When farmers make money they spend it — most often on land and equipment — to improve productivity.
With total Canadian farm cash receipts projected to increase just 0.1 per cent this year, Farm Credit Canada (FCC) is forecasting a seven per cent drop in farm equipment sales for 2016 and a seven per cent jump in sales in 2017 based on an estimated 3.8 per cent increase in farm cash receipts.
The forecast is in FCC’s “Projecting 2016-17 Farm Receipts and Equipment Sales” released June 28.
“These projections are highly influenced by strong prices in futures markets for major grains and oilseeds as well as a Canadian dollar that is projected to remain below its five-year average,” the report says.
FCC’s forecast could be thrown off by a fall in commodity prices following a bumper world crop or an increase in the value of Canadian dollar, J.P. Gervais, FCC’s chief agricultural economist, told reporters during a briefing June 23. However, farmers have probably locked in some of their new-crop prices, which are relatively good, he added.
FCC predicts the Canadian dollar will average 77 and 80 cents U.S. in 2016 and 207, respectively.
“Farm cash receipts are big driver behind the decision to purchase farm equipment,” Gervais said. “And conversely farm equipment sales are usually a leading indicator of future farm cash receipts.”
Gervais speculated equipment sales might not decline as much had farmers not purchased as much before 2015 when farm cash receipts were higher.
Gervais said at first he was surprised farm cash receipts were forecast to increase almost four per cent next year, but futures prices point to that, he said. “And (grain) demand has not gone soft and is not slowing down like some were expecting maybe a year ago,” he said.
While total (grain and livestock) farm cash receipts are projected to be almost flat in 2016, they are still above average, Gervais noted. Moreover, crop receipts are forecast to rise by 5.8 and 3.8 per cent in 2016 and 2017, respectively. As a result four wheel drive tractor sales, which account for 3.5 per cent of farm equipment sales, are expected to jump 24.5 per cent this year and by 2.4 per cent in 2017.
FCC projects combine sales will increase by 5.2 and 8.9 per cent this and next year.
Livestock cash receipts in 2016 are projected to fall 6.9 per cent mainly due to lower cattle prices, but also lower prices for dairy products.
Livestock cash receipts are expected to increase by 2.6 per cent in 2017.
Canadian farmers are earning more for their grain than their American counterparts due to Canada’s weaker loonie. And the impact can be seen in equipment purchases, the report says “Combine sales were down 34.5 per cent in the U.S. in 2015 while sales in Canada were down 21 per cent.”
However, most of the equipment Canadian farmers buy, especially combines, are made in the U.S. and prices reflect it. Combine prices in Canada jumped 16 per cent in 2015 mostly because of the stronger U.S. currency, Gervais said.
The dollar cuts both ways but “I would say, yes, overall the lower Canadian dollar is positive for our producers,” Gervais said.
Interest rates are not expected to change much in the short-term, but farmers need to take the possibility into account whenever borrowing money, Gervais said.
Low interest rates encourage equipment sales in the short-term, by making them more affordable, especially for expensive machinery, the report says.
There’s a risk farmers could be caught if interest rates suddenly rise, but that risk is no greater now than any other time, Gervais said, adding rates are expected to stay where they are in the short-term.
“Farm debt in Canada as of December 31, 2015 has gone up 8.5 per cent,” he said. “That’s a big number, but at the same time… you need to look at net income and net income is still at the top of the cycle. I am not entirely surprised to see that debt continues to go up at a time when net income is very strong.”
There’s no rule of thumb on how much farmers should invest in iron, Gervais said. Successful farmers have a plan and consider the costs of buying new versus used or fixing existing equipment.
“What I found successful producers to be doing is to be able to stretch some of these investments over time,” he said.
Gervais isn’t sure if more farmers are trading in for new equipment sooner, but those who do are probably seeking the latest technology used in precision farming.
“I can tell you from what is going on in the marketplace that leasing is more and more popular,” he added, speculating it’s also driven by farmers after new technology.