For most beef producers — especially those grazing cattle on pasture — land is your gold. And chances are that at some point you’re going to want more of it.
The problem is demand for land today is arguably higher than ever. Precision farming has enabled grain and oilseed producers to crop on pasture-worthy marginal lands they were never able to in the past. And most beef producers — especially those in crowded landscapes bordering on major cities — are well-versed in the constant competition presented by acreage seekers, industrial developers and others.
With all that activity driving up land values, it’s more important than ever not to put yourself in a ditch financially when expanding, says Art Lange, an Edmonton-based farm financial advisor. That means asking yourself some questions about why you’re expanding, if you can afford to and whether or not you need to own the expansion land.
“Before expanding, let’s see how profitable, or not, the basic operation is,” he says. “Are you really good at what you do already? If not, adding more work to a mediocre operation just compounds the problems.”
Too much debt?
The first question is whether you can afford to expand. That question of affordability can be more complex than it may seem, says Lange. If you have to go into debt to expand, the first thing to determine is how much debt is too much.
There are several ratios that can help producers discover this number, but for Lange the most important is the debt service ratio. This is determined by dividing your debt servicing capacity by your debt servicing requirements.
“This is the amount of money that is available to service debt after all farm expenses and family living costs have been paid,” he says.
“A simple example: if all the expenses for the farm and family living costs are $100,000 and real or expected income is $125,000, then there is $25,000 available to service debt — both principal and interest, or in other words, a debt service ratio of 1.25:1. Lenders usually want this ratio to be at least 1.2:1 or higher and higher is better. A ratio of 1.5:1 is considered good.”
However, your work is not done there. There are a number of ratios which measure your ability to service debt and each one can help build your case when applying for a loan. Business analysis tools such as the Agricultural Business Analyzer (ABA) combine these metrics to help beef producers and others build business plans. Although hosted by Alberta Agriculture and Forestry, the ABA software can be used in any province for any commodity.
Lange uses the program to calculate an operation’s current debt service ratio and then figures out how that number will change with the expansion.
“ABA generates several basic ratios and each one is classified according to ‘good’ if it’s on a green background, yellow if it’s a ‘caution’ and red is called ‘weak.’ If they are mostly green then that is probably a pretty good indication that you have a sound proposal.”
He doesn’t recommend that producers attempt to use the program themselves. Rather, they should seek assistance from a farm advisor.
“It’s fairly complicated so for a novice to work their way through it is going to be a challenge. I use it all the time so it’s easy for myself and my colleagues who use it.”
Should you expand?
Producers need to ask themselves what role expansion plays in the bigger picture, says Lange. “Does the expansion fit into your short- and long-term goals for your operation? Will it help you reach your ultimate goal?
“Do you benchmark yourself against other producers producing the same or similar products to determine how good you really are?” Software such as Alberta Agriculture’s AgriProfit$ benchmarking program is available to cow-calf and backgrounding ranchers free of charge, he says.
“Do you have the necessary skills that may be required for the expanded operation; for example human resource management, risk management, greater marketing expertise, the sheer responsibilities and stress of adding more onto your existing work load?”
Producers should also consider their own well-being and that of the other people on the operation.
“Will you be able to handle the extra work and responsibility and still have time for personal and family growth and free time? Have you consulted the rest of your ranch team and are they on side and eager to work with you to make this expansion successful?”
Cow-calf producers competing for expensive land may want to look beyond their immediate areas for expansion, says Lange.
“Competing with other interests around urban centres is going to be very, very difficult, so they may have to look for their grazing land elsewhere. I know cattle producers in Alberta that graze cattle in Saskatchewan on cheaper, rented marginal land.”
Grazing cattle on non-adjacent land comes with its own set of issues, however. “The logistics of moving cattle, trucking cattle back and forth and checking on them get into the mix when you are a long way away. Who looks after the fences? How do you know what shape your cattle are in?”
This brings up another, possibly controversial question: Is your primary land in the best location in the first place?
“If you want to ranch in an area where there is lots of competition for land, maybe you should be looking elsewhere,” says Lange.
“Why are you so tied to this piece of land? I usually get a reply that’s something like ‘It’s been in the family for generations. Grandpa or Great-Grandpa started it and we would like to keep it in the family.’ All that is good. But the economics for grazing cattle there probably don’t make sense.”
Finally, do you need to own your expansion land at all? “There is sometimes lease land available in marginal areas. Grazing reserves are another option, although they are usually pretty well booked up.
“I’ve dealt with 60-year-old farmers who are buying more land and I wonder if that makes sense. But there is a great desire in the farming community — to put it mildly — to own land. The idea is ‘It’s my land and nobody can take it from me.’”