Thursday, 30 January 2014

From Broad Acre farming to Niche Markets

After talking to Sarah at the Land Stewardship Project I was interested in following up some of the participants in small local farming that she had mentioned. However first, to broaden my view of agriculture in Minnesota I visited Gary Wertish from the Minnesota Farmers Union. In general terms the cropping farmers in Minnesota have had a good run in recent years and high land values reflect this. Underpinning this is the national crop insurance scheme, which has been successful, but has also changed the risk profile of farming to make cropping now less risky than producing livestock.

Discussion of farm beginnings with Gary highlighted the issues I heard at the LSP, which were that there is much work needed on succession planning and it is hard for any young farmer to secure lease land. Whilst there has been a lot of share-farming in the state in the past, this has mainly transitioned to cash rents. The decline of share-farming has been blamed on the increased certainty provided by cash rents and the stronger relationships and trust needed for share farming. As there are many more absentee landowners, these relationships are not as common and therefore cash rent is more appealing.

Whilst we discussed the situation in terms of broad-acre agriculture, when the conversation turned to beginner farmers the small-scale options invariably came up. Gary noted that the Community Supported Agriculture model is growing in popularity and appears to be sustainable. Gary mentioned the Hmong farmers as a good example of producers who have established themselves without a large land base. This group of immigrants came to the USA from near Laos in the 1960’s with farming heritage but no wealth. They established intensive horticultural operations on small plots and now supply about 60% of the produce for farmer’s market s in the Minneapolis area.

To follow up on this story I spoke to Lynn Hayes at the Farmers Legal Action Group (FLAG – based in St Paul) and Pakou Hang at the Hmong American Farmers Association (HAFA). Both are working with the small scale farmers who are producing food for sale in Minneapolis/St Paul and developed their farm businesses without access to large areas of land. Lynn noted that one of the most difficult issues for the Hmong farmers was that they could not secure leases for more than one year. This limited tenure meant they could not plan for the future of invest into crops that required a longer lead time. FLAG has had some success in securing longer leases for the Hmong farmers. Lynn noted that the work FLAG undertakes on leasing is mainly with these small scale farmers.

Pakou at HAFA also stated that this land access problem had been a hurdle for the Hmong farmers. The majority of the Hmong farmers are on 1-15 acres but have not been in a position to purchase the land. Pakou then told me about one of the Associations most successful initiatives, which involved HAFA finding an ‘angel’ investor to buy 150 acres of land which has then been leased out to 16 Hmong farmers on long-term leases. This gave the Hmong farmers the security of tenure they needed to invest in the land and in their businesses in order to produce certain higher value crops like strawberries. This sort of socially responsible investing was getting more publicity in the USA and I thought it would be a good fit for ethical managed funds.

Some of the lessons from the experiences of these small scale farmers will be applicable to broad acre farming, but I am also interested in it as a starting point for farmers who have neither the family inheritance to farm on a larger scale; nor the finance to develop a larger business. The entrepreneurial edge many of these businesses develop can be utilised by many much larger and more profitable farms.

Thanks very much to Pakou, Lynn and Gary for their time and for rounding out my understanding of agriculture in Minnesota.

Farm Beginnings in Minnesota

I am now back in Australia and aiming to catch up on my blog posts. A working holiday with regular posts on this blog with three kids in tow proved to be a little challenging. Now we are home to summer and it’s only an 80C turnaround in temperature from my time in Minnesota!

After my visits on the campus of the University of Minnesota I next headed to see one member organisations of the ‘Sustainers Coalition’ that backs the Minnesota Institute of Sustainable Agriculture. That organisation is the Land Stewardship Project (LSP) and it was founded in 1982to work for environmental and social justice in rural America. At the LSP I met with Sarah Claasens who and we discussed its many initiatives and programs, including two that I was particularly interested in. These two programs focus on assisting succession planning and helping young farmers to get a start in farming. These areas are central to my Churchill Fellowship project. The first is called the Farm Transitions toolkit which aims to assist with farm succession planning. The second is the Farm Beginnings program which provides participants with opportunities to learn firsthand about low-cost; sustainable methods of farming.

The Farm Transitions Toolkit interested me as a useful to facilitate succession and planning and also because it advocates the use of long-term cash leases where appropriate and outlines the mutual benefits that can be gained by both sides to the agreement. The long-term lease provides security to the farm operator to make investments in the land; and also encourages the landowner to use the lease as a legal instrument to deliver their vision for the long-term management of the land. Effective succession planning is important for any business, and Sarah estimated that 90% of Minnesotan farm businesses did not have adequate planning for this stage of their business. The Farm Transitions Toolkit is designed to provide tools for children to talk about future plans with their parents. It is focused on the older farmer, but if widely used it will provide a boon for anyone looking to lease land by increasing the supply. The issue in this part of the USA appears to be the same as everywhere else I have been – engaging the older farmer is the hardest area in which to gain traction.
The Farm Beginnings Program was launched in 1997 and it is a farmer-led, community based training and support program aimed at getting more farmers on the land farming sustainably. Of course a key challenge in getting new farmers on the land is how they secure the land to work on; which is where my interest in the work of the LSP initially arose. Sarah explained to me that the strong level of interest in the Farm Beginnings Program has resulted in it being split into three separate courses. A half day course is run under the title ‘Farm Dreams’ to provide information to those at the start of their farm journey. This can then be followed by the main Farm Beginnings course which is one year part-time and covers business planning and management aspects. The LSP also runs a ‘Journeypersons’ Course for those already involved in farming and who are looking to further develop their skills.

The challenge for those who have undertaken the courses is to secure farm land on which to operate their businesses. Many of the course graduates are focused on small niche markets where they can target particular consumers and develop a product that meets their specific needs. An example is the small scale urban farms that are developing a model known in the USA as Community Supported Agriculture (CSA). This model promotes close links between the farmer and consumer and for a fee the consumer receives a regular delivery of seasonal produce. This follows on from many of the entrepreneurial activities I have seen elsewhere on my trip which have been driven by the inability of the farmer to get access to land in a scale needed to produce the economies of scale required for broad acre agriculture. The discussions with Sarah then led to my further investigation of these models in Minnesota. 

Thanks very much to Sarah for sharing the work of the Land Stewardship Project with me.

Wednesday, 29 January 2014

Farm Financial Management in Minnesota

Happy Christmas and New Year to everyone. I have been a bit delayed in posting my last spate of visits in Minneapolis as my family arrived for the Christmas holiday. After they flew in from Australia via Seattle we headed up to Lake Vermillion in northern Minnesota hoping for a white Christmas. We were not disappointed. There has been heavy snow and very cold weather. We averaged about -15C in our time in the north and hit -40C (without including the wind chill) on the last day. Amazing temperatures, but we were lucky the wind was minimal. We had a great time and our fun included snow-mobiling, dog sledding, ice fishing (successful – we caught four of the famed Walleye and had them for dinner), driving on the lake ice, ice skating and generally enjoying the stunning frozen north. A great holiday.

Before I met up with my family however I finished my week in Minneapolis with some very useful and interesting visits. After seeing Helene at the Minnesota Institute of Sustainability I stayed on the St Paul campus of the University of Minnesota and visited Kevin Klair at the Center for Farm Financial Management.

The Center provides educational programs and software tools for farm financial planning, financial analysis, commodity marketing, and credit analysis. The products were firstly aimed at farmers; and whilst this is still a key target market for the products, major users now also include agricultural lenders and educators. The Center is also focused on education for farmers and industry professionals through its Extension program. With many similar agriculture departments at other universities being increasingly focused more on agricultural science than farm financial management, the Center has a growing reputation as the leader in its field. The range of farm financial management products includes:

·       Fin Pack – farm financial planning and analysis;

·       FINBIN – farm financial and productivity benchmarking;

·       Ag Risk Library – a collection of agriculture documents, presentations and materials;

·       Ag Plan – a farm business planning document;

·       Ag Transitions – a farm family succession planning tool;

·       Grain Marketing – a grain marketing tool.

One of the interesting elements for me was due to the comprehensive nature of the databases and the wide demand the farm benchmark data providers pay to contribute the information. Farm management association in approximately 15 states funnel the information to the Center.

Another key product is Fair Rent which evaluates both cash rental and share rental arrangements based on expected yields, prices, government program payments, and expenses. The results calculate a break even cash rental rate and help develop a realistic bidding range for cash rental negotiations. Underpinning the software is the comprehensive farm data the Center collects. I am interested to get to grips in more detail with this product.

With regards the beginner farmer programs that are operating in the USA, Kevin discussed the issues facing the small farmers and I was struck the similarities with the UK small holdings programs. The programs both give farmers a start but the next step to a larger holding and more viable farm is very hard. With productive cropping land in south-western Minnesota going for US$10,000/acre, land purchase are very expensive.

I certainly intend to look into the Fair Rent software and their business planning tools in more detail. Thanks to Kevin for his time.

Friday, 20 December 2013

From Canada to Minnesota

As I leave Canada a few items in the news caught my eye. One was a report on the sale of Assiniboia and its 115,000 acres of Saskatchewan farm land. The article noted that the $130 million purchase indicated the view of large Canadian institutions that there was still a lot of upside in the value of farm land in the province. The other article I read was a local blogger who mentioned that when geographer John Palliser was sent out across the west in the 1850’s to scout the route for the new railway he commented that Saskatchewan was a dry wasteland unfit for human occupation. Farmers since then have developed their farming practices to suit the conditions and short growing season. However, a number of people I talked to mentioned how hard it was to get people to move to Saskatchewan. The population has hovered around one million people for long period and it will be interesting to see if the oil/mining boom and buoyant farming conditions encourage people to a life a on the prairies despite the harsh climate.

My next stop is Minneapolis, Minnesota. Another city located in the centre of the North American landmass and therefore affected by the cold continental climate. It was -12C when I landed with snow falling steadily. I am meeting with a range of people here who are involved in farm management and agriculture in the region. I also visited a local museum that explained why this large city is here in the first place. The Mill Museum in downtown Minneapolis is on the site of the old General Mills flour mill. It is next to the Mississippi River and St Anthony’s Falls. The waterfall provided the power that led to Minneapolis from the 1850’s to the 1930’s becoming the world’s largest timber mill and then the largest flour miller. The power from the falls drove the mills that produced flour from the wheat that poured in on the rail network from Montana, the Dakota’s and western Minnesota. So this city has been at the heart of a vast agricultural region for a long period.

My first meeting was with Helene Murray who is the Executive Director of the Minnesota Institute for Sustainable Agriculture (MISA). MISA is a partnership between the College of Agricultural, Food and Environmental Sciences at the University of Minnesota, the Sustainers' Coalition, and University of Minnesota Extension. The Sustainers' Coalition is an association of non-profit organizations that includes five partner organizations that focus on a range of land stewardship, farming and food production goals. Extension is a program that many of the historic ‘land-grant’ universities here in the US operate. It connect the universities expertise with people all over the state.

MISA brings together a range of organisations to develop approaches to sustainable agriculture that considers the land, people and the production of food. One of their areas of interest, that ties in with the key focus of my fellowship is in assisting the transition of older farmers away from farming and helping new entrants to make a start in the industry. MISA has coordinated all of its component parts to produce the ‘Farm Transitions Toolkit’ which provides the plans and tools for retiring farmers and beginner farmers to determine how they can work together. The toolkit states that successful farm transitions can help create healthy rural communities, strong farm businesses, and continued land stewardship. It is an excellent resource and one I plan to study thoroughly.

Despite all of this good work, Helene explained to me that the main problem hanging over MISA and US agriculture in general, is the latest five-year US Farm Bill. This allocates funding for a range of key elements in US Agriculture including crop insurance. There are also many elements in a Farm Bill that were included in the past to focus on broader social goals and to widen the scope of the Bill and public interest in it. One of these is the food aid program here known as food stamps. As with so many social programs funded by the government in the USA, the cost of these programs has been attacked by the right wing of politics and is heavily contested. The Farm Bill was to have been passed by now, but will likely now be finalised in January 2014. There are many in agriculture here who are waiting with bated breath to secure programs and funding for another five years.

My thanks to Helene for her time and for providing me with guidance on the other organisations in Minneapolis with whom it would be useful to meet for my Fellowship.

Thursday, 19 December 2013

The Ag Consultants who Farm the Prairies

My next visit was to see Gary Pike, who some farmers in Australia may know after his recent trips. He works with his son Dallas Pike and they are based in Calgary. They operate as farm management consultants and have also followed this up by establishing a farm management business which now manages 65,000 acres. As with Agcapita and Assiniboia, they are focused on farm investment in Saskatchewan as they see it as being undervalued.

Dallas spent a number of years working in Western Australia and noted that Calgary and Perth are very similar cities. The mineral wealth, mining activity and entrepreneurial attitudes found in Perth mirror the wealth from oil and mining activity and the pioneering spirit in Calgary. There is also a strong feeling of independence from; and some resentment of; the power held in the Federal government that is so far to the east for both cities.

It was interesting to discuss some of the parameters they consider when looking at land to invest in; that differ from Australia. The key one of these that stood out for me was ‘Heat Units’; which is a measure of the heat from the sun that an area receives and can be utilised by a crop. As you head north the availability of heat units decreases, so excellent soil in a northern region may not be attractive as a result. Certainly not a unit of measurement I have ever considered in Australia!

Broadacre’s farming operation operates 65,000 acres and manages the investment in land for a number of wealthy individuals. The land is leased out to good local farmers and the cash rent is paid 50% in the spring and 50% in the fall/autumn. They have tried some crop share arrangements, but the level of trust required makes them problematic. Given the appreciation in land value and the quality land that the investment is focused on, the lease payments are more likely to be 3.5-4% than 6% where they were initially. Excellent cropping land near Regina was $500-600/acre in 2006 and is now $2,250-2,500/acre. Given the good seasons, established farmers are happy to get the extra ground via a lease, but it is not a market where young farmers are in the running.

The big issue that Gary and Dallas alerted me to for young farmers here, and indeed for any farmer, is the difficulty in getting working capital. Despite the cash rate being low, and interest levels being low for well established businesses, Canadian farming is in the words of Gary – “Cash poor”. In the past working capital was secured by farmers here via deferred delivery contracts with the big grain companies. However the grain companies were caught out by margin calls related to the hedging associated with these deals at the time of the GFC. Since then the grain companies will co-sign with the banks for finance to farmers but require them to buy all inputs (seeds, sprays, etc) at the full price. While the headline interest rate on these services is put forward as 8%, the real interest rate when the discounts on cheaper inputs that are foregone is included is more like 28 – 32%. For a young farmer with no track record it is even more difficult to get finance.

My thanks Dallas and Gary for sharing their time me. Dallas, I hope we can send a few Marcus Oldham students your way for their prac year.

It has been fascinating to visit Canada. A country with so many similarities to Australia and a climate that is as close to the opposite of ours as could be. I also think of our recent dry conditions in Australia and the talk of global warming contributing to changed conditions for farming. In Australia, many think that the result of global warming might well be drier more marginal conditions, however in Canada, with a recent run of five of the best production years on record; maybe they will benefit from the changes. They could certainly do with a few more ‘heat units’.

Wednesday, 18 December 2013

Heading to the 'Heart of the New West'

From Regina I have flown west to the self-proclaimed ‘Heart of the New West’, Calgary. This is a much larger city than Regina, with 3 million people in the region. It is on the western edge of the prairie and in the distance the spectacular Rocky Mountains rise above the plain. Calgary is in the province of Alberta which is Saskatchewan’s western neighbour. It is a city which was founded for its agricultural riches but it is oil which has created the modern wealth of the city.

Here I planned to meet with an investor and a consultant who I thought I would be focused on agriculture in Alberta. However, the land prices in Saskatchewan lag behind Alberta so clearly that most of the farmland interests from Calgary are focused on its less populous neighbour to the east.

My first meeting was with Karim Kadry who is an Investment Manager with Agcapita Partners. Agcapita invests in Saskatchewan farmland and are focused on offering a low-risk farmland investment that attracts funds from smaller investors with $5,000 to $10,000 to invest; rather than on high net worth individuals. One of the interesting elements of this fund is that it has a relatively short time frame and it aims to return the investment from the first of its four funds in 2014 after a five year timeframe. In this time Alberta farmland has risen by 8% per annum and Saskatchewan land has risen by 14% per annum. Agcapita are also the only farm land investment fund in Canada that are eligible to attract funds from RRSP’s (Registered Retirement Savings Plan) which is a form of superannuation here.

The low-risk approach is achieved by leasing the land purchased to local farmers and then requiring the cash rent upfront for the coming year. Rents are 5-7% of the land value, with the capital appreciation of the land putting pressure on these targets. As a result of the upfront rent payment Agcapita carries no production risk for the coming season. The lease payment cash flow is used by the fund to pay the administration costs and a return and then any remaining funds are used to buy more land for the fund. Investors receive the capital appreciation on the fund when it is wound up. This approach has seen Agcapita grow to be one of the three largest investment funds in Saskatchewan farmland.

The short timeframe surprised me, but it is partly driven by Canadian laws around legal structures for investment vehicles. However, the appreciation of the underlying asset is such that it has worked well for anyone who made the call to invest in Saskatchewan farmland after the GFC. This is a common theme around farmland investment here and elsewhere, it is not correlated to the share market and has performed strongly when few other asset classes have with less volatility. Given the recent rises in Saskatchewan farm prices, maybe the easy money has been made by now. Given the continued flow of funds to the investment funds here, it appears that investors have confidence that land prices will continue to rise.

Thanks to Karim for taking the time to discuss the work of Agcapita.

Alternatives to Farmland Ownership on the Prairies

According to Statistics Canada, nearly 40% of farmland in the country is rented. This includes 22% in cash rentals (standard annual payment farm leases); 13% of land leased from the government; 3% in crop sharing arrangements; and 1% in other arrangements.

In Saskatchewan about 80% of rental agreements are cash rents, as it is simple and easy to understand. For the growing number of people who have inherited farm land but who don’t farm it, the cash rent is the easiest option to understand and requires the least knowledge of the farm operation. The most common format for these leases remains a one year lease which gives both parties flexibility, but won’t allow for long-term planning for the producer on issues such as fertiliser application. In practice most of the leases that are for one year continue on over a number of years with the same tenant. A recent US survey found that the landowners were most concerned with the trustworthiness and reputation of their tenant and would rather they pay on time than pay the highest rate. This appears to be the case in Saskatchewan, but competition for additional land has driven up lease rates in some cases.

The average farm rental in Saskatchewan is $35.65/acre, however as Val Panko told me, this is distorted by a large number of family succession arrangements at concessional rates; and low rates on marginal grazing land. Data from Saskatchewan Agriculture found that rental rates for non-family members ranged from $6.25 to $140/acre. A wide range, but as with all broadacre farming, the best and largest farmers are willing to pay top rates to add scale to their existing operation when they have the capacity.

So there is plenty of land being leased on the prairies but as in Australia and the UK there seems to be more farmers keen to lease, than landowners with land. And the most likely candidate to secure the lease remains the large successful farmer who can pay reliably and whose track record will give the landowner reassurance about the farm practices that will be used. Any form of crop share is limited by the knowledge required by the landowner of the practices required or by trust between the parties. A cash rent is the easiest option.