Credit, as agriculture’s primary source of capital, is both essential to operate or grow a farm business and is financially risky. Despite the increased risk to the sector that goes along with more debt, a number of factors have mitigated that risk. They’ve helped to keep Canadian agriculture financially healthy.
Borrowing costs stayed low
As debt climbed, the costs to businesses of borrowing – i.e., interest rates – steadily declined in 2016. That was a big reason producers maintained the ability to repay debt, because overall farm income, the basis of debt repayment capacity, didn’t really grow in 2016. . Farm operating expenses declined 1% on average in 2016. Slightly higher revenues and lower expenses resulted in an estimated 4.6% increase in net cash income.
A strong balance sheet also matters. Across the country, farmland values climbed at an average rate of 7.9% in 2016. Overall farm asset values (including buildings, quota, equipment, etc.) likely grew slower than farmland values. The combination of a growth in debt and a slower pace of increase in farm asset values will raise the sector’s overall debt-to-asset ratio which isn’t necessarily a good news story. A low ratio gives you flexibility to extend the repayment period on existing debt when income is tighter, or borrow more money if an opportunity shows up.
But, as we pointed out in our March Financial Fitness series, Canada’s farm debt-to-asset ratio remains favourable compared to historical averages. Further, AAFC expects net cash income in 2017 to be the .
How do you protect your financial health?
Run different scenarios to evaluate your financial position. Expect interest rates to increase, albeit at a slow pace, especially if the Canadian economy becomes healthier and interest rates in the U.S. continue to move upward. That will pressure debt repayment capacity because, while we project farm income to remain strong, it likely won’t increase at the pace we saw over the last ten years. With lower growth in revenues, working capital will also be pressured – and that’s your first line of defense when profit margins tighten.
We’ll provide our revenue projections for different sectors in this blog over the course of the next two weeks. The outlook for Canadian agriculture remains positive. It’s a great time to ensure your financial planning brings you success now and into the future.