Data from Statistics Canada’s annual Farm Financial Survey suggest the events of the last 18 months will live long in the collective memory of Manitoba farmers – in the form of a pounding financial hangover.
The 2007 survey (the 2008 numbers are not yet released) would suggest farmers were quick to respond to the short-lived promise of better times ahead.Net cash income on an average-per-farm basis rose 50 per cent in 2007 over 2006. And 2008 looked like it would be a very good year indeed, until commodity prices started their nosedive in late summer.
So what did farmers do with the prospect of a windfall? Pay down debt, maybe? Are you kidding?
They borrowed more money.
While it is true short-term liabilities dropped in 2007 by nine per cent, long-term liabilities, which were already three times larger, rose by 13 per cent.
Borrowing money to reinvest is a standard business practice and debt isn’t necessarily a bad thing – unless you keep trying to borrow your way out of it. Perhaps the biggest surprise hidden inside the survey data is the extent of rollover financing – converting short-term into long-term debt.
Statistics Canada asks respondents to its Farm Financial Survey how much long-term money they borrowed to refinance old loans. It’s notable that that number had remained fairly static over the past several years – until 2007. Then it jumped by 160 per cent.
That is seemingly corroborated by Lyndon Carlson, the Farm Credit Canada’s vice-president of marketing. He recently told the CropLife Canada convention that FCC and other commercial lenders are enjoying a record year for credit extensions.
Carlson went on to wade into the big-little farm debate with the following comment: “There are pros and cons, big farms (versus) small farms, but one thing I say we’ve noticed is as farm size has gotten larger, they are able to manage their balance sheet in years where their income statement looks really bad and that wasn’t always the case,” he said.
In other words, big farms can still make their loan payments. This is all fine and well, as long as credit remains readily available, which Carlson assured his audience would be the case.
One aspect of the ever-increasing scale of agriculture that is rarely dissected is the impact it has on a farmer’s level of risk. Economies of scale spreads costs over a wider base, but it also increases aggregate costs.
Peter Blawat, an agricultural economist with the Manitoba government, recently illustrated the difference between a 1,200-acre grain farm in 1998 and a 2,000-acre grain farm in 2008. Land that was selling for $450 per acre 10 years ago is now worth around $800 per acre.
But machinery and operating costs have also increased significantly. In 1998, a farmer could take out an operating loan of $120,000 to put in a crop. Today, that farmer is borrowing $320,000.
The farm size has increased 40 per cent. The annual cost of financing its operation is up 166 per cent.
Meanwhile, the returns from wheat, canola and barley have been below breakeven for nine out of the past 18 years when operating and fixed costs are factored into the equation. The margins for those three crops looked spectacular right up until the summer of 2008. But now, the projected returns for canola are at $55 per acre, which is below the long-term average returns of about $58.
Wheat returns are still respectable, roughly double the long-term average of $54 per acre. And barley is still fetching a $22-per-tonne premium over its long-term average of $32.50.
These kinds of comparisons, based on the province’s annual crop production budgets, shed new light on the call by some farm leaders to make wheat more like canola (see page 7). While canola yields have certainly increased over the years, the crop averages only an extra $4 per acre over its non-hybridized, non-GMO rotation mate. Someone is benefiting from the “improvements” made to canola, but it sure isn’t the farmer.
Despite last year’s short-lived spike in commodity prices, farm profitability would be negative in most years, if it weren’t for government payments. The Farm Financial Survey numbers suggest farmers are falling even further behind.
If there’s any consolation, it is that farmers are in good company. Governments the world over are using deficit financing and programs to free up credit so we all keep spending more than we earn to feed the economy.
Perhaps the biggest difference between a farmer and an automobile industry executive – aside from the fact that farmers don’t fly corporate jets to the nation’s capital when asking for a bailout – is that the guys who run Ford, GM and Chrysler aren’t taking off-site jobs so they can keep making cars.
Maybe 2009 will be the year when farmers stop debating how best to supplement their farm income, and start building a farming system that does more than make the loan payments – one that actually pays the bills.