The News & What it Means – Falling Returns, Rising Expenses Put Squeeze on Farm Income

By John DePutter & Dave Milne – December 5, 2018

 

The news:

“According to a revised Statistics Canada farm income report on Nov. 27, Canadian realized net farm income was down 3.6% to $7 billion last year.”

– Syngenta website article, Nov. 27, 2018

 

What it means:

Increasingly tough times down on the farm.

 

Not that this is any big surprise. When realized net income of Canadian farmers bolted up almost 32% in 2012, following a massive gain of 56.3% in 2011, we all knew this couldn’t last. As commodity markets swing from high priced to low priced and back again, farm income follows the same tack.

 

But weakening commodity prices are just one part of an increasingly worrying situation.

 

Farm debt rising

Back in those big income years, farmers were big borrowers, too. Flush with profits and encouraged by historically low interest rates, some producers sought out more land or upgraded machinery. By the end of 2017, Canadian farmers collectively owed $98.2 billion, up 6.1% from the previous year and making it all but certain that total farm debt will push past the $100 billion mark by the end of this year.

 

Since 2010, Canadian farm debt has soared more than $33 billion or 51%, and has more than doubled from just 2004.

 

 

Meanwhile, with debt increasing, interest rates are rising as well. Thanks to the latest ¼ point increase in late October, the Bank of Canada’s key overnight lending rate now sits at 1.75%, the highest it’s been in almost a decade, dating back to December 2008. What’s more, additional rate hikes are in the cards, with the Bank of Canada Governor Stephen Poloz suggesting a more neutral rate would ideally be somewhere between 2.5 and 3.5%.

 

Combined with moderating grain, oilseed and livestock prices, those higher borrowing rates are beginning to bite. According to StatsCan, nationwide farm interest rate expenses were up 6.8% in 2017 – an increase it directly attributed to rising debt levels.

 

Fuel prices were also up sharply this past year (+10%), contributing to an overall 3% rise in farm operating expenses, the seventh straight annual increase.

 

It goes without saying that rising expenses and diminishing returns are a bad combination for any business. Ongoing global trade battles, which have sharply reduced prices for soybeans and some pulses, further add to the deteriorating financial outlook for Canadian farmers with exposure to affected crops.

 

Farmland values at risk?

The biggest asset for producers, Canadian farmland values showed massive annual increases during the years when farm income was soaring, adding to the good times in rural Canada. But with farm incomes now being squeezed and interest rates rising, one has to wonder whether that uptrend can continue.

 

According to a Farm Credit Canada farmland values report released last spring, the average value of Canadian farmland increased 8.4% in 2017, following gains of 7.9% in 2016 and 10.1% in 2015.

 

Farm Credit’s farmland values report for 2018 won’t be released until April, but the current climate suggests it may not be a question of if farmland values begin to sputter, but when.

 

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