Most farmers can handle the current slump in crop prices, at least for a little while.
It hasn’t been nearly as severe as the sell-off in the world’s stock markets, as COVID-19 hammers down everybody’s expectations of this year’s economic “growth.” We’ve got an instantaneous global recession occurring, plus panic.
But people still have to eat and farmers are going to grow a crop this summer.
The recent slump in crop prices makes a really bad year a really, really bad year, but for most it will be survivable.
However, that might not be the case for farmers facing big land mortgage payments. Those land costs could be what pushes some people over the edge.
That’s why it’s probably worth considering alternatives to borrowing money to buy land, especially in a long-term commodity bear market.
A farmer could find a way to intensify production on the land he already owns. Fish ponds? Greenhouses? Whatever. That might be possible.
Or, more likely, continue buying more land, but with an “equity partner,” rather than on borrowed money from a banker.
I was thinking about this after speaking with Joelle Faulkner of Area One Farms, whose investment fund provides cash to farmers to buy land, after which they essentially become a silent but observing partner. Their goal is to gain from the farmland increasing in value, and the farmer choosing to buy them out after 10 years or longer. They get an appreciating asset, and the farmer gets a land base to farm, plus the appreciation of his side of the land purchase.
The farmer contributes money as well, so it’s a joint ownership situation.
“They put in equity. We put in equity. We own and operate together,” Faulkner, who grew up on a dairy farm near London, Ont., told me.
She thinks this year’s travails, which have only worsened over the winter with the rail blockades and COVID-19, will make farmers more open to the concept of sharing ownership of some of their land base.
Area One Farms is hardly the only investment company looking to get into the business of investing in farmland because of its seemingly ever-increasing value. There are firms that buy land and lease to farmers, other partnership models, and custom arrangements proliferating in this era of strong land values but poor crop prices. There are also outfits that front the cost of various inputs for a share in crop returns.
There are lots of ways of removing some of the financing and cash flow risk of today’s low-margin, high-risk farming.
“It’s not ideal to have years like these years, where you run some losses or break-evens, but because you don’t have land expenses it’s unlikely you’re really going to have losses,” Faulkner said.
“If you have the management capacity to expand, but you don’t want to take on debt because it would be risky for you … then we’re a really good option.”
I predict you’ll hear many more pitches like this in coming years, as investors look for ways into farmland, and farmers look to de-risk their operations.
Farmers have generally resisted having partners because, for most, their independence is the most important thing they have. A farm isn’t just a job or a business to most farmers.
But in recent years lenders have become increasingly intrusive in reviewing farmers’ business and operating plans. To get various types of loans, many have to endure various indignities, as Mr. Moneybags ensures he isn’t handing over his cash to a Bad Operator.
Faulkner told me her firm’s intention is to let farmers farm, without their intrusion, and to never invest with somebody that farmed in an unsound way.
“If a guy presented a plan where he was growing canola on canola in a clubroot risk area, we wouldn’t end up partnering,” she said.
Things can get “ooky” with a partner. Trust is important. Having to answer somebody’s out-of-the-blue questions can be mighty vexing.
But eliminating that mortgage payment risk is something that might fit well with a farmer whose equity position isn’t great, but needs to expand, and isn’t willing to roll the dice on the weather.
It’s at least a thought, or something to throw at the banker, to let them know you might have options other than them.