Canadian agriculture is on a sound financial footing, with record farm income and land values peaking, while the increase in farm debt — also a record — is slowing.
Those are the major conclusions of the Farm Credit Canada (FCC) Outlook for Farm Assets and Debt 2016-17 report, published Sept. 7.
“The balance sheet of agriculture is healthy, but could face some challenges as farm income flattens and land appreciation slows,” the report says.
As of Dec. 31, 2015, Canadian farmers had $86.8 billion in total debt, Statistics Canada figures show. FCC projects farm debt will increase five and three per cent in 2016 and 2017, totalling $93.2 billion and $95.4 billion, respectively.
However, Canadian farmers’ collective net worth (total assets minus total liabilities) as of Dec. 31, 2015 was $474 billion, up more than double (a 159 per cent increase) in five years and 269 per cent higher than 15 years ago.
While farm debt has been increasing, so too has farm income, making the debt affordable, J.P. Gervais, FCC’s chief agricultural economist, told reporters Sept. 6.
The average Canadian farmer is expected to have a net worth of $2.7 million this year, Agriculture and Agri-Food Canada said in an outlook document issued Feb. 19.
“We say with confidence that farmers are in a strong position to meet their financial obligations,” Gervais said.
“There are some headwinds I would say on the horizon with respect to plateauing farm income and… slowing land appreciation.”
2015 was the first year in many when farm debt climbed faster than farm asset values, he said. As a result the 2015 farm debt-to-asset ratio rose to 15.5 per cent.
“But that still compares favourably with the last five years when we had a ratio of 15.9 and the last 15 years when the ratio in Canada was 16.7 per cent,” Gervais said.
Farmland values nationally, on average, are projected to increase five per cent this year and one per cent in 2017, Gervais said.
“So you see that soft landing that we have been talking about now for a number of years,” he said. “Farmland appreciation is slowing down… potentially levelling off in 2017.”
Most Canadian farms have good liquidity — a reflection of working capital, which is the farmer’s first line of defence when financial problems arise, Gervais said.
However, farmers need to watch their net income, he added.
With commodity prices having apparently peaked, is the agriculture boom over?
“We think that we are going to be able to ride the wave of strong income a number of additional years,” Gervais said. “We know agriculture is a cyclical business. The thing is though, we have been surfing this wave of really strong net income increases reaching a record again last year. I think we are going to be able to surf the top of the wave a little bit longer, but producers should be absolutely aware of the fact that there is a bit of downside risk because we are really at the top of the market.
“I don’t think it will be harder to expand or anything like that but the market dynamics could be different in the next few years, that is for sure.”
Farm suppliers could see less business though.
“We think that plateauing (farm) income will lead to a decline in farm equipment sales,” Gervais said in an email. “But we see a rebound in 2017 sales of new farm equipment.”
Media reports say the economic picture is less sanguine in the United States. Canadian farmers have been shielded from the lower commodity prices received by their American cousins by the weaker Canadian dollar.
“On the issue of the dollar I’ve been saying for a number of months this is perhaps the biggest risk that we have,” Gervais said. “There is no doubt that net income has been inflated by the low Canadian dollar. That has given us a buffer, a shield, from some things out of the downturn that we have seen in the United States.
“Our projections actually rely on the assumption the Canadian dollar is below $.80 (U.S.).”
Low interest rates, in combination with higher farm cash receipts, drove land prices higher, he said.
FCC doesn’t expect a sudden jump in interest rates, but Gervais said farmers could adjust to slow increases.
Land is farmers’ single biggest asset, representing 67 per cent of total farm assets, compared to 54 per cent in the 1980s.
“In all provinces, land was less affordable in 2015 than it has been in the past, not just because value went up across the country, but also because appreciation in land values has outpaced increases in total farm revenue,” the FCC report says. “The affordability of land can be identified as being meaningfully different than its historical average in Quebec, Ontario, Manitoba, Alberta and British Columbia.”
The report says Saskatchewan farmers are sitting on a lot of inventory. They could experience cash flow problems if grain transportation problems arise, but Gervais doesn’t expect a repeat of the 2013-14 backlog that affected grain shippers across the West.
The report also notes there’s a strong correlation between the value of farmland and buildings and farm debt. Between 2001 to 2015 total farm debt increased by 125.8 per cent. Over the same period, the value of farmland and buildings increased by 211.1 per cent.
Land and buildings look to have been a good investment. Between 2001 and 2011 their value doubled, appreciating an average of 7.2 per cent a year.
From 2012 to 2015 the annual gain was 11.7 per cent for a total of 39.4 per cent.
During the same period farm debt grew by an average 8.1 per cent or 26.3 per cent in total.
Between 2001 and 2011 farm debt increased 5.3 per cent a year for a total appreciation of 68.3 per cent.
Gervais said it’s hard to compare American and Canadian farm finances, because the industries are structured differently.
“In Canada there will be more debt on the books of producers, whereas in the U.S. some of that debt in the farm sector will be on the books of the integrators (that process farm produce),” he said.
“I would say even in recent years the dynamics in the marketplace tended to favour Canadian farms. We have seen quite a bit of a downturn in the United States and we have been shielded from a lot of that because of the Canadian dollar — most of it actually. I still think we are comparing favourably to U.S. farms.”