Cover Story - BIG or small: Which farm model is most economically sustainable?

Monday, August 9, 2010

While small farms have been declining in number and those with $500,000-plus revenues growing, the biggest drop has been in mid-range operations. Agricultural policy must take account of these trends and not lump small and large together

by Mary Baxter

Blake Vince describes himself as a small farmer within a large farm operation. The 38-year-old partners with his father Elwin and his uncle, Tom, to grow 1,400 acres of corn, soybeans and winter wheat near Merlin in Chatham-Kent.

The family shares workloads and pools its buying power to obtain price breaks on equipment and crop inputs. Vince considers himself a small farmer because each partner manages and pays for most of his own acreage separately. They market their crops separately, too.

Research produced by David Sparling, the Richard Ivey School of Business agri-food innovation and regulation chair at the University of Western Ontario, indicates that Vince straddles two, very different farm types – the large and small farm – that have evolved in Ontario in recent years. The amount of revenue generated is what differentiates the two, as well as the amount available to invest into the business. "If you're investing half a million in your business and I'm investing $2,000, we're going to become different," Sparling explains.

I first heard Sparling speak about two different farm types at a Toronto conference in 2006. His outlook for the small farm, defined in terms of earnings, was grim. Research indicated that farms making less than $100,000 a year were not economically sustainable. Sparling was mostly referring to the traditional family farm – "almost a self-sufficiency model." A small farm operator who "really knows what he's selling," in terms of all of the different values that can be added to a product, is more economically viable, he has said more recently. However, he suggests it's those with large farms – earning $500,000 or more a year – who have the most promising future.

Sparling is far from the first to declare that smaller farms are in jeopardy and larger operations are agriculture's future. For years, Statistics Canada data has documented the decline in Canadian farm numbers and the growth in physical size of those remaining. He is among the first, however, to quantify the emergence of two farm income types in Ontario and their defining characteristics.

Larger operations can be a source of full-time employment for several family members and others, he says. They will diversify to accommodate family members' involvement in positions that are meaningful to them. With opportunities such as on-farm green energy generation, biofuels, ecotourism, transportation and food processing available to them, larger farms are growing by adding non-farming activities. With their greater internal and financial resources, these farms can access a broad range of skills.

"Large farms are fully committed businesses and so they will use a lot of the standard business measures for success – how are you doing financially, are you paying down your debt, are you building up sales," Sparling explains. Impact on family and the farm's future are other prominent considerations. They want the business to be good enough so their children would want to be involved.

Small operations typically contribute only a portion of the total farm family income. Personal fulfillment is of equal or greater importance than income.

In these operations, the goal of earning a living totally from the farm often drives growth.

Beginning farmers will invest in small farm operations with the intent of growing larger. Growth involves expanding operations – "you would have to have a certain amount of scale if you really want to live off of it," Sparling says – and finding high-value markets. Because they don't have access to the same in-house resources and expertise, smaller farmers must rely on networks to grow, such as teaming with others to sell product at different local markets.

Mid-range farms declining
Canadian farm financial database statistics appear to partially bear out his observations about the emergence of the two types. Between 1995 and 2008, there has been a marked decline in the number of farm operations in Ontario earning $250,000 or less a year and a huge leap in numbers earning $500,000 or more. But the greatest drop – 38 per cent – actually occurs in the mid-range farms earning $100,000 to $249,999 annually. While the number of farms earning less than $100,000 has also declined, it is by a significantly smaller amount – 16 per cent. Farms earning $1 million and over, on the other hand, experienced the greatest increase, at 258.2 per cent. (See Figure 1)
A look at operations that occupy different revenue classes substantiates many of Sparling's observations. Other differentiating characteristics, such as approaches to financing and acquisition of both property and equipment are revealed, as are some surprising parallels between the two types.

Ann Slater, for example, reflects most of the characteristics of the smaller farmer. She farms 1.5 rented acres on her brother's farm near St. Marys in Oxford County and earns $35,000 a year from her operation. Slater, 47, spent several years working part-time while she honed production so she could manage her market garden full-time on her own, which she now does. (She uses unheated hoop houses to extend the growing season and, during that time, will turn over two-to-three crops in a single area). She specializes in certified organic produce and has made the most of local networks, such as the St. Marys Farmers' Market and local restaurants, to sell her produce. She has also introduced a community-supported agriculture program, in which consumers invest up front to acquire fresh produce throughout the growing season.

Slater's income is tiny, but, as she points out, she does not have a family to look after. Her goal is to increase her income a little bit each year.

Her expenses and revenue are stable, and she doesn't use any government or bank financing (her operation is too different to fit into most conventional financing opportunities, she says).

If a major crop fails, as tomatoes did in 2008 and 2009, she recoups costs through later season crops.

John and Suzanne Williams' Midland area farm also shows most of the hallmarks of the smaller operation. They grow organic vegetables and hay on their 100-acre farm and maintain a 20-acre sugar bush. Last year, they earned $70,000 gross revenue from the operation.

John, 47, has farmed full time since 2003, while Suzanne teaches. Her job and benefits "have really been what has enabled me to do this," John says.

Farming is John's second career.

He managed a store that specialized in outdoor sports equipment. His parents had a hobby farm and he had always been involved. He attends conferences and workshops as well as networks to hone his farm and business skills.

John's goal is to earn a wage of $25,000 to $30,000 a year and establish a comfortable balance between work and family life. To achieve that goal, the couple must expand. They try to finance improvements out of their profits but, as the scale of the operation increases, that's more difficult to do. "When we moved our whole syrup operation and increased it we had to invest $40,000 to do that; it all had to happen at one time. I couldn't do $10,000 a year," John explains. He has accessed some government programs to make equipment upgrades.

Expansion in organic production poses other challenges. "You really have to figure out your weed control and everything, pest control, how it's going to work, and then it changes at every scale you're working at," John explains.

He has bought some specialized equipment, such as a small harvester for salad greens. "You can cut 100 pounds of greens an hour; and we had been doing it all by hand, with a knife."

Becoming larger has also meant taking on five seasonal employees, which is a major expense.

One big hurdle John faces is tracking down programs to help with improvements. Larger operations may have the time and resources to search out programs and do paperwork; he doesn't. And some programs, such as crop insurance, just aren't relevant for his operation.

Full-time farming goal
Blake Vince's farm revenues land him squarely in the $100,000 to $250,000 revenue class, although the family partnership's total revenue is significantly higher. Like the Williams, his goal is to farm full-time and achieve a better work-life balance. That's "still a ways away," he says, noting that, since launching his farm career in 1995, he's had to carry a full-time job in seed sales.

Vince started with a six-acre "pickle patch" and custom work deroguing seed corn seed fields. He is expanding his land base, as many larger-scale farmers do, by combining sharecropping, renting, buying and custom farming. He also taps family resources for help with labour and expertise and to achieve economies of scale. He bought his own farm with an eye to how it would benefit the business partnership. There's a scale in the backyard to track how many bushels belong to each partner and grain bins where everyone's crop is stored. He's added a grain dryer as well.

Like the other two small farmers, Vince envisions a future of farming on his own. It's not out of choice: his father is 63 and his uncle is 59. The transition from one generation to the next is underway.

He's using technology and innovation to achieve efficiencies that will pave the way for him to farm on his own.

He bought Ontario's first Soil Warrior zone tillage machine in 2006 and was also one of the first in his area to adopt RTK (real time kinematic) satellite navigation. The technology enhances the precision of field equipment and provides hands-free equipment operation. During the next round of equipment upgrades, he's considering jumping to a 40-foot system for the grain drill, planter and combine from the current 20-foot system.

Just as Slater has in her market garden, he's exploring ways to intensify production, albeit on a much larger scale. Using more cover crops in the cropping cycle is one approach; experimenting with twin-row corn production to try to push populations to a higher level and maximize daylight is another.

Because of his off-farm income, Vince can reinvest the small annual salary he pays himself into the farm. He prefers to put his cash into land rather than machinery, which he will consider leasing, especially if it's highly depreciable. He uses the acquisition of their RTK system as an example. At the time they bought there was no RTK broadcasting network in their area. Many of the components were highly depreciable and wouldn't be worth much for resale in a few years. So he negotiated a lease-to-own agreement. "The lease is a 100 per cent write-off," he says. "And then at the end of the term I own (the technology) for $1." Moreover, leasing won't tie up equity in property if it's needed to acquire more land and (therefore) won't jeopardize his ability to secure financing to buy land. "In my business (debt) can burden you, but you can't let it scare you," he says.

In the $1,000,000 class
Developing a steady cash flow has been a cornerstone to the expansion activities of brothers Randy and Tim De Block. Randy, 47, and Tim, 48, operate a farm business that is almost a picture-perfect example of Sparling's large farm type. Along with farming 2,000 acres of rented and owned land north of Mitchell in Perth County, the brothers custom farm 2,000 acres and custom spray between 25,000 and 30,000 acres.

As well, they own two hog finishing barns, which they lease to others, and operate a grain elevator for their own and their customers' use. Their annual revenues easily land them a spot in Statistics Canada's highest farm revenue class of $1,000,000 and above.

Custom work is what generates the steady cash flow, as does the elevator, explains Randy. The revenue offsets machinery costs and eases their dependency on commodity prices. Equity "only lets you borrow money," says Randy.

"Equity doesn't pay the bills."

Diversification has enabled the brothers to create well-defined roles for themselves within the business. Tim manages the grain elevator and custom spraying; Randy looks after the trucking, combining and planting. They also enlist family resources – their father, who started the farm, still helps out with office work and the brothers' sons (Randy has three daughters and one son and Tim has two daughters and two sons) work part-time.

Like the Williams, they employ seasonal, part-time help – between four and six workers. As well, they have added the expertise of an independent agronomist to analyze their soil and determine their nutrient needs. Randy says the outside assistance has increased yields, produced better standability in crops and reduced input costs.

Just as innovation is playing a role in growing Vince's farm operation, it has played a part in the De Block brothers' expansion. In the 1980s, the family fed livestock and grew corn on corn. Now, they maintain a full crop rotation of soybeans, wheat, edible beans and corn, and have switched to no-till and minimum tillage.

Equipment they acquired to work their own fields presented an opportunity to diversify. The hog finishing barns they built are a source of nutrients for their fields. They keep detailed records of input costs per acre and crop performance on every farm they work. "We need to know individually what's working and what isn't working," Randy says.  

Unlike the smaller farmers described here, the De Block brothers' count among their goals creating an operation that's flexible enough to allow the next generation to join in.

Their children's involvement will determine the long-term plan, Randy says.

At the Vermeersch family's farm operation near Tillsonburg, the next generation is already involved, and has been for a number of years.

Family members are evolving in areas of specialization, although roles still overlap.
The operation consists of more than 7,000 acres of corn, soybeans and rye. The family operates its own elevator and does a small amount of custom planting. George Vermeersch and his wife Willy built the business from 190 acres they bought 25 years ago. Today, their two sons, Greg and Jeff, both in their early 30s, work with them.

George looks after the elevator; Willy and Greg manage the farms. Jeff works in the field and deals with the sprayer and chemicals.

Like the De Block brothers, the Vermeersch family reaches out to obtain expertise and develop their own skills. They rely on their suppliers. "They become part of the team really," says George. They keep a white board in their office to alert people to training opportunities and farm shows. "We try to get on as many courses as we can," says George.

The family focuses on keeping most of their operation in-house. It has meant innovation, both in the way they approach cropping activities and in the equipment they use. They standardize their equipment, for example, using the same make, model, motor and transmission for their transport trucks and the same manufacturer and cabs for their tractors. It saves costs with training and maintenance, Greg explains. To manage fuel costs, tractors are matched to the right jobs, he adds.

They warehouse their own seed, which enables them to buy at discounts. They have located their office and grain elevators in the centre of the 40-mile radius in which they farm. The elevator is close to trucking and rail, and has three-phase power. They have also enlarged its pit's holding capacity to reduce offload time.

Transitioning from tobacco
Most of the land they have acquired was previously in tobacco production. To prepare it for cash crops they have  removed kilns, greenhouses and fence lines, and installed drainage tiling. They bought equipment to do their own clearing and tiling in order to save costs.

Like Vince, the Vermeerschs use innovation to save time, improve their crops' performance and minimize expenses. They prefer specialized equipment for fieldwork. Multi-tasking equipment is not suited to the long hours of continuous operation that a larger farm demands, explains Greg. They make adjustments to accommodate field conditions. To alleviate compaction problems, for example, they added crawler tracks to their grain carts. How to manage stalk residue is a big concern and they have been testing combine chopping corn heads.

Like both of the small farmers described above, the Vermeersch family sells direct to end-users. The margins are usually better, explains Willy.

As Vince does, the De Blocks and Vermeerschs will either lease or buy equipment, depending on circumstances. They will also rent and own land.

Both families also consider their operations mid-sized rather than large. "There are guys out here running 10,000 acres and two or three combine units," Randy De Block points out. George Vermeersch notes their operation is small compared to many on the Prairies or elsewhere in Ontario.

Unlike the De Blocks, however, the Vermeerschs have no plans to spin the expertise they've honed or their equipment resources into a full-fledged custom-farming venture. They are busy enough with their own farm, Greg says.

In all of the farm operations described, the operators' relationship to technology has been key. Slater's decision to grow intensively has meant mechanization is not an option and limited the size of her operation. The Williams and Vermeersch families both require equipment that is specifically designed to meet the differing scales of their operations. Vince is using technology to make farming a large acreage on his own achievable. The De Block brothers have used their specialized skills and equipment to diversify their business.  

What they need from government might differ, but most express a similar ambivalence towards the impact of agricultural policy. Slater and Williams observe that many programs are simply not relevant for their operations.

Slater says policies favour larger-scale and more specialized operations, but notes that there has been more effort recently to support diversity in farming. There's growing acceptance of organic practices. "In the last five years, I think that awareness has changed quite a bit," she says.

Vince says government policy encourages farmers to expand, but more should be done to help younger farmers, like himself, to grow. Business risk management policy needs to change, he says, pointing out that the former NISA (net income stabilization account) program offered him opportunities to reinvest in his farming operation when he qualified for payments. But he didn't qualify for payments when it was replaced with NISA's successor Canadian Agricultural Income Stabilization program or the current AgriStability program.

Other than crop insurance, the De Block brothers don't work government risk management programs into their budget because they are usually too short-lived, says Randy. Land policy at the local level can sometimes pose hurdles, he adds.

The Vermeerschs have tapped government programs to build in-house resources, but they remain tight-lipped on policy's effectiveness for their own operation, other than to observe that most programs come with caps.

Policy challenges
For his part, Sparling says that for both large and small farms to prosper, governments need to recognize the differences and avoid lumping them together in policy development. Basing a nationwide strategy on policies meant to encourage the small farm and attaching a significant portion of agricultural funding, for example, "would probably be a disastrous strategy" for Canada. "We have to be competitive on a global scale and we also have to be able to innovate." Those more likely to make the investments to be competitive, such as introducing larger-scale bioenergy generation, are not going to be small farms, he points out.

The perception that risk management payments helps the smaller farmer is mistaken and has led to "way too much" investment in business risk management programs, he adds. Farm income support is needed when farmers face a certain amount of challenges, but placing "90 per cent" of funding into this area is not an effective way to help the industry prepare for the future.

He notes that, with the exception of those which serve high margin markets, small farms are not as economically viable as their larger counterparts. Using economic policy to support something that really isn't as viable economically "doesn't work as well."

The challenge therefore becomes how to help them perform better. That might lead to supports for identifying higher-value markets and networking activities. It might also involve looking at how to stimulate rural business to create off-farm jobs.

Moreover, when you're talking about low family incomes you're actually moving into social policy "and you need to recognize that," he says.

Government policy is often driven by industry pressure and industry boards. "Farmers as individuals can only do so much." Marketing boards and associations will be key players in the future, he predicts.

"That's where you actually have enough of the industry together and the key leaders," to consider future directions for the industry, what conditions are needed to get there, and how to help influence government policy to create an environment where farms, big and small, can flourish in the future. BF