Today’s large commercial farms require sophisticated management to succeed.
That means drawing on the counsel of experts, says a prominent agricultural banker.
Brian Little, head of agriculture and agribusiness at RBC Royal Bank, said in an interview that over the past two censuses the number of commercial farms grossing more than $250,000 per year has increased by about two percent per year. At that rate, there would be about 50,000 such operations in Canada by 2025.
These operations are increasingly managed by several people with specialized skills overseeing two or three key enterprises.
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An example could be a farm with grain production and a cattle feedlot owned and managed by brothers.
The owner-managers know a lot about their operations and the industry, but can’t be experts in all aspects of their complex business, which could include hired staff, international sales and large cash flow.
“They will have access to professional advice counsel,” Little said.
“They may have an advisory board. They will be sophisticated in the way they use risk management tools, hedging, contracting. They will manage their inputs like they manage the sale of their products. In other words they’ll be shopping hard to fix the price of their fuel, fertilizer, seed, chemicals.”
The advisory board could include professionals in accounting, law, crop or livestock production, banking, marketing and human resources.
“And likely a representative from outside the industry who would provide an objective viewpoint about the business plan, the farm plan, the business results,” he said.
Little said many farms will develop five-year plans, updated annually, to guide development.
“To be effective I think you’ll need that strategy in place because of the volatility and just the change in the industry, whether that be through technology or pricing or marketing.”
A common perception of a commercial farm is one that owns a large land base, but that is not necessarily so, Little said. Land rental, leasing, partnerships and other business arrangements are becoming common.
Without land as collateral, lenders need to look at alternative methods to secure loans. More emphasis will be placed on assessing the owners’ skills in managing production and marketing risk.
The farmer will need an ongoing relationship with account managers at lending institutions.
“The conversation, the dialogue needs to be ongoing, at least more than twice a year, maybe every month or so,” he said.
This means the lenders must develop a deeper level of knowledge about the agricultural environment in which the farmer operates and the tools that will be helpful, such as currency exchange, hedging, investment management and estate planning.
To be successful in the sector, banks will have to maintain a strong interest in agriculture for the long term.
“(At RBC) we know there will be peaks and valleys. To be supportive of the client and committed to the industry, the lender has to stay, has to participate,” he said.
“Your client is counting on you for support, whether it be through financing, through investment deposit services or other services.”
He said RBC has been in agricultural banking for 40 years and plans to continue in good times and bad.
An example of that was in the period following the discovery of BSE in the Canadian cattle herd.
“We established a national committee and worked out a strategy whereby we met with every feedlot account we had and worked out with them a plan for the next 12 to 18 months to determine what they were going to need to help them get through it,” he said.
Similar strategies were used with the hog industry and British Columbia’s poultry industry when they faced hardship, he added.
