Farmers can ride out these economic hiccups
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.”