the professionals involved in the sale.

A Guide to Agricultural Security Agreements in Alberta

This document examines the nature of mortgages, registration, priorities and terms.

“Use all of the resources available to do your ownership, financial and cash flow planning,” said Dehod. “Speak to your banker, your accountant, or your farm adviser. Speak to your lawyer regarding issues that could affect title ownership. A strong purchase plan will aid in making the purchase of land a good investment.”

These documents can be found at the “Farm Manager” section of agriculture.alberta.ca by visiting either the Financial Management section or the Business Arrangement and Taxation section.

The post Three resources to read before buying land appeared first on Alberta Farmer Express.