With 2024 in flight, it’s time to start looking at the factors that will affect farmer’s finances for the upcoming growing season. Producers won’t be surprised to hear that many of the same challenges that characterized 2022 and 2023 will persist, including continued pressure on their profit margins.
What’s eating into profits? High interest rates will again cost farmers more, and they’re compounded by the fact that borrowing volumes remain high – especially as timely bulges remain essential to support working capital and capital assets.
“Thin margins are a consistent theme for our clients,” says Trevor Sproule, AVP & Head, Agriculture Banking, based in Lethbridge. “Effective cash flow management is so essential, as is the ability to service debt, expand operations and endure unpredictable events.” In this environment, partners that understand a producer’s needs can help offset these factors.
"The quality and effectiveness of the solutions offered by your financial services provider depend on the fit, expertise, and strength of the relationship," he explains.
"Given the current uncertainties and volatility in weather, markets, prices, and resource availability, risk mitigation is crucial. Even if it’s not CWB, partner with a bank who understands your operations, performance, business strategies, goals, and objectives. Your financial strategies should be aligned to your specific needs."
What else should Canadian farmers be looking for to keep their financials primed in 2024? Let’s look at the top challenges and solutions.1. Interest rates
After a series of hikes took effect at a historic pace, interest rates appear to have gained stability. While they will continue to take a toll on payments, it remains to be seen whether rates will fluctuate or remain stable.
The solutions:
“The goal is to mitigate interest rate risk. Many producers will consider locking in two- or three-year fixed rates, which are more favourable than floating rates,” says Sproule.
Justin Dubasov, a senior business development manager based in Saskatchewan, adds that taking the short-term, fixed approach can come with a further benefit. “Many producers have ambitions to grow and expand their operation, and opportunities tend to pop up with very tight turnarounds. Choosing to lock in a short-term rates on a loan helps to mitigate any potential rate and cost increases that come with purchasing longer-term, tangible assets like machinery or land over that period.” Dubasov also says that short-term rates can offer peace of mind because it minimizes commitment while allowing for the opportunity to adapt to any subsequent changes, especially as the current interest rate environment remains uncertain.
Sproule explains how a typical laddered debt structure can 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. Formidable input costs and declining commodity prices will continue to complicate thin margins
Thin margins characterize many farming operations, and so keeping a close eye on input costs and commodity prices will remain part of prudent management. After all, farmers have no control over these values, and can’t pass along increased costs to buyers.
Falling commodity prices, such as those for wheat and canola, will impact a producer’s bottom line as global inventory and supply chains have improved. While declining fertilizer and diesel costs will provide some relief on input costs, prices for other critical growing ingredients remain substantial. Producers will need to keep a close eye on potentially higher prices for urea nitrogen, while phosphate may remain expensive and in short supply.
The carbon tax will remain a factor as well. Farmers anticipate the price of inputs needed to operate their business – from seed and crop protection products to parts, machinery and shipping – will increase due to the carbon tax they and their suppliers must pay.
The solutions:
Avoid an unnecessary margin crunch with good cash flow management practices.
When you look at cash flow, the question is whether you have enough to make your best management decisions, says Sproule. “Should you be pre-buying? Or maybe you can add storage to your infrastructure so you can take possession if you have to?”
Sproule and his team work with farmers to ensure their clients 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,” he says. “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.”
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Consider dedicating a portion of commodities to contracts
Producers can gain some valuable payment stability – and offset risk – by contracting a measured amount of next year’s crops to larger food corporations. “By doing this, farmers benefit from having stability in knowing their product will fetch a specific price on a determined delivery schedule,” says Dubasov. “There are risks to be aware of though. Market changes or weather events can affect a producer’s ability to meet their contractual obligations and force the farmer to head to the open market to make up the shortfall at potentially high prices. Annual commitments need to be planned in step with crop and revenue projections.”
Creative equipment financing
In addition to harvesting the deep expertise of the Agriculture Banking team, farmers who work with CWB reap the rewards of a deep connection to 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.”
*The 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, 2024.
3. Labour supply
A tight labour market will continue to impact agriculture in unique ways. Rural locations, seasonality, public misconceptions and an older workforce often characterize the farm as a workplace. 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. And while attracting migrant workers is starting to become easier, retaining employees remains a challenge because many workers often use their positions as stepping-stones to further opportunities.
The solutions:
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. 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,” Sproule says.
Finding employees who are willing to stick with the job is easier said than done, and providing free employee housing can remove one reason to flee. Some farms are providing housing, buying apartments and even turning hotels into worker accommodations.
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Learn more4. Revenue risk
“Perhaps more than other sectors, agricultural fortunes depend on the potential of volatile and unpredictable factors like weather events – which seem to be more frequent and severe – as well as global commodity markets and complex supply chains,” says Sproule.
The solutions:
Crop insurance is a well-known way to protect a farmer’s revenue, but there are other options as well. “We can of course introduce our clients to insurance and risk management people in our network,” explains Sproule. “But when we talk about mitigating risk, we like to have big picture conversations and consider all the different tools, beyond crop insurance, that can help you sleep better at night.”
With moisture shortage one of the leading yield risks for many farmers in Western Canada, drought insurance can be another safety net, but Sproule and Dubasov are also seeing more producers take matters into their own hands.
“Irrigation is becoming a more widespread tool for producers who can turn to it,” says Dubasov, who notes that strides are being taken to increase the number of acres 'under water' in southern Saskatchewan. “Drilling into aquifers is a significant investment, and only a small percentage of producers will be in a location where drilling is an option, but irrigation can help to increase crop yields on a more consistent level.”
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 observes 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. The thing is, succession planning takes time – it’s not something you can do in a couple of months.”
The solutions:
Sproule encourages his clients to take time now to develop a strategy to ensure the farm can continue running smoothly far into the future. “There has to be discussions about who’s going to take over the farm, how the family works together, how decisions are made, and how the business can continue for many years to come. We can introduce you to the right people to support you through those complex conversations, too.” he explains.--
Like any year, 2024 is sure to be bursting with things to plan for and work toward. Agriculture producers have a lot in the hopper, but CWB’s Agriculture Team is there for you – not just as bankers, but as trusted partners who can help navigate the complex challenges ahead. “The more risk we can mitigate for you, the better,” Sproule closes. “And when we mitigate your risk, you have the best chance at building a profitable farming operation.”