Canadian agriculture remains in good financial shape despite a softening of all the key financial ratios in 2015, says Farm Credit Canada.
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.
“Canadian agriculture continues to be financially strong and we believe that it’s still going to allow us to invest in productivity to make sure we can meet the ever-growing food demand in the world,” said FCC chief agricultural economist J.P. Gervais.
The debt-to-asset ratio of Canadian farms increased for the first time in six years.
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.
Gervais said a low ratio is a good thing.
“It provides flexibility if you are facing a challenge. It allows you to look at your financial situation and make some adjustments there if need be or flexibility in case you want to leverage an opportunity,” he said.
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. 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.
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. But that is below both the five-year average of 2.7 percent and the 15-year average of 2.6 percent.
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. currency.
“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.”