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Profitable, commercial scale crop production in Alberta requires access to a significant acreage of suitable farm land. As margins have tightened in the crop sector, farmers have responded by growing the scale of their operations to maintain financially strong businesses. These larger farms have reduced per unit costs of production through economies of scale. Their scale also enables them to adopt new production technology such as new higher yielding varieties, herbicide ready production systems and variable rate fertilizer and fungicide applications that add efficiency and reduce environmental impact. They are also able to purchase modern machinery that is more fuel efficient such as auto-steer capability which further reduces cost and adds efficiency.
The concept of larger farms and farm consolidation is not new - it has, in fact, been going on since the 1930’s - but there are several factors converging at this time that make the exploration of opportunities to finance consolidation a more critical issue.
Traditional farm growth has usually been gradual and largely based on purchasing, bit by bit, small parcels of nearby land. Farm growth continues to increase in momentum because of long the range economic pressures and the growing trend toward renting land.
Additionally, the issue of accessing land through purchase has become much more difficult. Farm land values in Alberta have continued to escalate and the gap between selling price and productive value continues to widen. Adequate farm size is sometimes severely limited by access to capital. Renting a higher proportion of land is a very viable way to increase farm size, but the incorporation of significant rented land access to rented land is fraught with difficulties associated with the typically short term nature of rental arrangements. It is very challenging for tenants in such situations to properly plan and capitalize their businesses in the long term when much of their production base is on a year-to-year tenancy. In the past much of the rented farm land has been owned by retired farmers, which has created a stable base of landlords that understand farming. However, as these retired farmers age and pass away, the land transfers to their children and/or grandchildren who have less understanding of farming and emotional ties to the land. Over time this leads to pressure on the farmer renting the land to either pay higher rents or purchase the land to be able to continue farming it.
Larger more profitable farms are the key to a strong sustainable industry and also to attracting/retaining talented young people to farming as a career. Given that the average age of Alberta farm operators in the 2006 Census was 52.2 years, up from 49.9 years in 2001, the issue of attracting young people into farming is key to a strong agriculture sector.
Unlike other industries, like the oil and gas sector which was built on equity financing, agriculture has only had access to debt financing to grow the productive base of their operations. The gap between selling price and productive value means that farmers must be able to leverage their existing land holding from both a security and debt service perspective to acquire that debt financing. This not only means higher risk for the farmer but can seriously limit growth and the younger farmer’s ability to establish an economically viable sized farm operation.
There is clearly a lack of established/formal risk sharing equity financing or investment methods available to help young farmers grow their businesses. This equity participation could be on a whole farm basis or on a holding company basis where the farmer arranges for an equity partner to purchase land that he/she will operate on a rental, joint venture or custom farming basis. Now is the time to create a friendlier environment for investors interested in this important sector of Alberta’s economy.
Agriculture and all sectors related to food production are currently seen as one of the bright spots to the global investment industry but there are few opportunities for investors to participate at the primary production level of the industry. Both on a global and domestic basis, agriculture investment funds are being established and are growing. These funds are looking for opportunities to diversify their holdings in agriculture by including primary production along with traditional investing in the companies involved in input suppliers, agriculture products marketing and food processing.
There is a need for crop farmers to access outside equity to help them grow and build strong sustainable farm businesses in the current economic environment and there are funds prepared to invest, particularly in the land resource these farmers need for their growth, but the current regulatory environment is not friendly toward bringing the two together.
Consequently, the Red Deer Chamber of Commerce recommends that the Government of Alberta and the Government of Canada:
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