A 75 cent loonie allows prairie producers to have ‘relatively strong’ balance sheets while U.S. farmers struggle with debt
BRANDON — Feeling OK about your financial position?
Better thank the loonie because without its help, a lot of western Canadian farmers could be in trouble today, says economist Craig Klemmer of Farm Credit Canada.
“Profitability is directly impacted by the value of the Canadian dollar,” said Klemmer during a presentation at Manitoba Ag Days in Brandon.
“It really starts determining why the story lines … are so different in Canada versus the United States.”
While accounts of farm failures and farms in trouble are common south of the line, in Western Canada most farmers are still getting by with break-even returns. The loonie has a lot to do with that.
Back in 2014, at the end of the commodity boom, the loonie stood at about 95 cents of relative value to the American dollar. For 2020, FCC expects the Canadian dollar to average around 75 cents.
That 20-cent difference is huge. Each penny equals about $1 per head for hogs, $13 to $16 per head for cattle, and $5 per acre for crops.
“That’s about $100 per acre in additional revenue that producers in Canada are receiving as compared to the United States,” said Klemmer.
With most crop growers making less than $100 per acre in profits, that loonie-dependent difference is allowing prairie producers to have “relatively strong” balance sheets, while American farmers struggle with debt.
FCC expects interest rates to remain low and restrained for 2020. Crop revenues should remain close to break-even, with expenses slightly increasing.
That means farmers should keep a close watch on their finances.
“It’s going to be really important to ensure you have sufficient working capital,” said Klemmer.
“Cash is still king.”
With profits thin in 2019, the trend of slower increases in farmland values continued.
“I don’t think that’s a bad news story,” said Klemmer, suggesting that land prices have become expensive compared to profitability.
It takes five years of 100 percent of the revenue from a wheat-canola rotation on an average quarter section of Manitoba farmland to pay off that land. A few years ago it was only three to three-and-a-half times yearly revenues.
Low interest rates are helping to keep high-priced land purchases manageable, but the key questions about how interest rates are moving with farm revenue remain.
With FCC expecting interest rates to remain low this year, the loonie to be near 75 cents, and revenues likely flat, more farmland can be paid down.
“That’s going to be a good spot for agriculture, I believe,” said Klemmer.
Generally, this is a pretty sweet spot for Canada’s agricultural economy.”