Thanks to the adoption of new technology, Canada’s 262,000 farmers are producing more than ever before. The Bank of Montreal (BMO) reports that since the late 1990s, total labour productivity in Canada has increased by 31 per cent, while agriculture has surged 190 per cent over the same period. Aaron Goertzen, senior economist for BMO writes: “Few sectors of the economy can hold a candle to that performance.”

Here's a sample of what growers are investing to produce more per acre. Building a state-of-the art vegetable greenhouse runs $1.2 to $2 million per acre. Planting high-density apples in an orchard comes in at more than $50,000 an acre. And that new potato sprayer with a 120-foot boom: $600,000. For about the same price you can get a new potato harvester. But it’s tempting to add a $30,000 subscription package to optimize your data collection.

All of that new technology –AI, optimized LED lighting, robotics -- is priced at a premium, given that most purchases are in U.S. dollars. 

It may be just coincidence that Canada’s $6 billion annual farmgate value for horticulture almost equals Farm Credit Canada’s (FCC) current $6.1 billion horticulture loan portfolio. The sector represents 11 per cent of FCC’s total agricultural lending business, with greenhouse borrowing alone at $2.5 billion. 

“We have a reputation as a senior secured lender,” says Justine Hendricks, CEO, Farm Credit Canada, the Crown Corporation mandated since 1959 to provide loans to farmers. Marking two years this month as leader of the Regina-based lender, she shares the FCC strategy rolled out during her cross-country meet-up with owners and employees from all agricultural sectors.

“Be more bold,” Hendricks told the 2,300 employees at 103 branches across the country.

“Be an industry catalyst,” she urged to innovate FCC’s products and services. Highlighting the atmospheric river that flooded the Fraser Valley in November 2021 as  an example, she noted that within 48 hours FCC employees reached out to British Columbia blueberry growers with customized solutions such as payment deferrals. 

“Be a partner,” she said of FCC’s desire to work with other banking institutions. Practising what she preaches, she presented FCC’s story to a meeting of the Canadian Bankers’ Association. Promoting the idea that today’s capital-intensive farming requires more financing ingenuity, FCC sometimes looks to the re-insurance model of sharing risk with other institutions.

In the real world, the business case for any expansion or adoption of new technology is often made by the grower 12 to 18 months before deployment. Accordingly, growers talk to their bankers on a regular basis, pressure testing how much credit might be available. And as a matter of sound business practice, many growers tender their financial requirements to several banking institutions to ensure lending competitiveness. On the other side, lenders continually assess prospective borrowers using metrics such as credibility, experience, historical data and current financial performance.

As Hendricks confirms, FCC’s assessment of credibility is based not only on repayment schedules, but also on whether the expansion project was completed on time and on budget. Credibility is built over time. There is not only business risk but reputation risk. 

In addition, Henricks reveals, “We’re looking at risk mitigation products but it’s too early to announce the details.”  

Developing a credible business plan 

A lot of capital is needed to crank the engines of food production. Lorna McKercher, national director, agriculture for Royal Bank of Canada (RBC) oversees a loan portfolio of $95.2 billion of which $13.2 billion is horticulture. 

“I recently attended a conference where Dr. David Kohl from Virginia Tech emphasized how good managers recognize the importance of ‘getting better before getting bigger.’  That’s what we are seeing among producers – they’re focussing on current operations to improve the revenue line through more produce out of the greenhouse, or to decrease expenses through process or technology,” says McKercher. 

“A good business plan demonstrates how well you understand your operation’s long-term goals and potential challenges—whether it’s sales contracts, HR issues, production risks, or rising input costs,” McKercher continues. 

Dissecting the plan, RBC lenders look closely at historical financial and production performance, favouring accountant-prepared, three-year projections to evaluate the financial implications of any proposed changes. Return on investment (ROI) supporting the grower’s debt servicing capabilities is a priority. Sensitivity analyses—scenarios that assess changes in prices, production levels, or costs—are especially helpful, though RBC says these are seen less frequently. 

Maintaining a credit rating

McKercher explains that many factors come into play in obtaining and maintaining a credit rating, noting three key points:  management, financial performance and market/competitiveness. 

Good management can be seen to monitor production data and financial performance on a regular basis to ensure that important decisions are made in real time. Additionally, an up-to-date, three-year financial history supporting a grower’s ability to service current and potential debt is also critical to a lender’s decision-making. While having less leverage, a lower debt-to-operational cash-flow ratio shows lenders that a grower has more options when making decisions and dealing with risks or challenges.

Last but not least, how an individual grower performs in terms of production within the industry is an important evaluation point. This helps separate the financial results and the production results. 

“We look over many years, so if something unexpected happens in the industry – for example, trade tariffs, a significant increase in an input cost, disease, or so on – we give credit to those who are consistently above their peers in terms of kg/sq ft and other production variables,” says McKercher. 

Transitioning to the next generation

For every grower, inevitably, one of the farm’s biggest financial challenges becomes the cost of transitioning operations to the next generation, an undertaking in which both bankers and accountants play a significant role. This is one area where borrower credibility can really come to the fore since the financial transaction relies on the credibility of both the seller and the buyer. And this is also where assessments by respected outside professionals can be brought to bear. For many growers contemplating the last harvest, getting better before getting bigger might be best replaced by moving up before moving on.  

At the generational crossroads of capital-intensive farming, another transition appears to be under way. Within the banking industry, more and more female bankers are taking charge of major agricultural portfolios. In addition to Justine Hendricks at Farm Credit Corporation and Lorna McKercher at Royal Bank of Canada, there’s also Roxane Lieverse who joined Rabobank in January 2023 as head of Canadian Agricultural Banking based in Calgary. Here’s her wink at Venus versus Mars in her LinkedIn profile:  Disruptive Agricultural Banking Lender.