Canadian farm debt is on the rise – is that cause for worry?
Canadian producers have recently taken on more debt. This is, in part, due to the farmland values and the overall intensive capitalization of agriculture. Both increased recently. Historically low interest rates have also pushed up debt levels. That may sound worrying but, at least for the moment, there’s no cause for alarm.
That’s the overall message of our latest report, FCC Ag Economics’ Outlook for Farm Assets and Debt 2017-18, released today.
The sector has been financially stable for years and, thanks to rising net cash income, that should continue into 2018. We expect increases in overall debt and their accompanying interest payments, but the sector is well-positioned to handle those. For one thing, while both debt and payments are likely to become higher over the next year, their growth will be gradual enough to allow producers to absorb the extra costs.
Farm debt highly correlated with farmland values
Farm debt has risen in recent years, and it’s largely the result of farmers buying more farm land.
The low-interest environment of the past 15 years, along with the strong farm cash receipts that boosted income, pushed farmers to buy more land. All that activity drove up the value of farmland. In fact, farmland gained so much value relative to all other farm assets, it totaled roughly 70% of all farm assets in 2016.
Since land as a share of farm assets has been rising, so has farm debt. Total liabilities in Canadian agriculture reached $90.8 billion in 2016. (NOTE: This is about $5 billion less than the value we provided earlier, which included the additional household portion of farm debt).
Since 2012, the annual growth of farmland values has been increasing faster than the annual growth of farm debt outstanding. 2017 may be the year farm debt growth takes the lead. If so, it’ll be because of softening farm cash receipts and the addition of higher borrowing costs.
The recent Bank of Canada interest rate hikes will affect the value of farm debt outstanding, driving it up. But it takes a back seat to net cash income, the factor that will have a larger impact – and an impact that is good news for debt repayment.
Rising net cash income matters more than interest rates
Canadian agriculture has been booming over the past 10 years, thanks to a $19 billion increase in farm cash receipts. With those revenues, and interest rates at historical lows, producers borrowed more to expand their operations. We expect net cash income to remain healthy over the outlook period, meaning producers will be able to repay the debt they do incur.
Canadian ag is in a good position to weather the current interest rate climate.
For more on Canadian farm debt and assets, see FCC Ag Economics’ Outlook for Farm Assets and Debt 2017-18.
Amy joined the FCC Ag Economics team in 2017 to monitor agricultural trends and identify opportunities and challenges in the sector. Amy grew up on a mixed farm in Saskatchewan and continues to support the family operation. She holds a Master in Applied Economics and Management from Cornell University and a Bachelor in Agricultural Economics from the University of Saskatchewan.