by BETTER FARMING STAFF
Canada’s agriculture sector is in good shape and able to withstand financial shocks, according to a major industry measure released Tuesday by Statistics Canada.
The StatsCan balance sheet of the agricultural sector to Dec. 31, 2014 indicates national farm equity at the end of 2014 was up more than nine per cent compared to the end of 2013, reaching $444.2 billion.
The value of farm assets also rose 8.9 per cent nationally in the same time period to $524.8 billion, “primarily as a result of continued gains in the value of farmland,” the report said, calculating the farmland value gain to be more than 10 per cent.
In that time period as well, farm liabilities increased 6.8 per cent to $79.7 billion. The report said the national debt-to-asset ratio in 2014 was 15.2 per cent — the lowest recorded since 1997.
That low debt-to-asset ratio “means that it (the sector) can absorb some shocks because liabilities, or debt did not go up all that much,” says Alfons Weersink, a professor in the University of Guelph department of food, agricultural and resource economics. The ag sector is in “a fairly strong financial position.”
However, Weersink cautions that the numbers were an aggregate of everyone in the sector and not everyone is equally well off. “Not only will there be differences across farm types — let’s say dairy to a corn soybean farmer — but there will be differences in location, and there will be differences due to size, and so it hides some differences — the heterogeneity within the sector that is continuing to grow.
“There’s just bigger differences between farmers,” he says, explaining why the sector is diversifying at a greater rate. “We’ve got some smaller niche farmers, bigger commodity farmers - it’s just a more heterogeneous sector and so the financial position will reflect that.”
Weersink and the report both credited most of the growth in asset values to the increase in farmland values. “Farmland has continued to increase in value despite the drop in grain and oilseed prices,” Weersink says. “The rate of increase has started to slow but it still continues to rise in most parts of the country.”
The report notes that a $2.2 billion decrease in the value of crop inventories in 2014 moderated the farm asset increase. It attributed the decrease to softening prices and production which “returned to more normal levels after the bumper crop of 2013.
Ontario numbers are performing just under the national numbers in a similar growth trend: equity ($124.1 billion) increased 8.7 per cent at the end of 2014 compared to a year before; assets ($145.5 billion) rose 8.3 per cent year to year; and total liabilities ($21.4 billion) increased 6.1 per cent.
The numbers are a year old, but Weersink says there are indications the agriculture sector continues to be strong. He notes that the financial position of Farm Credit Canada’s clientele is strong. “They don’t have many people in tough circumstances right now. But it definitely could change with the continued drop in commodity prices, if interest rates ever rose.” BF
Comments
I recall a young FCC Employee telling me some of their clients could not survive a 2 percent increase in interest rates. Seems very risky to an old guy like me, but maybe i m just old.
When farmland is in a bubble, and artificially grows huge percentages, it will have an eventual tendency to return to its mean, normal, deflated price.
Even though farmers only partially leveraged up on the bubbling land prices, when the land prices fall, those farmers (and their bankers) will be left high & dry with their debt.
This happened in the 10 or so years before the 1929 stock market crash in 1929, and in some ways created much of the gunpowder that exploded in Oct 1929.
The same thing happened in the 1970's which exploded in the early 1980's, bankrupting many farmers, and killing the predecessor of Farm Credit Canada (the farm lender of today).
Today, FCC has the largest ag. loan portfolio, $20 Billion, an ag. sector portfolio 4 times bigger than FCC's nearest competitor. About 80% of those loans have floating interest rates, FCC's infamous Farm Line Of Credit ("FLOC").
With the terrible (and worsening) state of Canada's economy, the Bank of Canada will likely lower interest rates again soon.
However, banks (and the Canadian government) get their money from the bond market, not the Bank of Canada. There is a limited supply of Canadian bonds, and they will have to pay 30% more to buy a US bond. Unless the US Federal Reserve does "QE Again", bond interest rates are likely rising, significantly and rapidly.
FCC borrows from the Canadian government at the same rate that Canada borrows. With the new Liberal government planning on running a deficit, they are going to be borrowing lots of $, likely more than they anticipated. With the bad to worse Canadian economy, the lowering of BofC rates (causing Canadian and foreign funds to leave Canada), and the foreign exchange losses on the Canadian:US exchange rate, Canada's credit rating may soon be brought down a peg or two; all of which will make the residential, commercial, and farm interest rates in Canada likely rise far faster and higher than in the USA.
FCC loans will soon reflect those rising interest rates. If a farmer needs to refinance, it will be at significantly higher rates.
FCC said they stress tested their loan portfolio.
FCC's "stress test" of 200 basis points (ie. 2%/yr interest rate increase) is not much of a stress test. Canadian bank Prime Lending Rate (ie. the rate charged their very best customers) averaged 7.58 percent from 1960 until 2015, reaching an all time high of 22.75 percent in August of 1981 and a record low of 2.25 percent in April of 2009. As of Dec 2015, it's 2.7%, so a 200 basis point "stress test" is calculated at 4.85%, a fraction of the average interest rate paid from 1960 - 2015.
I call FCC the "Farm Debt Trafficker". Watch out farmers, because FCC will likely take you down with them.
However, FCC seems just as confident now as what their predecessor was in the early 1980's, just before they went bankrupt.
We'll soon see who is right.
Glenn Black
Small Flock Poultry Farmers of Canada
high equity will mitigate risk because it offers the farmer decision options when things don't go as planned . Conversion of that equity into cash will cover losses by both borrower & creditor.
It is Industry profits/cashflow service the payments on $80 billion of debt not equity . Based on past history , $80B @ 3 % interest is $2.4B & is payable by the ag sector. Given Jan 2016's income & expenses , I am not sure $80B @ 6 % ( $4.8B of interest costs) is payable. A silver lining for the 2016 is that fuel costs will be way down for the ag sector & that should cushion the blow if interest rates rise
In response to "High Equity & Farm Debt" http://betterfarming.com/comment/17866#comment-17866
I agree with most of what you say, except "Conversion of that equity into cash will cover losses by both borrower & creditor."
While true on the face of it, it assumes there is a willing buyer. Many farmers bought the neighbour's farm in a scramble before someone else snapped it up, as next year that farm land was a "sure thing" to be worth even more.
However, once farm land prices start to drop, as they did after the bursting of the last farmland price bubble in the early 1980's, nobody will be rushing to buy.
In addition, nobody will be rushing in to loan. FCC stole a lot of business from the Canadians banks when times were good. Those same banks will likely gloat over the troubles FCC created for themselves once the sea change occurs.
If a farmer starts eating their seed corn during a long hard winter, what's left to plant in the Spring?
So too with "Conversion of that equity into cash will cover losses by both borrower & creditor." That means selling the farm's core assets, as they are likely tied together by hypothecation (ie. core assets are pledged as security for non-core assets).
That means the cashing out of that farmer, and another farm sits fallow as a bank's seized asset that can't be sold without "mark to market", and exposing the bank's loss on their next financial report; so it sits and languishes as a "Ghost Farm".
Real estate is one of the most ill-liquid investments you can make. Depreciating and/or deflating real estate is the worst (eg. try selling a house in radiated Fukushima Japan). The only investment that is even less liquid is trying to sell the shares of a corporation that just went bankrupt; few people want to buy.
If an over-extended farmer can't find a buyer, and can't find a lender, and can't find someone to re-finance his over-leveraged farm, he is stuck. Banks seizing the farm's assets is the next stop.
That's when the jackels and carpetbaggers come in to feed on the rotting carcass. Unfortunately, they're worse than a pack of coyotes, and most farmers have personally seen how bad coyotes are.
Glenn Black
Small Flock Poultry Farmers of Canada
Sure, my equity to debt ratio has gone up, thanks largely to "a rising tide lifts all boats" spending spree by the supply managed sector, but my increased equity, like that of every other farmer, was unearned and doesn't help my funded debt repayment ability at all.
Therefore, the first sentence of this story has things entirely-backwards - an increased equity does NOTHING to mitigate a financial shock, a truth known all-too-well by every banker.
Stephen Thompson, Clinton ON
Steve
The rapid rise of farm prices over the last few years, a great deal of it financed by some bank, clearly shows that many bankers are not looking at the cash flow when lending. They see more assets/equity and are pouring gas on a roaring fire by lending more money.
I agree that a lot of farm balance sheets will look a lot better with the increased land values priced in, but the return on that equity, and the cash produced after taxes and depreciation to pay for new land are the important numbers, especially the marginal return on new investments, and those numbers have to look a lot less rosy on most farms.
John Gillespie
Banking is like any other occupation:
(A) individuals are rewarded by how much they lend
(B) supervisors are rewarded by how much their employees lend.
Everyone hopes to have been promoted to a safer position if/when things collapse - just like in any Ponzi scheme.
Back in the early 1970s, those of us who toiled for FCC (which, at that time, lent ONLY on an income approach to value, thereby nipping stratospheric P/E multiples in the bud) were paid a straight salary, albeit a very-good one, for doing our job. There were no bonuses paid based on how much we lent but it is my understanding that FCC does so now and that practice is deplored by a number of my fellow FCC alumni who, like me, viewed employment at FCC as more of a calling to the priesthood than our personal "get-rich-quick" scheme.
In the same way that, in "The Big Short", two young Florida-based mortgage brokers knew so little about the investment business that they asked "Who's Warren Buffett?", we now have an entire generation of bankers who have never seen a bad loan and who, for their own personal gain, have every reason to "pour gas on a roaring fire" because they've never seen a "fire" and/or if they have, hope to be "out-of-town" when the fire starts.
All of which leads to "The Greater Fool Theory" which asks, "Who is the greater fool, a bank for lending on the basis of 50:1 P/E multiples, or a farmer for borrowing?"
However, the greatest fool is anyone who believes that increasing equity/debt ratios based solely on stratospheric P/E multiples indicates anything except a looming disaster.
Stephen Thompson, Clinton ON
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