The Industry That Fears Its Own Success – Why do farmers want agriculture to fail?

Primary producers love a good crisis. I once heard it called “the paradox of progress”, but in my mind, we are in an industry that is so afraid of change and complexity that it continually tries to remain in the past.

From land prices to equipment values, many believe collapse will ‘fix’ the industry, but it won’t. It will only accelerate consolidation. So, let’s play out the scenarios.

The Land Valuation Dilemma

Several months later, we are still talking about Trent Klarenbach, the man who has predicted the fall of agriculture in Canada. A bold statement to say the least, but somebody who adamantly predicted that we are likely to see a future much like we did into the early 1980s. So, what happens if he is correct?

As land values decline, we will see the baby boomer generation begin to liquidate, which may cause an oversupply and lead to further valuation drops. Even Trent made it clear that those who believed his analysis were heavily weighted to the older generation, so it would be feasible that they would jump first on the sales train as the values drop.
Many producers that recently overextended and grew with high price purchases will most likely see an offside situation with their banks on leverage and in turn, be forced to deleverage or restructure (sell land or put more equity towards the loans). Again, an increase in supply on the market and a possible further decline in land valuation.
The farms that have been complacent or the large, consolidated operations that have kept their debt-to-equity leverage low (higher rented acres) will now enter back into the market and continue to consolidate at a high level. Too many look over the fence and believe the consolidated enterprises are extended, whereas many have a high number of rented acres and are in a solid leverage model that could sustain a 25% to 50% drop in security valuation.
New entrants will continue to struggle as large operations have higher debt service, profits, and cash flow. Many believe a land drop will benefit the incoming producer, but I believe it will make competition much higher and even harder to outbid those with generational wealth and large working capital balances.
Private investors will see opportunity as rental rates rise, further pushing competition and consolidation.

Land prices may correct, but it won’t make entry easier. It will simply transfer acres to fewer owners.

Iron Disease and Its Outcome

Ben Voss, on our podcast, stated that the current machinery market could not continue at this level. Although I do agree in principle, I also see the scenario playing out as more interesting than just a full-scale collapse. So, what happens if we have a severe oversupply in the equipment market and Ritchie Brothers becomes the hottest commodity in agriculture?

The farms with new machinery and high equity will hold back from their annual roll and most likely term out the equipment over a seven-to-ten-year amortization. The equity they did have in the equipment will be eroded due to the drop in valuation, and this will have them moving away from newer implementation and more towards a utilization metric. These farms may need to inject working capital to lock in the financing if equity has eroded below the loan valuation at the time of restructure.
The operations with one- to two-year-old trades will also lose a large amount of equity, making it hard to make any moves, as when they rolled into the used ones the last time, it most likely ate away at their equity valuation. Without a cash injection into the deals, many farms will not be able to trade or will make the choice not to. This segment will be hurt the most as many are on one-year agreements to flip with their financer and will be underwater significantly at the time of trade. We may see a “repo man” enter a farm for the first time in my history in agriculture.
Those with older equipment will see the lowest drop in value because they didn’t have much to begin with, but the jump to newer implements will still require cash flow, and in today’s tight margins, this may not be worth it. They will continue to sit on older equipment and follow the construction industry, repair and use, repair and use.
The most interesting area is that the estimate is that new prices will drop (which they may), but there will be a delay as manufacturers will continue to cut costs before dropping prices. We will see new technologies shelved as research and development costs are reduced, and the labour at the manufacturers will go down to skeleton crews until it becomes impossible to produce. Only then will we see a drop in new pricing.
We are seeing dealerships with large labour shortages in mechanics. As farms hold older equipment, we will need increased service, not less. Retail will stop accepting trades as the buyers dry up, and you will be stuck with your equipment whether you want to trade it or not. Most farms will need to invest in on-farm mechanics, and this is tough, as only those consolidated entities most likely can afford this price tag per acre. Downtime will become one of the largest risks in agriculture, not weather or policy.

Dollar Today, Gone Tomorrow

The last area for the crystal ball will be what happens to profitability going forward. To identify this, we need to start with the past. When did $12 canola become unprofitable and force us to go to the government for money? In 2019, the price of canola was in the $9 and $10 range, and farms were making a profit. Next year, profit may be lost in the inputs, but the biggest issue in agriculture is the farms themselves when it comes to profit.

With the commodity markets remaining stagnant, many producers will lock the bins and try to wait out the industry. This will work until January or February, when the retail financing becomes due and they are forced to sell. The prices will decline further with the oversell, and as logistics are overwhelmed, the railways will not deliver on their promises. Many producers will not make their payments by the deadline, and higher interest costs will result.
Those producers who have working capital will outlast the spring rush but will depend on summer to make up for their carrying costs of the additional grain. The additional interest and loss of any quality due to storage will have its own effects, but overall, there will be a large increase in lending to put next year’s crop in without selling this year’s grain. Banks will tighten as they see the cash flow drop, and this will cause issues with the operations and further growth side.
The large and/or progressive operations with advisors will sell grain this fall for a low price and most likely buy it back in the hedging market. They will take the hit based on getting the present value of cash into the account and make purchases of inputs, hoping for future profit when the time is right. On paper, they can hold the upside at a fraction of the cost or cash, and next summer hopefully make up the loss in value today. It helps to know marketing in a year like this.
The next crop year will be tight and will belong to those who planned. The farms that bought fertilizer this summer and closed the hedge with a sale for next harvest will come out at a breakeven or slightly better. The rest will fight for profit while they can, on ups and downs. I believe that those farms that want to grow will, those that don’t want to grow won’t, and we will continue to lose baby boomers due to ideas of risk and new entrants due to lack of cash. Really, not much different what we are already seeing today.

Get out of the Gap

Strategic Coach calls it playing in the “GAP”. It is one of the leading causes of stress and anxiety in agriculture. As primary producers, we are bombarded with “clickbait” and “doomsday” predictions. Even from our own industry partners, I have found that farms are the worst when it comes to providing negative commentary about agriculture. And we continue to wonder why nobody wants to come back into the industry.

To get out of the gap, you must rely on your own networks and education.

You are the five closest networks around you, so choose wisely. In life, we have many choices, and who we spend our time with is one of those. One of the greatest life lessons I learned was to find a network that is ahead of you and chase them. If you spend your time with those below you, you will become them.
Celebrate your success; in agriculture, we sometimes forget to stop and smell the roses. I have been guilty of this many times, as we no longer get the harvest numbers completed, and we are already planning out the coming year. When do we stop and celebrate the team, the leadership, the choices and decisions we made last year? And celebrate with your family, as they most likely make sacrifices with you to be successful.
Lastly, don’t get stuck in the victim mentality. We are in an industry that likes to blame the weather, the markets, the rising costs, and most of all the government for our problems. When you fail to plan, you plan to fail. Uncontrollable risks are not real; you always have control over your planning and your reactions. Predict the possibilities before they become opportunities.

The question isn’t whether the next downturn comes, it’s whether your farm is prepared to use it as an opportunity instead of an excuse.

“Veni Vidi Vici” is the Latin text meaning “I came; I saw; I conquered” – Julius Caesar.