Smart barn financing
These days, the price tag for a new facility can easily srun to seven figures. Plan to stay flexible, just in case.
In recent years, some of the busiest farm building contractors in Canada have been in Manitoba. From dairy to poultry to hogs, producers have been vigorously expanding and modernizing their operations.
Right now, hog barn construction is leading the way, as more producers add finishing space in an effort to balance production in their operation. Compared to earlier times, the planned populations of these new buildings can be astounding. A typical new sow barn is built to accommodate 3,000 sows.
According to RBC Royal Bank’s Wayne Negrey, sow barn expansion is now mature within the province, but finishing barns are in demand. The rule of thumb for financing a finishing barn is $325 per head space. With the most common size being 2,000 head, the price of a standard-sized finishing barn is $650,000, not including land. Producers often put two or three such barns on an 80-acre parcel of land. In a sector where prices are cyclical, producers will try to balance the capital cost with the expected life of the facility.
With million-dollar builds becoming routine, it’s easy for producers to make costly mistakes in the early stages of operation.
“Regardless of the farm sector, the most important issue for producers is to have the right financing structure at the front end,” says Negrey, senior account manager based in Winnipeg. “The major thing we come up against is demand for longer amortizations and for financing a greater proportion of the asset. But if the capital structure is highly leveraged, there’s less room to do some refinancing at some point in the future, if circumstances require it.”
Negrey urges construction-minded clients to maintain some flexibility on the balance sheet. Some financial institutions are willing to finance 85% of a barn, with a 25-year amortization. In other cases, producers are offered pay-interest-only deals, more or less indefinitely. Negrey sees significant risk in this approach – not to the lender (they have the assets) but to the producer.
“We recommend that our clients or prospective clients meet with their agriculture specialist to determine an appropriate capital and financing structure,” he says. “It’s not just about gaining access to financing in the short term, but helping to set them up for success in the long run.”
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