Creating Monsters – Has the family farm become unsellable?
“Toto, I’ve a feeling we’re not in Kansas anymore”.
I have often referenced my business partner, commenting that he didn’t want to “create a monster”. For those in agriculture who have continued to grow in acres and equity, the future landscape is beginning to change. We have always said that farms are equity rich and cash poor, so it begs the new questions that are coming to light in the current environment: do consolidated farms have an exit strategy?
Growing up, I bought my first quarter at 24, then another and another until the farm had a respectable size of 4,000 acres of owned and rented land. In today’s agriculture, most farms can no longer purchase one quarter. The last few land sales I did the due diligence on were between 1,000 acres and 10,000 acres. For those away from the farm these days, that is $3M to $60M depending on where you are in the province.
So, how does the industry deal with the new size of operation? Are they still sellable ventures in the current environment? Does the next generation want to deal with the size and scope of the current business model? Have farmers created monsters?
Exit Strategy 1 – Straight Sale
Let’s say a 5,000-acre farm is worth $20M ($4K per acre). In today’s interest environment over a 25-year amortization, the interest cost alone is around $1M per year ($200 per acre). Very few operations today, ours included, have the limited ability to average this cost base over our other land base, owned and rented. The ability of large-scale operations to continually make this type of investment may be possible on a one-and-done; the ability to make numerous deals this size is unattainable.
This is the representative sample of the average consolidated farm today. Most likely, another 50% of the land is rented, but overall, the land alone is pushing into the tens of millions of dollars. Get any larger, and the number of purchasers decreases at a significant rate. Even other types of structures (Hutterite Colonies, private equity) have standards on size they are comfortable with, and many of the farms I see today have already blown through that ceiling.
Exit Strategy 2 – Divide and Conquer
Most of you reading will say an easy answer, divide the land between neighbours and give the next generation a chance to grow. One small problem, the infrastructure that comes with these operations is most often in the millions and based on how many guys I argue with around farm shops, throw that in as well.
With tightening margins in agriculture, many operations have chosen to build storage facilities well beyond the old 4,000-bushel Westeel hopper. It is not uncommon to see infrastructure on farms between the bins, the shops, the dryer systems, approaching the tens of millions of dollars as well. Split land, you deal with legal fees and the annoyance of the number of lawyers you deal with between the purchaser and seller. Splitting infrastructure becomes a whole new beast.
Exit Strategy 3 – No Exit
Become an entrepreneur; with land values in some provinces growing by more than 10%, and after watching the stock market look like a roller coaster these days, maybe it is time to start thinking differently. The returns I see on well-run operations, which have limited fear of weather and markets due to strict risk management, are well above the market indexes. When a farm becomes too big to sell, it possibly shouldn’t.
Everybody these days looks for instant gratification. The new Corvette, the beautiful house, the like button on X. In farming, the next generations see the dollar signs that come with the liquidation of land and equity. Whatever happened to a return on investment? We treat farms like they are different; quick lesson, they are not.
Some farmers are starting to think differently. Whether it is due to the above-noted conflict with selling a scaled business, or just the fact that they understand finance and accounting better than their predecessors. Owning a business is becoming a goal, rather than just instant gratification. I am starting to see a change, a slow one, but a change, nonetheless.
In the end, I don’t believe we have hit the ceiling yet. Some farms that have hundreds of thousands of acres are in a new game, but currently, agriculture is still sitting on the top of the fence, ready to fall over. Whether it is the sheer size of the deals, the fact that too many farmers miss out on too many kids’ ball games, or just the sheer complexity of business, things are changing. In the end, we pat ourselves on the back for success, but have we created a new monster under the bed?
