Balance sheet of agriculture - debt increased faster than equity in 2019
The 2019 balance sheet of Canadian agriculture reveals the industry's financial health heading into the COVID-19 pandemic. The ability to cover short-term liabilities with cash or liquid assets declined in 2019, which suggests a weaker first line of defence for farms facing financial challenges.
The balance sheet's overall strength is also measured by the degree of financial leverage in the industry. The debt-to-equity or leverage ratio measures the total amount of debt in Canadian agriculture relative to total equity. This equation is important because it measures how much of the operation is financed by creditors compared to the farm. It also assesses an operation’s ability to access capital and address operating environment challenges.
Debt-to-equity in Canadian agriculture weaker
In 2019, farm debt increased by 8.4% to $109.2 billion, while farm equity increased $18.7 billion or 3.6% to $546 billion. As a result, the debt-to-equity position increased to 0.2, implying that 16.7% of assets in Canadian agriculture is debt-financed.
Operations expanding or making investments often find themselves with a ratio larger than this on their balance sheet. The nature of the investments also results in differences across sectors. Portfolio data from FCC reveals that the median grain and oilseed farm operation had a leverage ratio of around 0.8 in 2019. The median debt-to-equity ratio was about 1.1 for poultry operations.
This is the fifth year in the row that the debt-to-equity ratio is trending higher, and it’s the weakest the ratio has been since 2010. Despite the higher leverage, Canadian agriculture remains in a strong position to weather potential challenges in 2020 as farm equity is five times larger than the debt.
What we expect moving forward
The debt-to-equity of Canadian agriculture is expected to soften further in 2020. Lower livestock prices, labour challenges and demand disruptions are expected to result in weaker farm revenues and higher operating costs. As a result, the demand for operating debt will remain strong.
Conversely, lower farm revenues are expected to slow the appreciation in farmland values and overall farm equity. FCC will release its mid-year farmland value assessment in mid-September – so stay tuned.
Overall, Canadian farm operations have access to the financing they require to weather current industry disruptions. Work with your lender and accountant to determine the suggested ratios for your specific industry and be sure to understand them according to the strategy and risks facing your operation.
Isabelle joined FCC in 2018 as a Product Training and Support Analyst on the AgExpert team. Her prior experience includes working at the Canadian government’s Indian Residential School Secretariat and managing research projects in the banana and plantain industry in Central and West Africa. Isabelle holds PMP certification from the Project Management Institute, an MPA from the University of Regina and a PhD in Rural Economics from Belgium’s UCLouvain.