Business management: still room to improve

Wednesday, January 17, 2024

Is farming more of a lifestyle for you?

By Richard Kamchen

Despite a growing need for a more business-oriented approach to farming, few producers are adopting the tools they'll need to ride out challenging times.

Being your own boss, working outside in nature and alongside family, and producing food for the world have all come under the umbrella of "farm lifestyle," a lifestyle that's lured many to farming and kept them going for generations. But lifestyle alone isn't enough to sustain a business.

And while research shows that farmers in Canada see the benefits of running their operations more like a business, few are making the necessary changes.

Declining adoption

According to Farm Management Canada (FMC) research, there's been an overall decline in the adoption of business practices by Canadian producers, says FMC executive director Heather Watson.

Between 2015 and 2020, farmers with a written business plan declined from 26 per cent to 22 per cent, while those with a financial plan dropped from 51 per cent to 43 per cent, she says. Farmers with an HR plan fell from 25 per cent to just 12 per cent, while those who regularly used business advisors to help meet business goals declined from 32 per cent to 23 per cent.

"According to our research, less than half of Canada's farmers report they have an in-depth understanding of their financial information, and around 40 per cent have a structured approach to financial planning to ensure sufficient capital to withstand changes to their business environment," Watson says.

But it's not as though they see no value in a business approach. In fact, the opposite is true, according to a national survey FMC and Farm Credit Canada conducted in January 2023.

"We learned that producers recognize the importance of farm business management practices and believe their goals are more achievable with solid business practices in place, such as monitoring finances and financial performance," says Watson. "In fact, this was the No. 1 way they felt they could reach their goals."

The joint survey found producers would like to engage in farm business management practices more often than they do, but struggle to find the time, Watson says.

Good times impede change

But it's not just time. It's also a matter of necessity.

"When profit is plentiful and easy, business planning and management skills don't have to be strong," says Kim Gerencser, president and CEO of Growing Farm Profits.

"But it's like anything else: Who wants to pay attention and put effort into a challenging and difficult task when things are good? There's no need."

Average management can produce above-average results when profits are abundant thanks to good growing seasons and strong commodity prices. And for about the last 15 years, the farm sector has experienced periods when even the bottom 10 per cent of farm managers were abundantly profitable, he says.

"There are plenty of large farms that have grown and are wealthy in spite of themselves because the markets and the weather have rewarded average management, have allowed them to grow and expand, and appear to be larger and more successful than they probably are. Those farms can be found everywhere," Gerencser says.

Lenders sending wrong signals

Lending institutions also have contributed to many farmers' indifference to change by not sending the signals that would encourage them to act.

"I do think business planning and improved management skills would be elevated across the industry much quicker if the banks collectively got together and said, 'We really want to see this from our ag clients,'" Gerencser says.

But the chances of that happening are extremely slim if his experience in the banking sector is any indication.

Gerencser found that lenders' preferential treatment was given to farmers they deemed "low risk" instead of those who could share their long-term business goals and management strategies.

"Low risk comes from profitability, cash flow, and meeting the bank's leverage and debt servicing ratios," he explains. "The lower your risk, the more preferential treatment you get."

Under these guidelines, even farms with average management were able to score low-to-medium-risk as a result of bullish commodity markets and favourable growing conditions, Gerencser says.

Those that banks demanded more and better business management and planning from were higher risk operations, like borrowers who'd been delinquent in repaying their loans.

"The need often forces the hand to improve the management skills. And the need is more often than not coming from the bank," he says.

In this way, banks are dealing with the symptoms rather than the disease. But when things are running smoothly, why rock the boat?

Also playing a part in maintaining the status quo is the lending market's ultra-competitiveness.

As banks trip over each other to get at the best farm clients, they tend not to make loan agreements dependent on strict business management and planning criteria because they know a potential borrower can simply walk away and go to one of their competitors, according to Gerencser.

Trigger events

Watson says change is often precipitated by "trigger events" when the status quo isn't sufficient to achieve desired performance.

In farming, trigger events could include changes to weather, markets, inflation, interest rates, and cost of production – all of which farmers have experienced recently.

"While some farmers try to wait it out – hoping to return to status quo – others take action, and this is where we see farmers taking a more strategic approach to farm management," Watson says.

Gerencser hopes it doesn't take a major reversal in fortunes to force the hands of farmers to adopt better management practices, because such momentous challenges could have widespread destabilizing effects.

"Especially in Western Canada, we need a strong ag industry," he says.

"If things turn so severe that the entire industry is struggling, and that's what it takes to force the bottom half of farm managers to adopt better practices – let's not wish for that. That's bad for everybody."

What Gerencser anticipates, however, is the next bear cycle squeezing profits and having an effect similar to BSE 20 years ago.

"BSE forced a lot of average or less than average cattle producers out of the market. A prolonged bear cycle will do the same thing to grain farmers."

Separating the herd

Producers best positioned to ride out coming storms are those who saw the benefits of good management skills, and adopted those practices to accelerate their profits during the last 15 years. "That's what's really separating the herd right now," Gerencser says.

Watson adds that Canada's leading farmers are treating their farms like a business, and in turn are experiencing increased profitability, confidence in decision-making, greater farm team harmony – leading to successful farm transitions to the next generation – and reduced levels of stress and anxiety.

"Implementing change requires the right resources, and this may be one of the reasons we often see farmers with larger operations treating their farm like a business. They may have more resources at their disposal to hire additional support in managing their farm business," she says.

But it's not just the big farm operators who've changed, Gerencser insists. It can look that way because successful farms have been able to invest and grow their operations.

He says there are plenty of 2,000 to 3,000-acre farms out west that are run like corporations, with a management approach very similar to those of large farms, with the main differences likely being smaller overheads and debt. Their smaller size, however, also permits their owners to continue living the "farm lifestyle."

"But they view the operation of the business with management-first practices. Profit is an expectation and they are incredibly successful," Gerencser says.

"I don't think it's a size thing; it really truly is a mindset." BF