What’s eating into profits? Interest rates have nearly doubled for many borrowing clients. At the same time, borrowing volumes are increasing because costs are high, and more funds are needed to support working capital and capital assets.
“Margins continue to be compressed. That diminishes cash flow as well as the ability to service debt, expand operations, and withstand one-time events,” says Trevor Sproule, AVP & Head, Agriculture Banking.
This kind of environment makes it increasingly more important for farmers to align with a banking partner that truly gets them, adds Georgina Knitel, AVP & Agrologist, Agriculture Banking.
“The fit, expertise, and strength of the relationship you have with your financial services provider directly impacts the quality and effectiveness of the solutions they’ll be able to offer,” she says. “Uncertainty and volatility – in weather, markets, prices, input and resource availability – are at the forefront these days, and so risk mitigation within the sector is playing a larger-than-ever role. You’ll want to work closely with a banking partner who understands your operations and performance, business strategies, goals and objectives so they can deliver strategies that are best suited to your needs.”
Based in Lethbridge, Sproule and Knitel both grew up on Alberta farms (Knitel still has a specialty Wagyu beef herd and irrigated crop land), and both have specialized education – Sproule in business management and Knitel in agricultural economics.
Together, they have decades of experience in agriculture banking where they help clients weather whichever economic seasons come their way.
Here they harvest the prime issues pressing farmers’ financials in 2023 – and plant some ideas for cropping them.
1. Interest rates. A doubling of interest rates over the past year has resulted in many payments increasing as much as 50 per cent in the same period.
“The goal is to mitigate interest rate risk. And so, last year we were asking clients to look at their short-term rates and think about protecting themselves by locking in a portion for a longer term,” says Sproule. “In this current interest rate environment, we suggest to lock in a portion for short-term as the outlook is that rates will begin moving downwards.”
He explains a typical laddered debt structure might, for instance, lock in half of a farmer’s debt for five years at a higher rate and keep the remainder on a short-term or even floating rate. “When rates are low, paying an extra percentage point to lock in a rate might not make you feel good, but that rate may still be really cheap if you look at the last 20 or 30 years,” he says. “If you can afford to pay it, it can protect you.”
2. Increasing costs, decreasing margins. “Agriculture is typically a low-margin business – and so, rising input costs take away from already thin margins,” says Knitel. She adds this is compounded by the fact that primary producers don’t set their prices when purchasing inputs or when selling their products, and therefore can’t pass along those increased supplier costs.
Here’s a snapshot of what’s currently putting a drain on expenses:
Cost of fuel: Fuel costs remain high in comparison to recent years.
Cost to rent land: EBITDA per acre is estimated at $65-$115, leaving little room to pay land rent as well as repay debt.
Equipment costs and availability: Costs are increasing, due in part to supply chain issues, steel and aluminum shortages, and computer component availability. Prices for new farm equipment rose approximately 16 per cent in the last 18 months, which has also had an influence on the prices for used equipment. Saskatchewan Agriculture’s Crop Planning Guide has referenced the annual cost of machinery investment at 7.5 per cent.
Fertilizer costs: “I have seen fertilizer estimated near one-fifth of many farms’ cash costs,” says Knitel. “Fertilizer prices have risen nearly 30 per cent since the start of 2022, following an 80 per cent surge in 2021. Natural gas is an essential element for most nitrogen fertilizers – therefore, supply shortages remain a threat, while increasing prices are near certain.”
Commodity price volatility: While 2023 forecasts for crop prices are higher, commodity prices will be volatile. This is due to factors including: war in Ukraine, inflation, global economic gyrations, supply chain disruptions, potential trade disputes, and damaging weather. Producers that are not sophisticated with their marketing strategies will have a difficult time selling their commodities in these volatile markets.
Carbon tax: Farmers anticipate the price of inputs needed to operate their business – from seed and crop protection products, to parts and machinery, to shipping – will increase due to the carbon tax they and their suppliers must pay.
The key to avoiding the input crunch is good cash flow management, says Knitel.
“When you look at cash flow, the question is whether you have enough to make your best management decisions,” she says. “Should you be pre-buying? Or maybe adding storage to your infrastructure so you can take possession if you have to?”
Knitel, Sproule and team work with farmers to ensure they have operating credit lines that allow them to secure inputs at the right time – and at the right price. “We help farmers structure their working capital so they can make good timing decisions,” says Sproule. “And even if it’s too late for them to pre-buy this year, we can start talking to them about next year so they can be in a good cash-flow position.”
In addition to harvesting the deep expertise of the Agriculture Banking team, farmers working with CWB reap the rewards of the bank’s close relationship with partner companies like CWB National Leasing – Canada’s largest and longest-standing equipment financing company.
As Paula Hartfiel, Sr. Account Executive, CWB National Leasing explains, creative equipment financing solutions can offset high equipment price tags and interest rates.
“Many of my clients have been using our ‘five and five’ program to finance new agriculture equipment,” she says. “It helps keep payments as low as possible. With this program, farmers can lease or finance for 50 per cent of the equipment cost for five years on a fixed interest rate, then purchase or re-finance the rest over the next five years.* This allows farmers to make lower payments over a longer period of time, and also avoid spending a huge amount of cash up front.”
*Five and five program is subject to credit and agriculture asset approval, and applies to new equipment. Contact CWB National Leasing for details. Offer valid until October 31, 2023.
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3. Labour supply: A tight labour market is impacting many industries – and in farming there are some additional factors at play. “Agriculture labour is unique given its rural and often remote location, seasonality, older workforce, and public misconceptions,” says Knitel.
Sproule adds that farm labour is generally seen as a lower-paying, manual job and so it can be more difficult to convince domestic workers to go back to the farm. Attracting migrant workers has also become more challenging, thanks in part to backlogs at the border.
While one approach to addressing labour shortages is investing in labour-saving technology and equipment, it’s also important for farmers to be seen as a good employer. As Knitel explains, banking services can be an effective tool in recruitment and retention.
For example, CWB can put together an employee banking package for farm workers that bundles services like chequing accounts and home finance options. CWB can also arrange direct payroll deposits and, through Wellness at Work, offers a group savings program for businesses with as few as three employees – far less than what other banks typically require.
In addition to this, the Agriculture Banking team can connect farmers with insurance partners to help arrange health and dental benefits for workers. “All of this makes it easier for a farmer to become an employer of choice, and that’s vital in this environment,” Knitel says.
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4. Revenue risk. “Perhaps more than other sectors, agriculture’s fortunes depend on volatile and unpredictable factors like weather events – which seem to more frequent and severe – as well as global commodity markets and complex supply chains,” says Sproule.
Crop insurance is a well-known way to protect a farmer’s revenue, but there are other options as well. “Our network includes insurance people, so we like to have intelligent discussions with clients and look at all the different ways to mitigate risk,” says Knitel. “We can broker discussions about things like drought insurance and revenue protection that go beyond crop insurance.”
5. Business continuity. Only one in 10 business owners (nine per cent) have a formal business succession plan, according to recent report by the Canadian Federation of Independent Business (CFIB). It’s something both Sproule and Knitel certainly observe in their roles with the Agriculture Banking team.
“People know it’s important and they need to do it, but it can get pushed off when there are more pressing issues at hand – not to mention they would rather be out working their land than sitting at a desk tackling strategic management challenges,” says Sproule. “The thing is, succession planning takes time – it’s not something you can do in a couple of months.”Solutions:
Sproule and Knitel encourage their clients to take time now to develop a strategy to ensure the farm can continue running smoothly far into the future.
“It’s not just succession planning about who is going to take over the farm when the current owner is gone,” says Knitel, who is also a designated Family Enterprise Advisor. “It’s more about how farm families work together. How do they make decisions? Who does what? What can we do to ensure that this family and this business continue not just through this year, but for many years to come?”
That might seem like a lot of things to tackle. That’s why the Agriculture Banking team works with farmers not just as bankers, but as trusted partners who can support them through the complex challenges they face this year – and beyond.
“When we have that advisory discussion with farmers, it all boils down to how they can manage the risks,” says Knitel. “The more risk they can mitigate, the more profitability they can build into their business. And as their partners, we can support them.”