Sharper pencils urged as farm cash receipts reveal 3 key trends
Statistics Canada just released farm cash receipts numbers for the second and third quarters of 2018. Crop receipts in the first nine months of 2018 were 1.1 percent lower than for the same months in 2017. Livestock receipts were lower as well – $18.4 billion versus $18.6 billion in 2017, a decline of 1.0%.
Cash receipts suggest three important trends to monitor.
1. U.S.-China trade tensions produce no clear winners
Tariffs on U.S. pork and soybean exports to China lowered U.S. commodity prices, and ultimately lowered the price paid to Canadian producers. Could additional Canadian sales in the Chinese market compensate producers for the price declines? The evidence is mixed for soybeans. Receipts climbed 16.1% in the third quarter relative to a year ago, but this is also the result of a very strong 2017 crop. However, hog receipts dropped by 17.8% in the third quarter of 2018 versus 2017.
Trade tensions led buyers in China to turn towards other products available from Canadian exporters, such as canola or peas. While opening further sale opportunities, these tensions do not seem to have had a clear positive outcome – pea receipts fell 31.5% and canola receipts were down 7.7% in the first nine months of 2018 versus 2017.
2. Farm financial risks are rising
The Bank of Canada raised its key interest rate three times in 2018, following two increases in the second half of 2017. Higher borrowing costs take time to be fully passed through; as loans come due for renewal, businesses face higher interest payments. Higher income could offset higher borrowing costs, but weaker cash receipts are likely to soften the liquidity position of operations and pressure their ability to meet debt obligations.
Follow these useful risk management strategies from the University of Illinois: re-examine planned capital investments as well as the tax implications of forgoing investment; prepare cash flow projections for 2019 using various production scenarios, and plan for higher input costs and softer commodity prices. This will give an idea of possible future financial stress.
3. Farmland values increases should moderate
Cash receipts and interest rates are the two most important drivers of farmland values. Provinces that recorded the strongest increases in farmland values for 2017 (Saskatchewan, Ontario, Quebec, and Nova Scotia) almost all recorded a decline in crop receipts in the first nine months of 2018. Ontario is the notable exception with an increase of 6.9%. Crop receipts also climbed in British Columbia, Manitoba, New Brunswick and Newfoundland and Labrador, suggesting that farmland values could increase overall in 2018 – though likely at a significantly slower pace.
Canadian farm cash receipts in the first nine months of 2018 suggest the farming sector remains healthy, but income pressures call for stringent execution of risk management strategies in 2019.
J.P. is the Vice-President and Chief Agricultural Economist at Farm Credit Canada. Prior to joining FCC in 2010, J.P. was a professor of agricultural economics at North Carolina State University and Laval University. He also held the Canada Research Chair in Agri-Industries and International Trade at Laval. J.P. is Past-President of the Canadian Agricultural Economics Society. He obtained his PhD in economics from Iowa State University in 1999.