The Role of Small and Medium Farms in Modern Agriculture. Arden Esqueda Research and Analysis Directorate Agriculture and Agri-Food Canada June 2012

Transcription

1 The Role of Small and Medium Farms in Modern Agriculture Arden Esqueda Research and Analysis Directorate Agriculture and Agri-Food Canada June 2012

2 Outline Overview of Small and Medium Farms in Canada Small and Medium Farms in Modern Agriculture Factors Determining Financial of Success Conclusions 18/09/2012 The Role of Small and Medium Farms in Modern Agriculture 2

3 Small and medium farms are an important part of the asset base of Canadian agriculture (Millions) Small and medium farms (with over $10,000 in revenues) account for 38%, or $105.1 billion, in land and buildings in Canada. 70,000 Market Value of Land and Buildings by Revenue Class, 2010 Total Value of Land and Buildings Onwed 60,000 50,000 Medium Farms 40,000 Micro Farms Small Farms 30,000 20,000 10,000 - Under $10,000 $10,000 to $24,999 $25,000 to $49,999 $50,000 to $99,999 $100,000 to $249,999 $250,000 to $499,999 $500,000 to $999,999 $1,000,000 and over Source: Census of Agriculture, Statistics Canada, /09/2012 Small and Medium Farms in Canada - Overview 3

4 Despite the decline in the number of small and medium farms, these farms continue to predominate 60,000 Number of Farms by Revenue Class, 2011 Small Farms Medium Farms 50,000 40,000 30,000 20,000 10,000 - Under $10,000 $10,000 to $24,999 $25,000 to $49,999 $50,000 to $99,999 $100,000 to $249,999 $250,000 to $499,999 $500,000 to $999,999 $1,000,000 to $1,999,999 $2,000,000 and over Source: Census of Agriculture, Statistics Canada, Despite the decline in farm numbers, small and medium farms still account for 56% of farms in Canada. The Census reported 115,742 small and medium farm operations in Canada for /09/2012 Small and Medium Farms in Canada - Overview 4

5 Small and medium farms contribute 16% of the total gross farm receipts in Canada However, small and medium are increasingly being recognized for their contributions outside of volume of production. Percentage of Total Gross Farm Receipts by Revenue Class, 2011 Small and medium farms Under $10,000 $10,000 to $24,999 $25,000 to $49,999 $50,000 to $99,999 $100,000 to $249,999 $250,000 to $499,999 $500,000 to $999,999 $1,000,000 and over Source: Census of Agriculture, Statistics Canada, /09/2012 Small and Medium Farms in Canada - Overview 5

6 Given the declining number of small and medium farms and their relatively small share of production, it raises some important questions. What is the role of small and medium farms in modern agriculture? What makes some producers more successful than others? This presentation will: Highlight the role of small and medium farms in modern agriculture; and Look at the factors that determine the success of small and medium farms. 18/09/2012 Small and Medium Farms in Modern Agriculture 6

7 Small and medium farms contribute to modern agriculture Modern agriculture includes farms that are innovative, consumer oriented, profitable and environmentally sustainable. Many people view only large farms as being part of modern agriculture. However there are many small and medium farm also embody many of the characteristics of modern agriculture. Characteristics of small and medium: Economically viable; Market - and consumer - oriented; Point of entry into agriculture; and Innovative. 18/09/2012 Small and Medium Farms in Modern Agriculture 7

8 The majority of small and medium farms had positive net operating income, in 2010 In Canada, 62% of farm operations in the small and medium category reported positive net farm income, while 38% of farms did not. Number of Farms by Positive and Negative Net Operating Income (NOI), ,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Small Farms Positive NOI Negative NOI Medium Farms - Under $10,000 $10,000 to $24,999 $25,000 to $49,999 50,000 to $99,999 $100,000 to $249,999 $250,000 to $499,999 $500,000 to $999,999 $1,000,000 and over Source: Census of Agriculture, Statistics Canada, /09/2012 Small and Medium Farms in Modern Agriculture Economic Viability 8

9 Profitable small and medium farms have above average gross margins Farms with Positive Net Operating Income (NOI), 2010 Revenue Class Number of Farms Revenues Expenses Net Operating Income Gross Margin $10,000 to $24,999 29,740 $ 499,712,593 $ 300,974,061 $ 198,738,532 40% $25,000 to $49,999 30,945 $ 1,115,275,707 $ 719,915,585 $ 395,360,122 35% $50,000 to $99,999 32,985 $ 2,389,096,037 $ 1,660,229,484 $ 728,866,552 31% $100,000 to $249,999 43,330 $ 6,966,521,547 $ 5,126,964,684 $ 1,839,556,863 26% $250,000 to $499,999 19,285 $ 6,609,082,532 $ 5,098,355,419 $ 1,510,727,113 23% $500,000 to $999,999 7,540 $ 5,119,462,207 $ 4,102,598,623 $ 1,016,863,584 20% $1,000,000 and over 3,845 $ 11,040,656,359 $ 9,525,863,231 $ 1,514,793,128 14% Total 167,670 $ 33,739,806,982 $ 26,534,901,087 $ 7,204,905,894 21% Source: Statistics Canada. Taxfiler data, 2010 On average, farms that generate farm operating income of zero or greater, tend to generate more income per dollar of revenue relative to larger farms. This implies that, as farm size increases, the gross margin of farms tend to decline for the profitable farms. 18/09/2012 Small and Medium Farms in Modern Agriculture 9 Economic Viability

10 Small and medium farms is an entry point into agriculture for many young farmers Small and medium farms have lower asset values requiring smaller capital requirements for establishing an operation or entering farming. The 2006 Census found that more than 50% of farms with at least one young operators were micro (17%) and small (39%) farms. Many large farms of today started small and grew their operation over time An analysis by AAFC of Statistics Canada s Longitudinal Administrative Database shows that for farms with operators under 35 years of age: 37 per cent continued and were in the same size range ten years later; 21 per cent had continued and had grown larger; and 42 per cent had left farming over a ten year period. This suggests that small and medium farms are an attractive entry point for beginning farms. 18/09/2012 Small and Medium Farms in Modern Agriculture Entry into Agriculture 10

11 Small and medium farms are innovative in marketing, products produced and financing Given the competitive pressure in agriculture markets, it is important that farmers with limited resources implement alternative activities that have the potential of yielding higher income per acre of agricultural land. Farms can use a number of marketing, product and financing innovations: Marketing As part of their effort to increase their share of the consumer dollar, many farms are turning to local and regional food systems, taking part in the local food movement. Products Farmers are product differentiating and offering specialty and niche market goods and services like, organizing farm tours, hay rides, festivals, petting zoos, and providing on-farm picnic facilities. Research has found that, farmers who participate in alternative market activities (direct marketing, agritourism, road side stands etc.) can achieve greater income on their existing farmland base (Govindasamy et al., 1997 and Adelaja, 1995). Financing For small farms access to capital can be challenging, so farmers can implement Community Support Agriculture (CSA) financing structures to generate cash flow for the farm during slow periods. 18/09/2012 Small and Medium Farms in Modern Agriculture Innovation 11

12 Consumers are increasingly demanding more specialty goods and services Many small and medium farms provide a unique consumer-oriented production not readily available from larger farms. Unlike large and very large farms, which are exportoriented, most small and medium successful farms are oriented to serving local markets. Studies on consumers attitudes have shown that buyers are increasingly demanding better quality fresh fruits and vegetables, and are willing to pay premium prices for higher quality foods (Connell et al., 1986; Eastwood et al., 1986; Rhodus et al., 1994). Such specialty goods and services include: products and services that are organic, grass-fed and free range, values-added products like preserves, bread and sausages. Many of these goods and services are direct marketed on a local and regional level, allowing primary producers to capture more of the consumer dollar. 18/09/2012 Small and Medium Farms in Modern Agriculture Consumer and Market Orientation 12

13 More than half of consumers indicated they were willing to pay more for locally-produced food These specialty products, services and value-added activities provide farmers the opportunity to earn extra income by catering to consumers demands. 18/09/2012 Small and Medium Farms in Modern Agriculture Consumer and Market Oriention 13

14 There are several ways of determining the financial success of small and medium farms Economic analyses of firm behavior are typically based on the assumption of maximization or minimization of a goal. While economists recognize that multiple goals are important in making business decisions, a single goal, such as profit maximization, is used because it provides an analytical approximation for firm behavior (Harman et al., 1972). This analysis uses net operating income as a measure of profitability, which has been well documented in studies (Lins et al., 1987; Seger et al., Melichar, 1979; Haden and Johnson, 1989). However, other measure of success have been suggested as being important to a firm (Patrick and Eisgruber, 1968). These could include the reduction of year-to-year income variability, an acceptable family living level, increasing net worth, increased leisure time, and other goals. 18/09/2012 Factors Determining Financial Success 14

15 The data being used in this analysis is the Farm Financial Survey (FFS) The data set is disaggregated by province, farm type and revenue class and contains information on assets, liabilities, revenues, expenses, capital investments and capital sales. Farmer operator and farm family demographics and crop and livestock information are also collected to measure physical characteristics of the farms. Due to operational constraints and respondent burden considerations, some specific farms are excluded from the target population to obtain the survey population. Among the exclusions are farms with less than $10,000 in sales. Data from 2007 to 2010 are used in this analysis, which contains 18,928 farms small and medium farms. Small farms: 12,139 Medium farms: 6,789 18/09/2012 Factors Determining Financial Success Farm Financial Survery 15

16 Net Operating Income (NOI) is used as the measure for financial success Dependent variable: Success: In this analysis, success is defined as farms with Net Operating Income (NOI) that is greater than or equal to zero. This analysis is interested in successful small and medium farms, so all farms with revenues below $250,000 are included. Net Operating Income Freq. Percent Less than zero 8, Greater/Equal to zero 10, Total 18, Independent variables: Experience of the oldest operator, the lifecycle of the farm (i.e. multi- or single generational), farm size, off-farm income, net worth, program payments and dummy variables for province, farm type and year are included. 18/09/2012 Factors Determining Financial Success - Variables 16

17 The probability of success on small and medium farms will be estimated The following generalized version of the probit model will be estimated: 1 if net operating income is zero or greater; Success = { 0 otherwise. P( Success 1 X ) Age Multigener ation Paymentin Farmtype i i Offfarm 8 Year 11 i 0 NetWorth i 4 i 1 i Single Farmsize 12 9 Province i 2 Payment i 6 i e i i 18/09/2012 Small and Medium Farms in Modern Agriculture 17

18 Results indicate that farms with a single operator are more successful relative to farms with multiple operators Farms with a single operate have a higher probability of success relative to farms with multiple operators from the same generation (i.e. siblings or spouses) and multigenerational farms Suggesting that, on small farm operations, farms with fewer operators are more successful. This also implies that in a single year farms might forgo income to achieve other farm family goals (i.e. farm succession). Independent Variable Coefficients Marginal Effect Operator Characteristics Age of oldest operator *** Succession Status/Farm Lifecycle Single Generation *** Multigenerational *** Farm Characteristics Net Worth -3.78E-08 ** -1.50E-08 Program Payment 4.68E-06 *** 1.86E-06 Interaction Term -3.45E-06 ** -1.37E-06 Off-Farm Income -8.53E-07 *** -3.38E-07 Farm Size 4.96E-06 *** 1.97E-06 Note: * Significant at 10% level or greater; ** significant at 5% level or greater, *** significant at 1% level or greater. 18/09/2012 Small and Medium Farms in Modern Agriculture 18

19 Net worth and off-farm income both had a negative relationship with success Net worth had a negative relationship with successful, however the magnitude was small Results suggest program payments have a positive relationship with success However, program payments are more important for the success of small farms relative to medium farms. Off-farm income had a negative relationship with success Farm size had a positive relationship with success Independent Variable Coefficients Marginal Effect Operator Characteristics Age of oldest operator *** Succession Status/Farm Lifecycle Single Generation *** Multigenerational *** Farm Characteristics Net Worth -3.78E-08 ** -1.50E-08 Program Payment 4.68E-06 *** 1.86E-06 Interaction Term -3.45E-06 ** -1.37E-06 Off-Farm Income -8.53E-07 *** -3.38E-07 Farm Size 4.96E-06 *** 1.97E-06 Note: * Significant at 10% level or greater; ** significant at 5% level or greater, *** significant at 1% level or greater. 18/09/2012 Small and Medium Farms in Modern Agriculture 19

20 Results reveal that farm type is the primary determinant of small and medium farm success Grains and oilseeds and dairy were more successful relative to mixed farms, while hog farms were less successful. Most provinces had a higher probability of success relative to Ontario. The prairie provinces of Manitoba and Saskatchewan had a higher probability of success; this could be explained in part by their production type. The eastern provinces of Quebec, New Brunswick, Nova Scotia and Newfoundland and Labrador all had higher probabilities of success relative to Ontario. In Quebec, a strong food culture and tradition within the province might help enhance farm success, particularly if farms are participating in value-added and other alternatives market activities. The ASRA program and a strong dairy sector may also explain the success in Quebec Independent Variable Coefficients Marginal Effect Farm Type Grains and oilseeds *** Dairy *** Cattle *** Hog *** Poultry Province Alberta Manitoba ** Saskatchewan *** Quebec *** New Brunswick ** Nova Scotia ** Newfoundland and Labrador *** Prince Edward Island British Columbia Year *** *** *** Note: * Significant at 10% level or greater; ** significant at 5% level or greater, *** significant at 1% level or greater. 18/09/2012 Factors Determining Financial Success 20 Results

21 Farms of all sizes contribute to the success of modern agriculture This project has highlighted some of the important characteristics of small and medium farms in modern agriculture. The importance of small and medium farms in modern agriculture includes their ability to remain economically viable, their consumer- and market- oriented focus, their role in entry into agriculture and their innovativeness. Results of this analysis highlight some of the farm characteristics and farmer demographics that are significant in explaining the success of small and medium operations, including the lifecycle of the farm, program payments, farm size, location of the farm and production type. Data constraints should be addressed and further policy research is required on small and medium farms. 18/09/2012 The Role of Small and Medium Farms in Modern Agriculture Conclusion 21

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