The News & What it Means – Surviving Until the Good Times Return

By John DePutter & Dave Milne – December 5, 2019
The News:

“Realized net income of Canadian farmers declined 41.0% from 2017 to $4.2 billion in 2018 on sharply higher costs and a slight increase in receipts.”

Statistics Canada, November 26, 2019
What it means:

Plenty of belt tightening down on the farm.

At first blush, a 41% reduction in realized net farm income – the difference between a farmer’s cash receipts and operating expenses, minus depreciation, plus income in kind – would seem like a massive financial hit, and it is. Farmers all know the reality: income is declining while expenses and debt are climbing.

But all farmers likely also recognized this downturn was coming. Realized net income was lower in 2017, as well, easing 3.6% to $7 billion, and there’s a chance they’ll be in the red for 2019 due to still-rising expenses and continued weak commodity prices.

However, it’s impossible to talk about the current declines without talking about the previous gains. In 2010, net farm income was up almost 17% and then spiked 56.3% in 2011 and 31.7% in 2012. A small reduction (0.7%) followed in 2013 before net farm income rebounded the next three years to bring the number of farm income increases to six in seven years. All the while, land prices were increasing as well, making the farming gig look like a pretty good one.

The bad times are back

The trouble with farming and markets is they’re cyclical. The good times are inevitably followed by bad times, and it’s easy to see the bad times have arrived.

Yes, the value of Canadian farmland and buildings is still increasing – StatsCan reported the average nationwide per acre value of farmland and buildings as of July 1, 2018 at $3,111, up 8.5% from the previous year and the 26th straight year such values have risen – but so too is debt. In fact, collective nationwide farm debt cleared the $100 billion mark for the first time in 2018 and the long-term trend suggests it will continue to creep higher in 2019.

On the other side of the border, there’s been plenty of media hype about the darkening picture for U.S. producers, with the number of Chapter 12 bankruptcy filings in the 12-month period ending in September up 24% from the previous year to 580, according to the American Farm Bureau. With the uptick in expenses, this year’s poor planting/harvest weather and the added pressure of the now-concluded CN Rail strike there’s lots of pain on Canadian farms too, and some operations may be going out of business as well.

The good times will return – eventually

Certainly, the balance sheets of Canadian producers are weakening. But as Farm Credit Canada analysts said in September, the sector remains in a “financially robust position with adequate liquidity and has a strong solvency position.”

The trick for Canadian farmers now is to weather the current storm until the good times return again. In the meantime, producers will need to keep a close eye on expenses and find ways to deal with lower returns.

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