Over the last five years, grain farming has been very
profitable. Higher grain prices led to higher profits, resulting in
producers reinvesting heavily in their operations. This has caused
the fixed costs of farms to increase significantly.
We've witnessed two common outcomes of this reinvestment.
First, higher debt levels are taken on by farm managers. The new
debt results from the purchase of new assets such as land,
buildings, and equipment that are financed instead of bought for
cash. Financial Institutions have been eager to lend money into the
profitable grain sector. Lastly, producers face higher land rental
costs as the demand for productive land increases in times of high
Prices have been strong over the previous five years, but
have dropped significantly this fall and continue to decline with
an outlook of a very large crop in the United States, leaving
producers to question if this is the beginning of a shift towards
low prices in the coming years. While grain prices and margins in
western Canada have been good, depending on the localized yield,
producers may now need to re-evaluate their operations to protect
their competitiveness in a time of falling prices.
One of the advantages of grain farming is having one production
cycle a year. Operations have the ability to adjust before the next
production cycle starts. The time between harvest and the start-up
of the next production cycle in the spring provides six months of
operational analysis. Producers can evaluate their operations and
make adjustments to become more efficient. Other industries face
much shorter production and adjustment cycles, such as the hog
industry, where they produce and sell every month, and shifts in
prices can dramatically and quickly affect their bottom line. As
producers face a potential price decrease, some steps can be taken
to minimize future risk:
Begin by reviewing your operation's cash flow given
today's prices. Does the farm generate enough cash and have
enough operating credit to put in next year's crop?
Evaluate long-term commitments. Land or equipment rental
arrangements that are priced to reflect the previously high prices
may require re-evaluation now that prices are on a downward
Does the farm have the ability to service debt today and into
the future? For some operations, lowering fixed costs will be
necessary to ensure profit.
Do you need to restructure your farm finances? Some operations
won't be able to sustain their current payment levels with
lower profit margins. Lengthening loan amortization allows the farm
to conserve cash and carry an operation through several cycles of
decreased prices and profits.
Ultimately, producers must determine if they can afford to
operate during a time of lower prices. Mitigating the risk by
making necessary adjustments to their operations can help them
weather the price dip
This article was originally published in the Western
Producer in September 2014.
The content of this article is intended to provide a
general guide to the subject matter. Specialist advice should be
sought about your specific circumstances.
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Russell v. Township of Georgian Bay provides a useful reminder of the fact that while municipal officials sometimes appear to hold all of the cards in disputes with home owners, that is not always the case.
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