That's super. I'll warn you that I am a very fast talker, so feel free to interject. My apologies in advance and hello to Merv on the phone.
Mr. Chairman and honourable members, thank you for inviting Farm Management Canada to speak before you today on matters concerning farm debt in the agricultural sector.
By way of introduction, I'm Heather Watson and I've been the executive director at Farm Management Canada for the past seven years. I'm here with my colleague and director, Merv Wiseman, who will introduce himself and speak to you a little bit later.
We're very pleased to speak to today's topic, as we feel economic sustainability is the prerequisite for Canada's agricultural sector, as a whole to not only survive, but to thrive and continue to be a global leader. The farm financial crisis that defined the 1980s caused government and industry stakeholder groups to contemplate how best to prepare the agricultural industry to better manage against risk and uncertainty. They turned to farm business management. In 1992, governments and industry established Farm Management Canada, formerly called the Canadian Farm Business Management Council, as a national body positioned to coordinate farm business management programs and training to equip farmers with the resources, tools, and information to prevent the 1980s from happening again.
Farm business management is the key to establishing a mechanism whereby thinking ahead and proactivity become part of everyday decision-making. It's how farmers know where they are, where they want to be, how to get there, when they get there, and what happens next. Such planning is inherently connected to business continuity and transition planning.
Farm debt is a key consideration when it comes to employing business management techniques to manage risk and seize opportunity. Debt can be used to stimulate innovation, growth, and competitiveness for farm businesses. However, debt can be problematic for some farmers who do not have the working capital or liquidity to remain flexible and resilient in our ever-changing and complex industry.
In general, business has been good for farmers and according to our lending institutions, our industry is in a good financial position. Farm income, debts, and assets present a positive outlook. Key variables include interest rates, exchange rates, and commodity prices. These have all been relatively favourable.
This is good news for the sector, however two concerns do arise. First, one must consider whether these conditions are by default or design. Have we simply lucked out and what if our luck changes? This is Management 101. Are we actively working to create positive outcomes and mitigate risk?
Second, are we taking advantage of these good times to get our business affairs in order to position the farm for the best chance for success when conditions do change? Are we taking the time now to invest in business management practices? Are we identifying what is in our control and working toward solutions? The answer for the majority is no. We continue to use the money to invest in more assets.
One thing in agriculture is certain: change and the uncertainty brought by change. Over the next 10 years, we expect three out of four of Canada's farms to change hands. Agriculture will experience what renowned expert and farm family coach Elaine Froese calls the tsunami of agriculture where today's farmers will transition not only their assets, but their managerial and leadership skills to the next generation.
Our farm management decisions and process for making informed decisions are now more critical than ever. What got us to where we are today will not get us to where we need to be and our young farmers know this. They're taking matters into their own hands, bringing their own business management acumen to the farm. For years, farm business management enthusiasts have believed the success of any farm enterprise is directly related to the business management skills and practices of the farm manager. However, there has been a lack of convincing evidence, making it difficult to convey the value and increase the adoption of these practices until now.
A new groundbreaking study goes beyond existing research and is the first to establish a measurable link between business management practices and financial success. The study, called “Dollars and Sense: Measuring the Tangible Impacts of Beneficial Business Practices on Canadian Farms” is mentioned in the report I gave to you in advance. It reveals the adoption of business management practices on farms and specifically planning activities remain fairly low. Only 26% of farmers have a formal business plan and 33% have a financial plan, 27% have a succession or a transition plan, and 18% have a human resource management plan. There is room to improve and farmers need our support in doing so.
By comparing the management practices of Canada's top performing farms with those at the bottom, the study reveals the recipe for success. There are seven business management practices driving farm financial success. This entails continuous education, financial literacy, using business advisers, and planning. Farmers adopting these practices have an average annual return on assets of 10%, which is 525% higher than the bottom 25%.
Farmers in the top 25% also have much stronger asset turnover scores,100% higher, and the gross margin ratio is 155% higher than for farmers in the bottom 25%.
In an ever-changing industry, the farm business management process provides a solid foothold for farmers to confront change with confidence, manage risk, seize opportunity, and make informed decisions.
I will now invite my colleague Merv Wiseman to provide his comments and perspective as a director on Farm Management Canada's board of directors, president of the Newfoundland and Labrador Federation of Agriculture, past president of the Canadian Agricultural Human Resource Council, and owner and operator of the world's largest silver fox farm in North Harbour, Newfoundland.
Merv, over to you.