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Despite rising interest rates, financial strength remains in Canadian ag

Despite rising interest rates, financial strength remains in Canadian ag
Sep 14, 2017
By Kaitlynn Anderson

However, producers may want to avoid making rash decisions 

 

By Kaitlynn Anderson

Staff Reporter

Farms.com

 

The Bank of Canada’s first interest rate hike in seven years should not alarm Canadian producers, according to a recent report released by Farm Credit Canada (FCC).

In fact, Canadian agriculture still remains in a strong financial position. FCC’s Outlook for Farm Assets and Debt 2017-18, published on Tuesday, explains the situation in further detail.

“Interest rates remain historically low and the Canadian dollar has benefited from a strong Canadian economy, making imports from the U.S. a little less expensive,” J.P. Gervais, FCC’s chief agricultural economist, said in an interview with Farms.com.

FCC addresses two important measures of financial strength, liquidity and solvency, in the report.

 

Liquidity

The current ratio (which compares current assets to current liabilities) is one measure of liquidity. This value for Canadian agriculture in 2016 was 2.30, which is close to the 15-year average of 2.39, according to the FCC report.

A current ratio value between 1.5 and 3 shows that “there is enough room to cover the current liabilities while providing flexibility to face unexpected events.”

The ratios do not reflect individual subsectors, such as beef or poultry. Rather, the values are representative of the industry as a whole and therefore “should not be used for benchmarking purposes.”

“The mix of agriculture varies across different regions of the country,” said Gervais. “As a result, it is difficult to make region-to-region comparisons, as the capital requirements can vary significantly based on the type of agriculture.”

Instead, producers should focus on “where a province stands now relative to the historical average,” said Gervais.

Solvency

The debt-to-asset ratio is a measure of solvency, which indicates producers’ “ability to meet long-term debt obligations.”

“The more an operation funds assets with debt rather than equity, the greater its risk of being unable to pay back the amount it owes,” states the report.

This value is vital in agriculture due to the seasonality of cash flows and prices, which are “prone to cyclical behaviour,” according to FCC.

The debt-to-asset ratio increased to 0.15 in 2016, but is still lower than the 15-year average of 0.17, which indicates that farming operations are still flexible in regard to extending existing debt terms and borrowing, according to the report.

The lowest values of this ratio can be found in provinces where there is a high volume of cropping operations (Alberta, Saskatchewan), while higher values can be found in areas where there are more supply-managed operations (Quebec and Atlantic provinces).

“It is important to re-evaluate the business plan on a regular basis and ensure you are making sound investment decisions based on your risk tolerance,” said Gervais.

“My advice would be (for producers) to evaluate and consider different scenarios relative to income and interest rates to understand what type of risk your operation is exposed to,” he said. “Then, (farmers can) decide if it is time to take some risk off the table by locking-in interest rates or hedging.”

Gervais has some final words of advice for Canadian farmers.

“The current environment may create an opportunity to make an investment a little bit earlier than you initially planned, but avoid rash decisions.”


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