Some cracks may be appearing, but Canadian farmers for the most part remain financially healthy, according to Farm Credit Canada.
In a website commentary posted Tuesday, FCC agricultural economist Isabelle Nkapnang Djossi noted the many challenges farmers faced in 2018, including softer commodity prices, higher input costs, trade tensions and increasing interest rates. But while farm balance sheets may have weakened, Djossi maintained the ag sector remains in a “financially robust position with adequate liquidity and has a strong solvency position.”
For example, farm assets increased 4.2% to $623 billion in 2018 due to an appreciation of long-term assets. Appreciation in farm real estate continued to support the financial health of Canadian agriculture, increasing 5.7% on the year. Investments in machinery and other long-term assets also contributed to growth in total farm assets, Djossi said.
On the other hand, weather-related challenges and trade restrictions negatively impacted producer profitability and the value of farm inventories. Current assets declined 3% ($1.2 billion) in 2018 primarily due to a $1.1 billion decline in inventories.
But while the industry current ratio slipped to 2.28 in 2018 from 2.55 a year earlier, financial literature suggests a ratio higher than 1.5 is still healthy. (The current ratio measures a business' ability to meet financial obligations as they come due, without disrupting normal operations).
Total Canadian farm debt expanded by over 8% in 2018, as producers continued to make investments in land, buildings, and machinery. Lower commodity prices also increased the demand for operating loans and short-term financing needs. With farm debt increasing at nearly twice the rate of assets, the debt-to-asset ratio softened to 0.16. Regardless, Djossi said the degree of financial leverage in Canadian agriculture remains in line with the 15-year average at 0.16.
Similarly, Djossi said return on assets (ROA) for Canadian ag has fallen to 1.7%, down from the 15-year average of 2.5. However, that still compares favourably to the U.S., where the rate of return on farm assets is expected to drop to 1.3% in 2019.
Still, Djossi warned that Canadian producers will need to keep a close eye on their bottom lines amid challenging times and rising financial risks.
“It will be important for Canadian producers to continue monitoring their balance sheets and develop strategies to deal with pressured profitability and liquidity challenges,” she wrote.
Source : Syngenta