Lessons from the 2018 Canadian Balance sheet of Agriculture
Softer commodity prices, higher input costs, trade tensions, and increasing interest rates created headwinds for Canadian agriculture in 2018, weakening the balance sheet of the agricultural sector. But despite weakening financial ratios, the overall industry remains historically healthy.
Reduced cashflows and inventory adjustments led to slowing growth in farm assets
Farm assets increased 4.2% to $623.0 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%. Investments in machinery and other long-term assets also contributed to growth in total farm assets.
Weather related challenges and trade restrictions negatively impacted producer profitability and the value of farm inventories. Current assets declined 3.0% ($1.2 billion) primarily due to a $1.1 billion decline in inventories. This situation has weakened Canadian producers’ ability to meet short-term debt obligations as the current ratio went from 2.55 in 2017 to 2.28 in 2018. Regardless of the drop, liquidities are strong.
Debt increased at a faster rate than assets
Total 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. The degree of financial leverage in Canadian agriculture remains in line with the 15-year average at 0.16.
In 2018, farm operating expenses (after rebates) increased 6.5% to $50.6 billion—the largest percentage increase since 2012. Higher interest rates are one of the major drivers of this increase.
What does this mean for Canadian agriculture?
Canadian agricultural producers faced many headwinds in 2018. This contributed to weaken the balance sheets of Canadian producers. But the sector remains in a financially robust position with adequate liquidity and has a strong solvency position. And despite tighter profit margins across crop and livestock sectors, the return on assets is at 1.7%, lower than the 15-year average of 2.5%.
It will be important for Canadian producers to continue monitoring their balance sheets and develop strategies to deal with pressured profitability and liquidity challenges.
Economist
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.