Harvesting opportunities for brokers: the untapped potential of farm financing

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Tara Sterken loves farms. For years, her family had maintained its own small farm while managing clients in the residential mortgage business. What quickly became apparent to her was the lack of good options for farmers in the market for a loan.

“We just ignored agriculturalists,” she says, “like they didn’t exist.”

As client relationship and broker business development manager at Glengarry Farm Finance, Sterken now spends a lot of time talking to farmers about their needs. Compared to major urban centres like Toronto, where commercials for second mortgages or private mortgages are to be found everywhere, private agricultural lending is much less known.

Nonetheless, farmers across Canada are looking for financing options as they buy up land and expand their operations. Brokers without a rural upbringing may not know a lot about how farms work, but Sterken says even a residential broker can be taught how to handle a farm deal.

“We can probably explain everything they need to know in five minutes or less,” she says. “If they’re passionate about it, they’ll continue to learn about it.”

The need for farm financing

In 2021, Statistics Canada counted around 190,000 farms across the country. Traditionally, most farm owners could depend on financing from Farm Credit Canada or Canada’s major banks like RBC and Scotiabank. Sterken says these offerings are mainly prime deals for borrowers with good history and no issues with repayment.

“They do the clean stuff,” she says. “When it gets bumpy, they can’t touch it anymore because they have to maintain certain ratios, and certain performance metrics because they’re a big financial institution.”

That isn’t always easy for a farm. A factory, Sterken says, is mostly the same whether it produces shoes or plastic cutlery. It’s a manufacturing business that runs profits and losses depending on market demand, the availability of labour, and ample materials to turn into finished goods.

Running a farm, she says, is a far more subjective process. For example, farmers always run the risk of drought, and two different farmers might make very different decisions when planting the same plot of land. Unlike residential or commercial deals, a farm deal is almost entirely about the land, not the buildings on it.

Plus, agriculture is an inherently cyclical business, with farmers depending on a bumper crop to make up for bad harvests. “Farmers will have a couple of bad years in a row and they will have negative income,” Sterken says. “They’ll have low income and wouldn’t qualify at an institutional lender.”

The answer for most residential or commercial borrowers in this situation is to look into the possibility of private capital.

And if a client isn’t able to keep up with payments, traditional financial institutions might not easily find new buyers.

“If one of the clients defaults, I think the turnaround to sell those properties is going to be a lot trickier than a residential home sitting in Ottawa,” says Michelle Stewart, a mortgage broker at Bulletproof Mortgage Team in Mountain Grove, Ont.

What brokers need to know

If a broker is interested in learning how to handle farm deals, Sterken says, the first thing Glengarry tells them is to look at the full financial picture of the farm itself. That means financial statements and reports. Any commercially operating farm, she adds, will have an accountant capable of showing the farm’s financial performance.

“It’s going to show what they’re spending money on, where they’re not spending enough money,” she says. “It’s going to give us that complete picture of the business, and that’s basically the crux of what we’re underwriting against.”

The next step, Sterken says, is going out and putting together a net worth statement that lists everything owned by a farmer: land, equipment, and cash in the bank. After that comes a cash flow projection, something that may be familiar to commercial brokers — a document that simply tells a broker about the farm’s business plan for a year ahead.

Of course, for a private lender like Glengarry, the circumstances behind an offer are equally as important. Sterken says the firm would get the farmer on the phone with the broker and talk through why private funding would be necessary. “They don’t call us unless something has happened,” she says, “so we want to figure out what’s gone wrong, and we need to find a strategy to go forward. Is this a farm we can help?”

After that point, Sterken says, a farm deal isn’t all that different from any other deal. The goal at Glengarry, like other private lenders, is to bring on a farmer for a short-term loan and move them on up to a prime lender when they’re capable of meeting the terms and conditions.

Lending to farms

Glengarry Farm Finance is built entirely around lending to farmers, but some brokers are dabbling in farm deals on top of other residential or commercial work.

Stewart says her first real farm deal happened between December 2022 and January of last year. She’d handled deals for other properties with hobby farms, but this one was big: it had dairy cows, beef cattle, and crop farming. The couple who owned the property still lived there, as did their son who worked the farm. His partner also ran a dog grooming business on the farm itself.

“It was definitely a learning curve,” she says of the deal. But as soon as she found Glengarry, she found it wasn’t all that hard.

The firm was able to provide guidance and tell her exactly what documents she needed. “They didn’t shy away from the fact that I had no knowledge or experience with farming stuff,” she says.

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