Purdue University’s Michael D. Boehlje offered Manitoba farmers a stern reality check last week about the tightening financial situation in farming. You might even say he was a bit grumpy about it.
After all, he’s seen it all before. The 73-year-old Boehlje would have been in his 40s during the 1980s farm crisis, when prices fell and cash-strapped banks drove overextended farmers into bankruptcy, dumping the land they seized back on to the market, which pushed more farmers over the edge.
The good news this time round is that land prices are expected to soften 15 to 20 per cent, not fall nearly 50 per cent like they in the 1980s. Interest rates are much lower today too.
There aren’t as many farmers who are highly leveraged, but servicing debt will be an issue, he predicted. Farm programs in the 21st century are less generous than they were in the 1980s — a lot less generous. That’s something Canadian farmers are perhaps more attuned to than their U.S. counterparts.
While there’s lots of things about farming that have changed since then, two things haven’t: commodity markets and farmers’ attitudes towards them.
The farm economist stressed current scenario is normal for commodity markets — a few good years followed by a period of low prices that lasts about twice as long. Even with the rising global population and a growing middle class in developing economies, clearing $200-per-acre profit is the exception in commodity grains, not the rule.
In his view, those good times are unlikely to return any time soon. Yet many farmers are managing as though they might.
That was the point in his presentation when Boehlje started to pace, his face got a little red and his voice rose a few decibels.
“Get a piece of paper and write across the top of it — ‘actions!’” he thundered as though the 400 or so farmers in the room were a group of sleepy first-year university students.
Point No. 1: “If there IS some recovery in the market, what should you do? SELL!” he said.
“What do most farmers do? SIT! Cuz it’s going to go higher.”
Nervous laugher rippled through the crowd.
Boehlje stressed farmers must be nimble if they are to capture any upticks in the market. It’s fine to hope that bad weather hits, and it hits someplace other than your farm.
But hope is not a strategy.
“Cost reductions are going to be pivotal. We should not expect to see us get back to profitability primarily through price increases,” he said.
Canadian farmers are being cushioned from the drop in global grain and oilseed prices because of the strong U.S. dollar relative to the Canadian loonie. To add insult to injury, U.S. farmers have not only seen market prices drop, they are having to sit on their low-priced commodities while their export competitors with weaker currencies snap up their markets.
However, the Manitoba Agriculture, Food and Rural Development crop production budgets released last month show that while margins aren’t in the negative zone here, they are marginal or break-even.
That means if farmers aren’t careful, a business-as-usual scenario could wind up eroding their working capital.
Boehlje identifies the farm’s working capital as its key financial vulnerability. Working capital is the farm’s current assets less current liabilities. The ratio is current assets divided by current liabilities.
He wants farmers to set their sights on maintaining a 30 per cent ratio to their gross revenue. “That is your first line of defence against financial stress,” he said.
U.S. farmers entered 2016 with working capital of about 57 per cent. By 2018, it is projected to be 25 per cent. “Is a lender going to loan them money to offset these losses? That’s not what lenders do,” he noted.
Farmland rental rates are way out of line with current profitability projections in farming, Boehlje said. He cited recent examples in the U.S. in which farmland was rented for two years for $500 per acre paid up front. Based on current margins, the farmer who now has that land — prepaid and locked in for two years — has spent $3 per bushel of corn just for the land. Corn is currently selling for $3.28.
In these times, farmers who own their land are in better shape than farmers who don’t, as long as they haven’t gone in too deep acquiring it.
As well, farmers still practising cash accounting instead of accrual could face hefty tax bills in a year when they are least able to pay them.
There could be some good deals on used farm machinery, but he cautioned against farmers destroying their financial resiliency chasing a good deal on shiny paint.
It’s sound advice. From the looks on their faces, he got his farm audience’s attention last week. Here’s hoping they heed it.