I recently participated in a conference organized by the Institute for theat the University of Guelph, titled “Are We Heading for Another Farm Financial Crisis?”
Let me provide my answer right away: No. We’re not. Agriculture as a sector is healthy.
A primary concern looking at farm financials is the growth in farm debt. Between 2005 and 2014, Canada’s overall farm debt grew 68 per cent to more than $84 billion.
The concerns around debt aren’t new in Canada. Discussions of Canadian consumer debt - totaling more than $1.8-trillion as of April 1 - have sounded alarm bells.
1. Interest rates will eventually climb
2. Debt reached new heights at a time when Canada’s economy is wobbling
3. The ratio of consumer debt to disposable income set a new record high at the end of 2014
4. The housing market is significantly overvalued
Of course interest rates are bound to increase… at some point. No one knows exactly when short-term and long-term interest rates will start to climb. Consumers, agricultural producers and businesses are well advised to test their ability to service their debt under a scenario of higher interest rates. That’s just smart.
But that’s where meaningful comparisons between consumer and farm debt end.
Canadian farm debt climbed at a time when the overall farm economy boomed. Net cash income at the farm level increased from $6.8 billion in 2005 to $13.9 billion in 2014. Early indications suggest net cash income is likely to be over $13 billion in 2015, pushed by strong crop receipts and livestock prices.
It’s a strong ag outlook… that’s in stark contrast with the soft Canadian economy.
The ratio of farm debt to net cash income has followed a totally different pattern than the ratio of consumer debt to disposable income. The farm-debt ratio has been on a declining trend since 2006, suggesting an improvement in the ability of producers to meet their debt obligations.
Farm asset values have also climbed in recent years, driven by rapid increases in farmland values. While risks exist in some Canadian regions where farmland is highly priced and where prices have climbed rapidly recently, overall market values of farmland seem in line with the fundamentals of the marketplace.
While I believe the underlying drivers of the farm sector paint a rather positive - if cautionary - picture of the farm economy, every producer must look at their own situation to determine their ability to pay down debt. Sound risk management strategies are critical to continue growing.
J.P. Gervais, Chief Agricultural Economist