Sharpen your pencils for the coming year, says the chief economist for Farm Credit Canada.
“We all know that we are in a sluggish economic environment. It is not going to be a good year but it won’t be a disastrous year,” J.P. Gervais told FCC’s Ag Outlook 2016 event in Brandon on Feb. 9. “In a world of tight profit margins, farm management skills are going to become even more important.”
A continued oil slump, the low Canadian dollar and consumer debt levels will all affect producers’ bottom line in the coming year.
“We are starting to see the low Canadian dollar having an effect,” Gervais said. “I don’t think that the sky is falling for us but overall I think it is important to know that the economy is not doing that well. We have seen downward pressure on the Canadian dollar. I do believe that we will see the dollar above 70 cents by the end of the year, but not above 75 cents.”
Gervais said that while Canadian farmers may be struggling with debt, Canadian households are even worse off.
“Consumers are carrying a lot of debt. On average if you look at debt, it is growing at a faster pace than disposable income,” said Gervais.
However, the coming year could still hold a profit for some as the Canadian agriculture industry is well positioned globally and foreign demand is healthy.
“Foreign demand is absolutely important and the landscape of the global market is actually very good for us,” said Gervais.
Gervais said the commodity sector should see consistent revenues but he warned producers to keep a close eye on the cost of inputs purchased in the U.S.
“If I look at crop receipts in Manitoba, assuming average yields and barring any weather disruptions, we are projecting that revenues will be constant,” Gervais said.
In the hog industry, Gervais expects a positive outlook for 2016, saying this year may even be the year for expansion in Manitoba.
“I think that the outlook is much better in 2016 than it was in 2015 for hog producers. Because of China exports and the U.S. is slowing its expansion, if you look at margins, you are looking at some good profitability,” he said.
Cow-calf producers won’t see a year as good as the past few, but Gervais expects revenues will remain at or above the break-even mark.
“But the cost of labour for the operator is included in those margins so breaking even is not necessarily a bad thing.”
Feedlots will have the tightest margins but Gervais notes feedlot operators should see some improvement near the end of the year.
“There is a tough start to the year for the feedlot but the outlook turns more positive as we move into 2017,” he said. “We are not looking at significant losses but it will certainly be a difficult time at the beginning of the year.”
Management skill essential
In order to maintain revenue, Gervais advises producers to focus on tight management practices and aim for small improvements.
“If you are able to make small improvements in different areas throughout your farm you can make great impacts on your bottom line,” said Gervais.
He said that rather than shooting for large improvements in specific areas, farmers should aim to implement the five per cent rule, which involves making consistent incremental improvements in different areas.
“For example, say canola is at $10, you yield 40 bushels an acre and have $350 input costs. You will be profiting $50,” said Gervais. “If you are able to improve your marketing by five per cent, increase yields by five per cent and cut costs by just five per cent, you would be looking at $10.50 for canola, yielding 42 bushels an acre and have lowered your costs to $333, giving you a profit of $108 per acre.”