Enhancing Canada's Farming Enterprises
By James Stuckey, Research Associate - Organizational Effectiveness & Learning
Erin Butler, Consultant - Centre for Food in Cananda
Executive Summary of Seeds for Success Report
Canada’s farms are the focus of much attention these days. Canadians are increasingly concerned about the manner in which their food is produced, with more and more people looking to farmers to provide foods that are cheap, safe, environmentally friendly, and in keeping with a multitude of social and cultural values. Farming in Canada is also economically and socially important. It contributes 1.7 per cent of national GDP and employs approximately 277,500 Canadians. It has deep roots in Canada’s rural fabric.
Farming is a sector with long-standing roots and traditions, but it is also one that is undergoing significant changes. The old ways of doing things are no longer guarantors of success; farmers face new opportunities, as well as risks and challenges. Whereas farmers have long been skilled at managing the growth of crops and livestock, they must now also be increasingly skilled at managing their businesses—and changes in the competitive environment require new and improved ways of managing both of these things.
Many farms have struggled to adapt: in 2010, almost 30 per cent of Canada’s farms lost money rather than making it.
However, other farms in the sector are achieving ever-greater success. On the whole, Canada’s farming sector is increasingly dynamic and ready to achieve the abundant opportunities offered by today’s food system—if challenges can be overcome.
This report considers the modern realities of farming business in Canada, and how it can be bolstered to achieve even more of the economic and social value that Canadians—and indeed, the world—expect from producers. While reconfirming some established notions about business in the farming sector, the report also sheds new light on a number of important questions.
Specific research questions the report addresses include:
- What are the business characteristics of farms?
- What is the structure of farming enterprise value?
- What are the profitability dynamics in the farming sector?
- What managerial factors help explain profitability performance?
- What needs to happen to enhance farming enterprises in Canada?
Farming Business Today
Understanding the business performance of the farming sector can be challenging. Farms exist across a continuum of business focus and motivation. For many, farming is a hobby or lifestyle activity, or a way of making a bit of money that supplements other sources of household income. For others, farming is a serious business endeavour, intended to make money and grow the value of the enterprise. Canada’s farms are becoming increasingly business-focused, as evidenced by the increasing number of operations that are incorporating as opposed to remaining sole proprietorships. Contrary to some perceptions, these operations remain almost entirely family-owned and -operated.
Canada’s farms are becoming increasingly business-focused, as evidenced by the increasing number of operations that are incorporating.
But there is considerable variability in the financial performance of farms in Canada in terms of annual profit margin: over half of all farming operations achieve either very high profit margins (over 20 per cent) or very low profit margins (under –10 per cent) in a given year. The size of a farming business is not necessarily a factor in how profitable it can be in a given year. Over the past decade, smaller revenue farms have occupied a greater percentage of the top profitability quartile than have larger ones. At the same time, smaller farm revenue classes also have the greatest share of farms in the lowest profitability quartile.
Subsector matters to profitability performance, but only up to a point. Farms in supply-managed subsectors—such as dairy cattle and milk production, and poultry and egg production—have been less likely to be in the bottom profitability quartile over the past decade than have farms in non-supply-managed subsectors. However, the data also show that farms that operate in more open and competitive markets (such as oilseed and grain farming) have the potential to be as profitable as—and even more profitable than—those in supply-managed subsectors. Over the past decade, the oilseed and grain and the dairy cattle and milk production subsectors have taken turns occupying the top profit margin quartile in the greatest numbers.
Management for Farming Excellence
Results from the Centre for Food in Canada’s (CFIC’s) Industry Survey reveal that the two main strategic priorities for farmers are lowering operating costs and improving the marketing of their products. Farming enterprises that are focused on producing undifferentiated commodities might find a greater need to focus on cost management, whereas those that have found ways to deliver unique value through product differentiation might focus more on marketing. Both priorities, however, have become more important for farming businesses of all kinds. And no matter what a farm’s business model, four key areas demand increasing levels of managerial focus and skill: capital management, marketing management, people management, and management of relationships.
Capital Management
Farms have become more capital intensive than ever, requiring greater management of farm capital, including land and machinery. In both cases, the decision to own versus rent—or to contract agricultural services—must be made with a view to maximizing overall enterprise value, which comprises both asset value (what is owned) and operations (how profits can be made). An increasing number of farmers are taking advantage of renting and crop-share opportunities in order to focus on their operations—and others are finding it more profitable to rent some of their land to other operations than to farm it themselves. For young or beginning farmers, renting can also provide an alternative pathway into farming—a critical consideration as the farm sector identifies ways of transitioning a new generation of farm business owners into the sector.
Marketing Management
Managing marketing has also become more important than ever. Farmers, who have traditionally not had to worry much about finding buyers, are finding an increasing need and opportunity to tap into non-traditional marketing channels—a change that reflects the increasing demand for agricultural products with specific quality attributes. Many farmers are bypassing traditional selling avenues (such as auction markets, grain handlers, and marketing boards) and going directly to buyers. These could include local consumers, restaurants, and foreign buyers; and might include niche or premium markets, such as “local” or organic. In addition, more and more agricultural production is now under contract between producers and processors—a development that offers opportunities (such as price premiums), as well as risks, for producers.
People Management
It is hard for farm managers to pay adequate attention to managing capital and marketing if they are also responsible for tending to all the other functions on the farm. Managerial specialization is key to business growth, but its development is often hindered by a farm operator’s unwillingness or inability to delegate and manage. Some farmers operate on the idea that the more they do themselves, the better it is for their bottom line. Many operators also report significant trouble finding the people they need—particularly where there is competition from other sectors (such as oil and gas) for the same skill sets. Both of these issues speak to the need for farm managers, themselves, to undergo more training in management and leadership—and to implement the workplace standards and practices that will help attract a new generation of smart, ambitious, and enterprising Canadians to farming.
Relationship Management
Farming today also requires a greater ability to manage relationships. To overcome common challenges and achieve a variety of objectives, many farming operations are collaborating through partnerships, cooperatives, and joint ventures. Each of these can offer farms the ability to combine resources and achieve many of the benefits of scale, vertical integration, or expanded business lines. Organized networks are supplementing the local coffee shops as forums for knowledge and best-practice sharing, and reflect the increasing business complexity in the sector. Indeed, improved interpersonal and relationship management skills are important to overcoming many of the challenges of managing capital, marketing, and people. The image of the farmer as an independent and solitary figure is increasingly at odds with the realities of successful farming business.
The Future of Farming in Canada
The agricultural landscape is changing, both figuratively and literally. However, farming retains some long-standing characteristics, including an industry structure built largely around family ownership and operation. Significant economies of scale are still not a dominant force in the industry’s organization, owing to the history of the sector’s development, the seasonal nature of farming work, and the difficulties and costs of consolidating non-adjacent land tracts (given the nature of family farm ownership). This is unlikely to change in the foreseeable future, even as farms continue to get larger as a result of greater business sophistication, entrepreneurial ambition, and economic necessity. The changes will, however, continue to create a greater need for managerial specialization.
Developing the Canadian Food Strategy
Building Stronger Farming Businesses
We present a set of recommendations about how to improve farming business in Canada to achieve greater business success. In keeping with the focus of this report, our recommendations are tailored toward farming businesses themselves—those with an immediate stake in the business success of the sector.
- Maximize assets and operations. Farmers should employ sound financial management to maximize the assets and operations of their businesses. Each must be managed and optimized as part of the business equation. This means understanding changing capital requirements (in the form of land and equipment and machinery), and creating the right mix to manage costs and optimize returns.
- Seek optimal farming scale. Farmers should seek optimal farming scale—a movable target by region, type of operation, and business model—as a strategy for obtaining capital efficiencies. Most people think of scale in terms of sheer expansion of physical resources. Actually, there are different types of scale that involve very different costs and benefits; the calculus of scale depends on the nature of the farming operation and its business model.
- Increase product differentiation to take advantage of changing consumer demands. Farmers should seek ways to increase their product differentiation to take advantage of changing consumer demands for greater variety, and increasing demands for products with more specific and functional quality characteristics.
- Specialize farming management to improve business performance. Farmers can do better by expanding their managerial capacity, allowing them to focus greater efforts on managerial issues. They can specialize management by using more outside labout, and by fostering partnerships and other types of cooperation.
- Invest in product and process innovation to achieve business growth. Farmers should make the most of innovation as a powerful strategy for achieving their business growth targets. Most farm businesses have a somewhat conservative attitude toward innovation, with most not seeking to be first adopters—but also not wanting to be last adopters. The CFIC’s Industry Survey results suggest that producers generally do not recognize the value that process innovation can play in achieving business objectives. Therefore, there is likely an opportunity for farm businesses to be more innovative in how they manage key business processes and activities.
- Utilize new leasing models. Farmers should utilize new leasing models in cases where the rising costs of farmland make it difficult to finance expansion, or where a farm’s operational continuity is at risk. Farmland investment funds (companies that purchase land and rent it back to farm operators for a rental fee or under varying types of profit-sharing arrangements) have become more prevalent in the sector to provide liquidity and stability to farmers who have difficulty growing or maintaining their operations. Farming stakeholders should work to identify ways of maximizing the value of this development to improve of farming business.
- Improve human resources standards and practices. The farming industry must strive to make farming a more desirable occupation. The industry faces a significant labour market gap, and much of this is outside of its control to remedy. However, there are steps that the industry can take to improve its human capital situation, including adopting human resources standards and practices that rival those of other industries.
- Begin farm planning with marketing. Farmers should begin farm planning with marketing—with a line of sight to the end buyer—rather than ending with it. That is, like other businesses, farming operations must identify opportunities in the market and tailor their business model and operations (what they produce and how) accordingly. Farmers have an opportunity to be “price-makers” and not just “price-takers.”
To read the whole report, click here.