There are several things to look for when analyzing farm
profitability. Gross margin and the farm's spending on labour,
power and machinery are obvious measures, but this week I want to
talk about land, building and finance (LBF), which focuses on the
capital structure of the business.
Rental costs of land and buildings, interest costs and property
taxes are the main drivers of this category. This analysis
illuminates a farm's net worth or investment philosophy rather
than how well a farm operation is managed.
Theoretically, the analysis of a farm's LBF costs should
include a measure of opportunity cost or the imputed cost of asset
rent or interest on debt used to purchase assets, even when capital
is financed by the farm's own equity.
Given that historical financial statements, which do not include
this notional cost, are used in a farm's financial analysis,
LBF expenses should at least be separated from other expenses so as
not to skew a comparison between two similar farm operations with
different balance sheets.
To illustrate, consider a young farmer who rents 1,000 acres right
next door to an older farmer who owns 1,000 acres that was paid off
20 years ago. It would not be accurate to suggest that the older
farmer is managing his farm better than the younger just because he
does not have any land rent.
This difference is simply a function of the difference in capital
structure of the two farms. Management of these businesses should
be evaluated based on the more appropriate measures of gross margin
and labour power and machinery.
Consider a scenario involving two 4,000 acre farms: Farmer A owns
1,000 acres debt free and rents 3,000 acres from an investment
fund. Farmer B owns all 4,000 acres, 75 percent of which is
financed by a financial institution. If interest and property taxes
were equal to land rent (which, presently, is close), then the
farms would have essentially the same LBF cost per acre.
However, a change in the market would affect each of these
investment strategies differently. If land prices continue to rise
and interest rates stay low, Farmer B's strategy would be
successful. If interest rates rise and land values plateau or
decrease, Farmer A's philosophy would result in a stronger
This type of analysis does not necessarily establish which strategy
is better. Rather, it reflects the impact of each strategy on the
operation's financial position and clearly separates metrics
reflecting investment decisions from the operating metrics of gross
margins and labour power and machinery.
Observing the LBF costs of many farms over many years has yielded a
useful comparison of profitability between different types of
The commonly used one third-two third gross revenue rent is a
consistently unprofitable model when the rental calculation
doesn't include the associated input costs. However, including
input costs results in an arrangement that is beneficial for both
the landlord and the tenant.
Accurate analysis of a farm's LBF is critical because it
provides farm managers with the information that is necessary to
make good investment decisions. Investment acquisition decisions
(rent or purchase) must be considered carefully because they have
long-term effects on a farm's profitability.
The Ontario Court of Appeal confirmed that courts will generally support and uphold decisions of condominium directors because they are better positioned than judges to make decisions pertaining to their buildings.
According to the city bylaws in Calgary, the grading of lots for new buildings must be done properly so that the water never flows toward the new building or any other nearby properties, but away from those buildings.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).