Farm­ers can ride out these eco­nomic hic­cups

The Woolwich Observer - - VENTURE - FIELD NOTES

MOST OB­SERVERS BE­LIEVE – and hope – the Bank of Canada is done with in­ter­est rate hikes un­til 2018, to see how the first two af­fect the econ­omy.

For the most part, it doesn’t look like agri­cul­ture will be sig­nif­i­cantly af­fected. But like ev­ery­one, farm­ers are well ad­vised to watch for signs of change.

Agri­cul­ture is en­ter­ing this new phase in good shape. The value of farm as­sets in Cana­dian agri­cul­ture is strong, and farm cash re­ceipts – which have risen by an im­pres­sive $19 bil­lion over the last decade – put the in­dus­try in a good po­si­tion to face higher bor­row­ing costs. A new re­port from Farm Credit Canada, Out­look for Farm As­sets and Debt 2017-18, was re­leased Tues­day. Co­in­ci­den­tally and un­re­lat­edly, it ar­rived on the scene just days af­ter the Bank of Canada’s sec­ond in­ter­est rate hike since July, which had been pre-

ceded by no in­ter­est rate hikes in seven years.

The re­port, based on 2016 data, is bullish on the farm sec­tor in this coun­try. Cana­dian agri­cul­ture was fi­nan­cially healthy last year, giv­ing it a firm foun­da­tion head­ing into an era of mod­er­ately higher in­ter­est rates.

“The fun­da­men­tals of Cana­dian agri­cul­ture are sound and most farm op­er­a­tions are in good financial po­si­tion to weather most sig­nif­i­cant changes in our econ­omy,” says J.P. Ger­vais, FCC’s chief agri­cul­tural econ­o­mist.

For example, the re­port notes liq­uid­ity – an op­er­a­tion’s abil­ity to meet financial obli­ga­tions with­out in­ter­rupt­ing nor­mal op­er­a­tions – re­mains strong. It de­clined slightly in 2016 from the 15-year av­er­age, but min­i­mally.

As well, the in­dus­try’s sol­vency po­si­tion is good, with the debt-to-as­set ra­tio a few points be­low the 15-year av­er­age. To­tal li­a­bil­i­ties in Cana­dian agri­cul­ture reached al­most $91 bil­lion in 2016, a 7.5 per cent in­crease over the pre­vi­ous year. Farm as­set val­ues grew too, to nearly $592 bil­lion, five per cent more than 2015. Farm­land made up al­most 70 per cent of to­tal farm as­sets.

The re­port pre­dicts slow­ing ap­pre­ci­a­tion in farm land val­ues be­cause of higher in­ter­est rates.

But it also pre­dicts to­tal farm debt out­stand­ing to have a lower rate of growth this year and next year.

One cau­tion flag raised in the re­port is that land, par­tic­u­larly in Al­berta and On­tario, has be­come more ex­pen­sive, com­pared to farm cash re­ceipts. How­ever, the au­thors also note the down­ward trend in in­ter­est rates over the years must be con­sid­ered when in­ter­pret­ing this ra­tio. Al­though land has be­come more ex­pen­sive, the cost of bor­row­ing has re­mained sta­ble.

But over­all, the mes­sage is clear: it’s a good time to be farm­ing.

Brenna Grant, man­ager at Can­fax Re­search Ser­vices, says the agri­cul­ture sec- tor’s healthy eco­nomic sta­tus is re­flected in the beef sec­tor’s abil­ity to re­build eq­uity over the last sev­eral years. She notes that land has be­come more ex­pen­sive com­pared to farm cash re­ceipts, mean­ing it takes longer for pro­duc­ers to pay off that ini­tial land in­vest­ment.

And, says Math­ieu Li­pari, program man­ager at Farm Man­age­ment Canada, it’s also a good time for farm­ers to ex­am­ine whether they are uti­liz­ing all their as­sets.

With in­ter­est rates low, many farms have ex­panded. Now, even though Cana­dian farms are in good shape, times are start­ing to change with higher in­ter­est rates and a slow­ing ap­pre­ci­a­tion of land val­ues, the very foun­da­tion of farm as­sets.

“We can say the in­dus­try is strong and do­ing well, but each pro­ducer needs to look at their op­er­a­tion in­di­vid­u­ally,” he says. “If a cap­i­tal ex­pen­di­ture will in­crease prof­itabil­ity, there’s a case to be made to buy it. But al­though money is cheap, it doesn’t mean as­sets are.”

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