What’s ahead for 2018 balance sheets and income statements?
As interest rates slowly rise from their historic lows, we want to help pump up your farm financial fitness. Throughout March, we'll be sharing posts to help put your 2018 farm financials into the larger Canadian context and explain key financial tools as you go. Check back weekly to see where Canadian ag is going and how you can stay ahead.
Let’s dive into the difference between Canadian farm income statements and balance sheets in 2018.
Canada’s farm economy picked up again in 2017: what’s ahead for farm income statements?
We estimate Canadian farm cash receipts totaled CA$62.3 billion in 2017. That’s a 3.3% increase, despite a drop of roughly 1% in year-over-year average commodity prices. But although total farm operating expenses are estimated to have also climbed in the same period, we estimate the sector’s 2017 net cash income (revenues – operating expenses) at CA$16.3 billion, or a very healthy 6% above the record-high profitability reached in 2016.
Looking ahead, Canadian agriculture revenues should be stable in 2018, growing 0.5% from the estimated 2017 level. Stable farm revenues and small increases to expenses yield a bottom line in 2018 that we expect will be roughly equal to the 2016-2017 average of $15.8 billion.
What this means for you
Driving 2018 revenues will be continued strength in global demand for Canadian exports and a Canadian dollar remaining below the US$0.80 threshold levels.
However, profitability will face some pressure. Total operating expenses are projected up 2% to CA$46.7 billion in 2018, although they’re not likely to increase quickly. Oil prices are expected to average around US$60/barrel and the prices of key fertilizers aren’t projected to climb significantly.
As well, the global supply of agricultural commodities will likely climb faster than demand for many of the commodities Canada produces. But knowing this can help you anticipate the changes you may see in your income statement and identify efficiency gains needed to face revenues levelling out in 2018.
Overall asset values, debt expected to increase in 2018
Land is usually the largest farm asset.
Our analysis suggests that the value of land and buildings climbed in 2017, perhaps as much as 5 - 6%. We project a 2 - 3% average increase in farmland values in Canada in 2018, in line with average annual productivity gains in crops and livestock. This would continue Canadian land values’ upward trend, although we expect it climbed at a slower pace than in previous years.
These projections, however, are uncertain until FCC publishes the actual movement in average farmland values on April 23. The ambiguity arises because of the lag between the date the Bank of Canada changes rates and the time when those changes are fully reflected in the economy. Even though the Bank increased rates twice in 2017, both increases occurred in the last half of the year. The timing may not have limited land purchases in that period. 2018 may prove to be a different story.
That anticipated growth in farm asset values in 2017 and 2018 helped push FCC’s December 2017 debt projections slightly upward for both years. We expect soon-to-be-released data will show farm debt outstanding grew at least 6% in 2017. We expect it to grow 4 - 5% in 2018, a slowing of the growth rate due to higher borrowing costs.
Debt likely grew faster than asset values in 2017 – and it should continue to do so in 2018. However, net worth (owners’ equity, or assets - liabilities) across Canadian agriculture is still expected to climb. That’s generally good news—and it speaks to the sector’s resiliency and optimism. Canadian farm equity has continued to grow despite softer commodity prices, thanks in part to the buffering effect of the dollar on overall revenues.
I say this with one caution: The lower total net income expected across Canadian agriculture in 2018, combined with the overall sector’s growing equity, suggests we’ll see a lower rate of return on equity in 2018. Rising interest rates and declining income can impact the growth rate of equity, especially for farms that are highly leveraged.
Help your business stay profitable in the current environment of stable farm revenues and rising interest rates.
Are you comfortable using financial statements to better manage your operation? A good place to start is your accountant or an FCC Relationship Manager.
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.
In this series
As farm profit margins tighten financial resilience will be important. What can we learn from the downturn in the U.S. farm sector?
What are the financial tools to measure the capacity of farming operations to face higher interest rates?
As 2018 interest rates are expected to increase, are fixed or variable rate loans your best option?