Assume Nothing – How the primary producer mindset changes in a downturn

I took a big step for my own well-being this month – I limited the amount of time I spent on social media for the first time ever. It might be because we have two very important elections on the horizon or the drop in commodity prices has created massive pessimism in Western Canada, or lastly that farms continue to make negative assumptions about others that are successful in their industry, but I needed a break.

 

I am going to concentrate on the last point. Unlike other blogs, I am not here to defend the mega-farm. I will be the first to identify that I have seen some horrific big farms and at the same time some well-run ones. Much like I have seen the same outcomes in many small family-run operations. 

 

I have told the story multiple times that the best farm, in terms of financial prowess, I ever witnessed was 3,500 acres and fed three families with multiple crops in the bin or deferred. So, for those that are going to say I’m biassed, save it for the time being.

 

This blog came directly out of an X/Twitter post I saw late one night as I was realizing that screen time was wrecking my sleep. The initial post was a great clickbait as it merely said “if we enter a downturn, what do you see happening over the next ten years in farming?” 

 

It made me stop to think for a bit which is better than most of the posts I just scroll by and forget before they hit the bottom of my phone screen. Then came the replies:

 

• The big farm will disappear as they are overleveraged and too high risk.

• The mega-farm will go broke as they don’t do as good of a job on every acre due to inefficiency.

• The investor farms will drop as the returns will go down and they will put their money elsewhere.

 

It was interesting to read because my initial thoughts were that there would be large opportunities for growth-oriented farms as a large portion of the smaller acre demographic would feel a drop in profits first. 

 

I don’t mean this as a slight, I just know the data. 

 

Large farms have an easier time controlling certain profit risks than small farms due to people, processes, and power.

 

People

 

I have always liked the assumption that as you grow you must work harder. The data shows the opposite as economies of scale allow growing operations to hire more experienced and educated third-party labour. 

 

As you grew, imagine if all those tasks that you might not be the best at (marketing, agronomy, human resources, etc) you could hire out and bring in experts to handle because you had more acres to average the cost over? If done correctly, and I don’t say this lightly, the growing enterprise or mega-farm can have multiple experts in a field of practice and do most of the tasks required in farming better than the average owner/operator.

 

The large caveat is that it must be done right. 

 

Many farms still focus on cost control and hire the cheapest labour. In this instance yes, the ability of the farm to do as good of a job over every acre as a smaller enterprise is difficult. However, if you had the acres to cover a full-time agronomist then this argument is null and void, and your acres probably have more education and experience over them than most. 

 

People treated as an investment increase the ROI on large-scale farms. You might not like the sentiment, but most large operations I work with do a better job per acre than a lot of small acre operations that can walk their fields numerous times per week.

 

Processes

 

Farming is just math. Most operations look at the progressive growing farm as a higher-risk endeavour. The truth is the key performance indicators and ratios on many of the farms I work with are considerably better than others. 

 

Whether it be that they have experts to negotiate with their financial institutions, or they can utilize equipment over many more acres for efficiencies, or back to the fact that as you grow your people get more efficient and therefore cheaper per acre. All these concepts are real in practice, but most don’t have the practice.

 

When we deal with our lenders we go to them with a proposal. We stopped asking for money a long time ago and started offering lenders the opportunity to work with us. This meant we negotiated all terms, interest rates, conditions, covenants, and any other underlying concepts. 

 

You might look at our balance sheet and the sheer amount of debt obligations and tell us we’re nuts or too high risk. But the truth is that the ratios are all that matter and the actual debt load is merely a function of return on borrowed investment. 

 

Let’s look at the bank ratios first. 

 

Whether it be debt capacity, debt to equity or working capital, the amount of debt on the statements is not an imminent factor. If the profitability and cash earnings equate to the amount of debt being carried, then the ratios could be stronger than other operations with farm-less obligations. 

 

In addition, through restructuring, interest terms, interest rate swaps, and other higher complex options, many large-scale farms most likely have better debt ratios than some of the smaller lower-debt enterprises. Larger operations with higher debt loads have access to beneficial lending options. Assumptions around which farms are higher risk really don’t hold water in many instances. And yes, interest rates are a risk, until you lock in a large portion of debt in long-term swaps at rates better than most short-term fixed rates. 

 

Let’s also look at equipment efficiencies. 

 

Our fleet of X9 combines looks pretty in the field, but to someone looking from the outside, they might think we’re inefficient or too high in debt. Truth is, our machinery costs per acre are almost the lowest out of every client I work with, non-dependent on size. 

 

As you grow you realize that people and processes with equipment create large efficiencies. This may be covering more acres per implement, multi-purchase discounts, or the fact that new technologies can be split over more acres in terms of cost. All these lead to efficiencies over the smaller operations that once again destroy the narrative that large farms will go first in a downturn.

 

Power

 

If you have ever shopped at Costco, you know that buying in bulk has much better pricing than single items anywhere else. So, when every farmer I know stops at Costco before leaving the city, they are buying at discounted rates due to bulk supplies. 

 

The secret is out!

 

The larger your farm is, the more products you buy, and the cheaper per unit the products become. 

 

Call it power, leverage, or whatever adjectives you like, it is simple economics. In terms of crop inputs, volume and size do allow for some leverage in cost financing terms or storage and logistics. Everybody knows this happens, but only when times get tough does it get called out loud and clear.

 

Looking at equipment and land, a larger operation has the ability to purchase more units from one retailer. It allows for discounts at the producer level and allows for fewer customers and administration at the retail level. This is also why you are seeing more large parcel land deals over individual quarters. The legal process, the costs, and the all-around time required for the deal are easier at a larger scale. 

 

This is not an us vs. them piece. I work with farms of all sizes and the true differentiator is strategy and planning, not just size. Everything above can be implemented on any size farm to push growth, but if you want to remain complacent then it does not work. 

 

In the end, the truth is that as you grow you get certain economies of scale that allow you to earn more and mitigate risk, not the opposite which many in the industry believe.

 

My favourite quote comes from fitness icon Phil Heath – “Hard work beats genetics until genetics works hard”. 

 

I think this fits quite nicely into the following, “bigger is not better, better is better, until bigger becomes better, then bigger is better”.