FCC confident amid rising farm debt

Debt-to-asset ratios dip below 15-year average

The picture of farm debt on the ground matches the bigger industry picture and it says Canadian farmers are generally in good financial shape.

A new report by Farm Credit Canada suggests producers are doing well despite a softening of all the key financial ratios in 2015.

Record farm income and solid asset appreciation have bolstered farm finances but 2015 was the first year in a long time that some of the key financial ratios weakened slightly.

“We say with confidence that Canadian farmers are in a strong position to meet their financial obligations,” said FCC chief agricultural economist J.P. Gervais.

The debt-to-asset ratio of Canadian farms increased for the first time in six years due to farm debt increasing faster than assets in 2015.

But the ratio remains historically low at 15.5 percent compared to the previous five-year average of 15.9 percent and the 15-year average of 16.7 percent.

The ratio measures the solvency of farms. It indicates that for every dollar of assets there is an average of 15.5 cents of debt. The current ratio is below the 15-year average in all three Prairie provinces.

Since 2010, the value of assets has risen 56 percent compared to a 43-percent increase in liabilities. Farm debt continues to climb, reaching $86.8 billion by the end of 2015.

Derek Squair, president of Agri-Trend Marketing, said the report findings are reflected in the balance sheets he sees working with the firm’s 1,800 farm customers.

Growers are in good financial shape and have strong debt-to-asset ratios. He isn’t concerned about the amount of debt being amassed on an individual farm level.

“I don’t think it’s getting out of hand,” he said.

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“It’s really a sign of consolidation, farmers getting bigger, two brothers farming together as opposed to separately before.”

According to the FCC analysis, the current ratio, which is a measure of liquidity also known as working capital, softened to 2.38 in 2015 down from 2.63 in 2014. However, that is in line with the historical average.

Gervais said working capital is the first line of defense against any future shock in a farm’s financial health.

“Most of the farms are still in a very good position,” he said.

Saskatchewan farmers are the most liquid with a ratio of 3.13 because they hold 30 percent of the country’s farm inventory.

Squair agrees that most growers have plenty of working capital to survive a downturn in the farm economy.

“We’ve had some pretty good years the last few years, so their cash flow is increasing,” he said.

The third key measure of farm financial health is return-on-assets, which is a measure of profitability.

The ratio increased to 2.3 percent in 2015, up from two percent in 2014 due to record net income.

However, that is below both the five-year average of 2.7 percent and the 15-year average of 2.6 percent.

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The ratio is slumping due to the rapid rate of appreciation in farmland values over the past five years.

Land comprised two-thirds of total farm assets in 2015, up from a little over half in 1981.

The value of farmland and buildings appreciated at an average clip of 11.7 percent per year over the past five years.

FCC is forecasting the rate of appreciation will slow considerably to five percent in 2016 and one percent in 2017 due to lower crop receipts.

Farm debt is forecast to increase by seven percent in 2016 and three percent in 2017, which is down from the previous five-year average of 8.1 percent.

Gervais believes the farm sector could withstand a gradual increase in interest rates but he worries what would happen if the Canadian dollar gains strength on the U.S. dollar.

“This is perhaps the biggest risk that we have in the industry,” he said.

“A loonie at 85 cents (US) would change a lot of the dynamics in the marketplace.”

Squair said most established farmers could withstand a hike in interest rates but he worries how it would affect young farmers.

“It depends where you are in your career and how much equity you have built up and when you bought your land,” he said.

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He agrees that a rising dollar would have a big impact on the financial well-being of Canadian farmers but he doesn’t think it would topple many growers because they have tools to hedge against a rising dollar.

  • Cheap money has lead to a lot of businesses getting over leveraged. It happens fast, and it usually happens to people who say it won’t happen to them!

    • Harold

      There is no such thing a “cheap money”, there is only debt with interest debt money. There is no such thing a “over-leveraged”; you either have a lever-(aged), or you don’t. This is what happens.