by Bonnefield Financial | Nov 8, 2017 | Opinion Matters
Canadian farmland has a long track record of producing steady, equity-like returns that are uncorrelated with the ups and downs of other financial assets. Bonnefield’s research has shown that long-term farmland returns are highly correlated with, and are primarily a function of, the long-term improvement in the productive capacity of farmland. Simply put, as crop yields have improved over time, and as farm operations have become more efficient through consolidation and technical improvements, the “earnings power” of the underlying farmland itself has increased, leading to an increase in both farmland values and farmland rents.
An analogy is to think of farmland like shares in a public company. If the productivity of a company improves, one would expect its profits to improve and the price of its shares to increase accordingly. But if, in management’s drive to improve the company’s productivity and profitability, they take on too much debt or weaken the company’s financial liquidity, then its profitability (and, therefore, share price) is put at risk.
The same is true of farmland. If the farm sector’s debt load were to increase to the point where farmers’ financial liquidity deteriorates substantially, farmland prices and rents would potentially be at risk. Such was the case in the early 1980’s when a debt boom coincided with declining crop prices and skyrocketing interest rates, resulting in a rare period of widespread farmland price declines.
So the obvious question is: How financially sound are Canadian farmers? Most farmers rely on debt to capitalize their operations. Are they sufficiently liquid to withstand a period of crop price stagnation and/or interest rate increases? Are we potentially at risk of a 1980’s-style farm crisis?
Statistics Canada’s most recent Farm Financial Survey suggests that the clear majority of Canadian farmers are in sound financial shape.
Recent analysis by Farm Credit Canada concluded that in 2015, 82% of Canada’s grain and oilseed producers had debt-to-equity ratios of less than 0.3. 77% of vegetable producers and 63% of potato producers had similarly low debt levels. More importantly, Canadian farmers appear well positioned to continue to service those debt levels as indicated by healthy debt-service ratios (net income divided by annual debt service payments). More than 2/3rds of all grain, oilseed, vegetable and potato producers in Canada had debt service ratios greater than 2.5, the result of several years of strong cash receipts and low interest rates.
FCC’s analysis also concluded that the “overall liquidity position of Canadian agriculture is strong”. The average current ratio (current assets divided by current liabilities) of all Canadian farmers was 3.0 in 2015, with the grain and oilseed sector especially strong at 3.6. To put this in perspective, FCC considers a farmer’s financial liquidity to be adequate if they have a current ratio of 1.5 and most Canadian farmers have current ratios well in excess of these levels.
The healthy financial liquidity of the Canadian farm sector stands in contrast to that of US farmers who, according to FCC, have experienced a decline in their current ratio from 2.87 in 2012 to 1.55 in 2016. Unlike their US counterparts, Canadian farmers have been insulated to some degree from lower corn and soy prices by a favorable USD/CAD exchange rate and a more diversified mix of crops (especially canola and pulses, the prices for which continue to be strong).
Indeed, Statistics Canada released figures in late November showing that Canadian farm revenues (“farm cash receipts”) for the first 9 months of 2017 were up 3.3% versus the same period in 2016. This increase is the 7th year in a row in which Canadian farmers have experienced year-over-year increases in revenues. Moreover, Canadian farm profits, as measured by realized net farm income, were up 4.2% in 2016, the 6th such increase in the past seven years.
The bottom line is that we are reassured by Statistics Canada’s most recent Farm Financial Survey showing that the clear majority of Canadian farmers, particularly grain, oilseed, potato and vegetable producers (the sectors that Bonnefield focuses on) are in sound financial shape.
by Bonnefield Financial | Sep 8, 2017 | Opinion Matters
The Liberal government’s proposed tax changes will likely cause the greatest destruction of wealth for Canadian farm families since the 1980s farm crisis. But unlike the crisis of the 1980s, from which farmers eventually recovered, the proposed changes are a permanent, structural change that will cause a drop in farmers’ income and net worth from which there will be no recovery.
Finance Minister Morneau and Prime Minister Trudeau have said that the proposed tax changes are aimed at wealthy Canadians who use “tax loopholes” to unfairly pay less tax than “middle class” workers. But the legitimate small business tax planning tools, which the Liberals plan to change, have been used for decades by small business entrepreneurs in all sectors across Canada to help manage and mitigate the financial risks associated with starting, building and selling their businesses.
The implications of these changes for all small business entrepreneurs are huge, but given the unique nature of farming, the impact on Canadian farm families will be especially severe. Farming, more so than most other businesses, rely on the entire family’s participation and support to succeed. Children, spouses and extended family members typically support the farm business, whether directly in the farm’s operations, or indirectly in unpaid, but essential ways. Canadian farm families typically incorporate as small businesses to enable them to efficiently share the income from their farm operations among family members. But the proposed tax changes will severely restrict a farmer’s ability to split income among family members, even though the reality for most farmers is that the entire extended family participates in one way or another in supporting the business.
Moreover, for most farm families, their primary (and sometimes sole) source of wealth for their retirement is their land. Because of the capital-intensive nature of farming and the volatility of most farm incomes, farmers often do not have significant other sources of retirement savings such as TFSAs, RRSPs and investment savings. By incorporating as small businesses, and having multiple family members as shareholders, farmers have been able to use legitimate tax planning tools to maximize capital gains exemptions and reduce the tax burden when it comes time to sell the farm to finance their retirement. The proposed tax changes will eliminate farmers’ ability to use multiple capital gain exemptions and will thereby dramatically reduce their retirement savings.
The extent of this pending wealth reduction for farmers is hard to estimate and is based on individual circumstances, but it is not hard to imagine that for a typical farm family like those we deal with every day at Bonnefield, the proposed tax changes could destroy a third, maybe even half, of the wealth they have accumulated over their career through land price appreciation.
Bizarrely, the proposed tax changes will make it far more advantageous from a tax perspective for a farmer to sell their business to a large conglomerate, rather than sell the farm to the next generation and keep it in the family. The 2016 census showed that the average farmer in Canada was 55 years old. So, over the next decade a substantial portion of Canadian farms are going to change hands.
At Bonnefield we often work with young farmers to help them finance the transition of their parent’s farm and expand their operations. The proposed tax changes will dramatically reduce the amount of after-tax cash available to retiring farmers and make it harder to transition the farm to the next generation.
For anyone concerned about the disappearance of family farms in Canada, the pending tax changes are a looming disaster.
Everyone agrees that tax fairness is an essential principle for a civil democratic society like Canada. But one’s tax burden should not only be proportionate to one’s income. It should also take into account the risk and sacrifice entrepreneurs incur to earn their income, as well as the benefit to society that results from their entrepreneurial spirit. Canadian farmers represent the best of that entrepreneurialism and risk taking, and all Canadians benefit from a thriving agricultural sector.
I urge you to contact Minister Morneau, Prime Minister Trudeau and your local MP and urge them to stop these ill-conceived, disastrous tax changes.
by Bonnefield Financial | Aug 4, 2017 | Opinion Matters
The volatile weather expeienced across Canada so far during the 2017 growing season has, once again, reiterated the need for a well-diversified farmland portfolio amidst unpredictable and challenging farming conditions. At the time of writing this blog, there are more than 150 wildfires burning throughout the interior of British Columbia due to abnormally dry weather and forcing over 6,000 people from their homes. In Saskatchewan over 60% of the province’s topsoil is considered short or very short of proper moisture levels. Meanwhile in Ontario, accumulated rainfall to date is 4 times that of 2016. The Maritimes have had relatively normal conditions so far this season.
The dry conditions in the prairies made for ideal seeding conditions but continued dryness will, with the exception of irrigated areas in southern Alberta, likely depress yields across much of the west in 2017. The rains in SW Ontario that delayed planting show little sign of abating, however, progressive farmers using good management techniques should expereince reasonably good yields.
Challenging growing seasons such as these also highlight the benefit of partnering with top-grade farmers who use progressive practices and sophisticated agrology analysis in their farm management techniques. We are seeing dramatic differences in the fortunes of farmers across the country between those who use excellent management techniques and those who do not. The former are experiencing average-to-good yields at this point in the season, while many others are seeing poor yields.
The revenue impact to Canadian farmers from a rebounding Canadian dollar has largely been offset by stronger agricultural commodity prices across the board and global demand for Canadian-based crops such as canola and lentils remains strong.
While Canadian farmers are facing challenges this growing season, most are coping reasonably well and maintain a bright outlook for years to come. Sadly, recent news from abroad is not so positive for farmers elsewhere.
Against this backdrop, investing in a widely-diversified portfolio of farmland in Canada – a politically stable country whose ag sector is expected to be a net beneficiary of climate change – looks very attractive indeed.
by Bonnefield Financial | Feb 9, 2017 | Opinion Matters
On February 9, 2017, Bonnefield appeared before the Standing Senate Committee on Agriculture & Forestry. The Committee is undertaking a “Study on the acquisition of farmland in Canada and its potential impact on the farming sector”
A video replay of Bonnefield’s remarks can be viewed by clicking here (beginning at the 9:10:30 mark of the video).
And here is the text to what we had to say:
_______________________________
Thank you, Senators. It is an honor to meet with you this morning.
My name is Tom Eisenhauer and I am the CEO of Bonnefield Financial. I apologize for not being able to join you this morning, however, my friend and colleague Wally Johnston is with you in person. Wally represents the 5th generation of a farm family from there in the Ottawa Valley and he is also our Vice President of Business Development at Bonnefield.
Wally and I, along with our partners at Bonnefield, founded our company back in 2009 out of a sense of frustration. Back in the mid-2000’s one of our sister companies – Manderley Turf Products, Canada’s largest turf grass farm – found itself in a situation that is familiar to many Canadians farmers – we needed to reduce debt and to find additional capital to grow our business.
So we tried to do what many non-agricultural businesses do – we tried to arrange a sale leaseback. Simply put, we wanted to find an investor willing to buy some of our land and to lease it back to us under a secure, long-term lease, so that we could use the sale proceeds to reduce our debts and to finance Manderley’s growth. As you know, sale leasebacks of this sort are common financial arrangements in sectors such as commercial real estate, the hotel industry, manufacturing, airlines and even the Canadian banks themselves sometimes use sale leasebacks to finance their operations. However, to our surprise and great frustration, we could find no investor in this country willing or able to provide sale-leaseback financing on farmland. So we decided to form Bonnefield in 2009 to do just that.
Since that time we have raised over $400 million, entirely from Canadian individuals and Canadian pension funds, and we have used that capital to arrange sale and sale-leaseback transactions with Canadian farm families in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick and Nova Scotia. To date, we have helped over 75 Canadian farm families to:
- reduce debt
- transition their farm businesses from one generation to another
- help young farmers grow their business without heavy reliance on debt; and
- provided farmers with long-term secure access to farmland that they had previously leased from others on a short-term, insecure basis.
In the process, we have, so far, secured over 80,000 acres of prime Canadian farmland and ensured that it will remain “farmland for farming” indefinitely and that it will be monitored, maintained and operated in a sustainable and ecologically responsible manner. In short, we have developed a business model that uses capital from Canadian individuals and Canadian pensioners to support Canadian farm families and to protect Canadian farmland.
So our prime reason for meeting with you today is to ask this Committee to advocate for responsible, evidence-based regulations that protect our farmland, while ensuring that farmers have ample access to the capital they need to operate their businesses profitably – including institutional capital.
I would now like to turn to five key points we would like the Senate Committee to consider in its ongoing study.
POINT 1: Farmers, not investors, determine the price of farmland in Canada
This point has been made by previous witnesses who have appeared before this Committee – notably, by JP Gervais, Chief Economist of Farm Credit Canada . JP pointed out that most farmland transactions in Canada are between farmers, and that the small number of investor purchases in Canada are not sufficient to drive farmland prices.
As further evidence, consider this:
- Statistics Canada, based on farm census survey data, pegs the total value of farmland in Canada at approximately $400 billion. Bonnefield’s internal estimates, based on actual land mapping rather than survey results, suggests that the total value is likely much higher than that – perhaps as much as $590 billion. Compare these figures with the total amount of dollars invested by institutional and high-net-worth investors in farmland across Canada in the past 10 years – likely in the range of $1 billion in total. So by implication, less than ¼ of 1% of Canadian farmland is likely owned by investors. It is simply not credible to assert that investor purchases of farmland – which we estimate constitute only 0.5% to 1% of total farmland transactions in any given year – could drive prices in a market that may be as large as half a trillion dollars.
I would also like to reiterate a point that was made to this Committee by Michael Hoffort, CEO of Farm Credit Canada: that farm producers are sometimes willing to pay much higher prices than investors – especially when a plot of land becomes available that is in close proximity or fits well with their existing farm business. A rational investor, on the other hand, should be willing to pay no more for a plot of farmland than the capitalized value of the sustainable rent that the farmland can yield. So contrary to popular opinion, investors, particularly disciplined institutional investors, may serve to moderate farmland price increases in some markets.
POINT 2: Recent increases in Farmland prices across Canada have, with very few exceptions, been driven by increases in farm profits and are in line with increased profit levels.
Slide #3 of the exhibits we provided, compares the change in average Canadian Farmland prices-per-acre (the grey line) with crop revenue per acre (the green line). You can see that farm income has grown dramatically over the last four decades and in the past decade in particular. Between 2005 and 2015, Canadian farm income more than doubled from $6.8 billion to $15 billion. You can also see that farmland prices have risen in lock step with farm incomes. Indeed, farmland prices have remained generally as affordable today (relative to income) as they were a decade ago.
We agree with Mr. Hoffort from the FCC who told this Committee that “strong land values are an indicator of the farm sector’s financial strength, not a warning signal or a threat to farm profitability”.
POINT 3: Farming is a capital-intensive business, and Canadian farmers need access to a broad range of capital sources – including institutional investors – to finance their businesses and to remain internationally competitive.
The agriculture sector in Canada is predominantly made up of businesses run by farm families – large and small. Some of these farm families operate very large sophisticated businesses but, contrary to popular belief, there are very few if any, “Corporate Conglomerates” operating farms in Canada.
Canadian farm families, however, find themselves competing against well-capitalized, low-cost foreign conglomerates when they go to sell their products on world markets and even when they compete against low-cost imports in domestic markets. To become and remain competitive, Canadian farm families need scale, efficiencies and access to capital. But if there is one area where Canadian farmers are at a significant competitive disadvantage, it is their lack of access to a broad range of capital from investors. We hear time and time again, from our farm partners – their number one complaint – is their inability to access capital.
This problem is especially acute for young farmers. We often hear that “there are not enough young farmers in Canada”. I beg to differ. I think there are lots of young people who want to farm, but they don’t want to farm like their mom and dad did – at a small scale, perennially undercapitalized, heavily indebted and financially insecure. Keep in mind, that to be optimally efficient, a canola, wheat and lentil farmer in Western Canada probably needs secure access to 3,000 acres of farmland, maybe more. In Eastern Canada, a young corn and soy farmer likely needs upwards of 1,000 acres or more to optimize a full line of modern farming equipment. The capital required to establish and operate a profitable farm business is often simply out of reach of many young farmers. As a result, young farmers often leave the farms to find employment elsewhere, leaving small towns to the elderly and our farm communities deserted of young, energetic, vibrant business people.
This is why we urge the Senate Committee to promote farmland ownership regulations that balance the protection of farmland for farming, yet encourages new and varying sources of capital to invest in agriculture – especially institutional capital which can bring the size and scale necessary to fill such a large void, in such a large industry. Canada falls well behind countries like the US, Australia and most South American and European countries in the depth and range of financing vehicles available to farmers. Farm Credit Canada and the Chartered Banks do an outstanding job of lending to Canadian farmers. But sale-leaseback businesses like Bonnefield play an important role in providing an alternative to debt. Private equity players are also needed, as are farm sub-debt providers, revenue streaming companies, equipment leasing, cooperatives and other innovative capital providers. In short – farmers should have the same access to investor capital that other Canadian industries have.
POINT 4: The biggest threat to Canadian farmland is not who owns it. the biggest threats are urbanization and re-zoning and the conversion of farmland for real estate development, quarries and industrial uses.
Indeed, our largest transaction to date was our purchase in 2013 of a large tract of mostly class 1 farmland located in Dufferin County, Ontario, from a US-based hedge fund that wanted to convert it into what would have become North America’s largest aggregate quarry. I am proud to say that 3 years after Bonnefield purchased this land with institutional capital, it is now being sustainably farmed by 6 local farm families, and some 30 farm buildings and 24 houses that were mostly vacant and in various states of demolition and depopulation, have been repaired, sold and now house families who contribute to the local tax base and a vibrant and growing local community. We have been proud to support and work with local groups such as Food & Water First and the North Dufferin Agricultural and Community Task Force, who are examples of grass-roots community groups who have been open to institutional investment as a means of protecting and enhancing their local farm communities, and who present a fantastic model of “how to do it right” for other Canadian farm communities faced with similar threats to their farmland and water resources.
Statistics Canada reports that 2.4 million acres – 2.6% of Canada’s arable land – was lost, primarily to urbanization, in the decade between 2001 and 2011. This is a staggering statistic that dwarfs all other threats to Canadian farmland.
Keep in mind, however, that it is not just institutional and foreign investors who threaten farmland with conversion and redevelopment. There is an old adage that farmers are cash poor but asset rich. As Prof. David Connell from University of Northern British Columbia told this committee in November, farmers sometimes have a perverse incentive – especially those who have made the decision to retire or who live on the fringe of urban centres – to seek rezoning of their land and to sell to it to developers. This is a problem that sale-leaseback financing of the type Bonneield provides, can help solve. With a sale leaseback, a farm family can access some of the equity locked up in their land, without the need to sell it to a developer.
However, preserving and protecting our farmland from the very real threats of urbanization and re-zoning, is remarkably simple. It requires little, if any new regulation. It requires no change in farmland ownership regimes. It does not require Senate Committees to delve deeply into agricultural policy. It is as simple as enforcing existing zoning regulations already on the books of every municipality, in every farming region of Canada.
We believe that rezoning high-quality farmland for non-agricultural use should be expressly prohibited everywhere in Canada. Rezoning applications for farmland should not be the purview of unelected officials (as with the OMB in Ontario) or elected municipal officials who often favor rezoning as a means of increasing their local tax base. We recommend that rezoning applications for high-quality farmland should not be permitted, except with the agreement of elected government officials at the highest levels and only in exceptional circumstances deemed to be in the national interest. Full stop.
POINT 5: Foreign ownership of farmland is not a widespread problem in Canada
As other presenters have repeatedly told this Committee, there are no reliable data on foreign ownership of farmland in this country, and we need to begin collecting and monitoring such data. But what evidence there is, suggests a low level of foreign ownership in most farming regions across Canada.
We have included in your materials, an article by Prof. Brady Deaton Jr. which reports on a survey conducted by the University of Guelph which estimated that non-Canadian ownership of farmland in Ontario (where foreign ownership is not restricted) at approximately 1%. Our experience at Bonnefield supports this conclusion: in the past 6 years we have examined many hundreds of farmland transactions undertaken by ourselves and others, yet we are aware of only a handful of transactions that involved a non-Canadian purchaser – and in these few cases it was typically a non-Canadian who was moving to Canada to become a farmer.
We are aware of, and deplore, isolated purchases of farmland by non-Canadians in places like the lower mainland in BC, where farmland has been taken out of production and where the owners benefit from tax breaks intended for bona fide farmers. But these examples are not reflective of a widespread problem across the Canadian farm sector – and could be easily addressed through local zoning and tax regulations.
In our view, the bigger (and better) question to ask is this: Does it really matter who owns farmland in this country? Unlike other natural resources like oil, water, and minerals, farmland can’t be exported or removed from Canada. And from a farmer’s perspective, if he or she can obtain better terms from non-Canadian investors than from Canadian investors, why shouldn’t they be allowed to access foreign capital just like every other Canadian business owner can?
My bigger concern is not who owns Canadian farmland, but who farms Canadian farmland. We believe that Canadian farmers should farm Canadian farmland. And we’ve put our money where our mouth is: 100% of Bonnefield’s capital has gone to supporting Canadian farm families.
We respect the decisions of provinces like Saskatchewan and Manitoba to restrict farmland ownership to bone fide Canadians and landed residents. We view these regulations as well-intentioned but they are not evidence-based and they are short-sighted because they inadvertently:
- restrict the flow of capital to farmers, making them less competitive
- force farmers in those provinces to rely more heavily on debt than they otherwise would; and
- reduce the value of their farmland below what it would be in a free and open market, and thereby destroy the wealth and nest eggs of many farm families.
If we truly believe that farmland must be protected from foreign ownership – something that we do not see as a problem – there are far better ways of regulating it than by restricting the flow of capital to the sector. Why not follow the example of other industries that Canadians have determined are nationally sensitive – like our broadcast industry and our banking industry? In these cases we have devised ownership regulations that ensure these sectors remain majority controlled by Canadians without unduly restricting capital investment from institutions and non-Canadians. Why not, for example, follow the precedent set in Alberta which has adopted regulations that require farmland to be at least 51% owned by Canadians (including Canadian institutions) and – more importantly – farmed by Canadian farmers?
So to wrap up, we recommend that this Senate Committee advocate for responsible, evidence-based regulation of farmland ownership in Canada; regulation that protects farmland from the larger threats posed by urbanization and re-zoning. But in advocating for responsible regulation, we ask the Committee to consider measures that will not prevent Canadian farmers from accessing the capital that they desperately need – including institutional capital – to compete against global competitors in a capital-intensive industry.
Thank you for your time and attention.
Wally and I would now be happy to answer any questions you have.
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