Scrimping on inputs | Company provides money to farmers whose capital is tied up in land
Farmers are grossly undercapitalized despite making more money, says a firm that provides growers with capital for inputs in return for a share of their future production.
Brad Farquhar, vice-president of Assiniboia Capital Corp. and the recently formed Input Capital Corp., said farming has become incredibly expensive.
He called it the biggest impediment holding back the Canadian grain industry.
He said growers facing rising input costs, escalating land values and sky-high equipment prices can’t afford to farm the way they should.
Farquhar figures a farmer is undercapitalized if he doesn’t have the working capital to spend $300 per acre per year on his crops.
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That is why western Canadian farmers are unable to come close to realizing the 60 to 80 bushel per acre yield potential contained in canola genetics, he added.
“The (Saskatchewan) provincial average is about 28 bu. per acre,” Farquhar told Breadbasket 2.0, a conference organized by Canada’s Public Policy Forum.
Farquhar said it has become difficult for a farmer who wants to expand his operation to buy land in smaller increments, such as a half section.
“Expansions are becoming chunkier.”
Instead, growers are forced to buy 3,000 to 5,000 acres when a neigh-bour leaves the business. With money tied up servicing land debt, farmers tend to scrimp on fertilizer and other inputs.
They’re also confronted by the huge expense of buying out their parents when they retire.
“How many industries do you know that have to recapitalize themselves every generation?” said Farquhar.
Input Capital Corp. was formed to address the undercapitalization issue. The company makes an up-front cash payment to farmers in exchange for the right to buy at a fixed price a portion of their production for an extended period of time.
That way the farmer has the cash he needs to grow a 50 bu. canola crop.
However, a young farmer at the conference said Farquhar and one of his companies are partially to blame for the undercapitalization predicament. The grower said companies such as Assiniboia Capital are forcing farmers to compete for land with the pre-tax investment dollars of city doctors and lawyers who provide Assiniboia with its capital.
“Do you see there being a backlash from the farm community towards organizations such as your own?” asked the grower.
Assiniboia Capital owns 115,000 acres of Saskatchewan farmland, which it bought on behalf of 800 investors.
The company has delivered an average annual return of 20 percent per year to investors since it started buying land in 2005 due to appreciation of the property.
“Some of those original investors have more than tripled their money,” said Farquhar.
He said Assiniboia has analyzed Saskatchewan farmland sales data and has a clear conscience about its activities in the province.
“The top value transactions are taking place between farmers themselves,” said Farquhar.
A grower will pay a premium for land that goes up for sale next to his own land, while Assiniboia is “agnostic as to location.”
“It is farmers who are your biggest competition and driving up prices,” Farquhar told the young farmer.
Farquhar said Canadian agriculture hasn’t been much of a draw for institutional investors. A 2007 study identified 427 publicly traded Canadian oil and gas companies on the stock exchange, more than 1,300 mining companies but only six publicly traded agribusiness firms.
“In agriculture, we’ve tended to over-rely on government to fund infrastructure investment in agriculture,” he said.
Investors have traditionally shied away from Canadian agriculture because of its reliance on supply management, marketing boards and restrictive farmland ownership laws.
The negative perception is slowly changing as some of those barriers fall by the wayside. Farquhar sees a lot more Canadian pension funds and institutional investors showing up at agricultural investment conferences lately.
“That’s an encouraging development for a company like ours.”
