Farming in a high-cost environment
- craigmacfie
- Apr 17
- 4 min read
By Craig Macfie
The cost to farm in Western Canada has doubled in the past fifteen years.
What was $250/acre in annual costs to farm fifteen years ago (using accrual accounting) is now $500/acre in Western Canada. Cost increases are being seen across the farm income statement including on inputs, machinery and land.
The more recent spike in costs due to COVID-19 and tariffs have many producers concerned about their profitability and what to do about farming in the current environment.
Dave Sullivan is the executive vice-president at Global Ag Risk Solutions (GARS), a firm specializing in farm insurance based in Moose Jaw, Sask. GARS has been benchmarking farm financial statements across Western Canada since its inception in 2009. According to Sullivan, farmers are taking on more cost and risk for the same $50/acre return on average as fifteen years ago.
The gap between costs and revenue
“Every time farmers create more gap between their costs and revenue, manufacturers will increase costs. Or we do it to ourselves by bidding up the price of land or land rent,” says Sullivan. “We must be satisfied with a one to two per cent operating return on investment on average because single digit returns are absolutely the norm on the market value of your land and machinery. As soon as there is additional profit in the system, farmers will invest in new land or machinery, or the suppliers and manufacturers will take additional margins.”
U.S. farmers have a similar problem but with additional support.
“U.S. farmers will budget and have a line item for government support,” says Sullivan. “It makes up a larger percentage of their budget and many farms wouldn’t break even without it.”
GARS was active in the U.S. until COVID-19. What did the firm learn about U.S producers and production economics versus Canadian?
“Crop insurance in the U.S. is very robust and highly subsidized — up to 60 per cent like it is in Canada. But there’s less of a gap in the market in the U.S. with more private product competition,” says Sullivan. “Canadian farmers generally have sharper pencils with better accounting practices. There are two main reasons: one is the spread between corporate and personal tax rates is greater in Canada which encourages more farms to incorporate. This in turn encourages more accrual basis financial statement preparation. The other reason is quarterly GST filing in Canada encourages more up-to-date bookkeeping practices.”
U.S. competition
One of my takeaways from attending Texas A&M’s TEPAP program (an executive program for agricultural producers) several years ago was that U.S. farmers are dealing with similar profitability and succession issues but with different politics.
So, what are U.S. farmers doing better?
“Farmers in the U.S. generally understand grain marketing better and have the Chicago Exchange which gives them an open market to trade in,” says Sullivan. “We only have that for canola. In Canada, we were so reliant on the Wheat Board, we didn’t build up that skill set. But Canadian farmers are good at adopting new crops, canola and lentils as two examples. When growing wheat wasn’t generating any money and insurance didn’t guarantee them a break-even, they needed to find something that was going to offset a poor performing wheat crop. This has led to the pulse industry in Western Canada. If you’re in the U.S. and if corn or soybean support is so high and you have support for corn ethanol and biofuel, you’re less incentivized to look at your farm as a stand-alone business apart from government support.”
Looking at financial statements across the two countries, specifically in the grain sector, Sullivan estimates that U.S. grain farmers see approximately 15 to 25 per cent of gross revenue from government support in a typical year, “potentially rising to 30 to 40 per cent in high-subsidy years (e.g., 2020 with trade war payments).”
“Canadian grain farmers see five to 15 per cent of gross revenue from government support, with less frequent spikes due to a focus on risk management rather than direct price supports,” he continues. “The bulk of this would be in crop insurance subsidies in both countries, but the gap between the two would be the direct per acre payments U.S. farmers get via the Market Facilitation Program and ad hoc programs when farmers receive per acre payments. In Canada, it’s primarily AgriStability, AgriRecovery, interest-free cash advances, and little to no support for grain farms for market disruptions.”
But whether farming in a high-cost environment or not, farmers should start with gross margin budgeting.
Gross margin budgeting
According to Sullivan, there have been improvements in gross margin budgeting and planning in Canada the past ten years. “We have seen producers send us a gross margin budget and then, in many cases, re-tool it after they realize it doesn’t cover their remaining costs and give them a reasonable shot at a profit.”
Another issue Sullivan has seen over the years is producers with too many crops in their rotation. “It’s a bit like betting on all the horses in the race,” he says, adding, “We’ve also seen farms chasing lentil profitability out of their normal range. We’ve seen farmers growing lentils in north-west Saskatchewan and Manitoba, but 2024 was a drier year, so it worked out. “
Sullivan says the number one issue with profitability isn’t with machinery or land costs but rather a lack of gross margin. Gross margin dictates what you can afford for machinery and land costs.
Risk management
Following the 2021 drought, GARS had to diversify their risk exposure adding more farms in Manitoba and northern regions.
Sullivan also helped build Parametrics.Ag (powered by agrisksolutions.ca) to underwrite a farm operation using weather data, providing a more detailed history of risks associated with each geographic location.
“We combine that with a farmer’s production and financial information and it allows us to underwrite with a high level of confidence. Now that GARS has been acquired by HUB International, we’re looking to expand our business even more. There are opportunities in the space giving farmers access to great property and casualty products and benefits. We hope to help cover all angles of risk.”
This article originally appeared in the April 15, 2025 issue of Country Guide:
Craig Macfie, CPA, PAg, provides fractional CFO services to growing farms and agribusinesses. Find out more at www.springcfo.com
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