Canadian farm liquidity may have softened in 2019, but producers generally remain well positioned regardless, according to Farm Credit Canada.
In a website post Tuesday, FCC ag economist Isabelle Nkapnang Djossi noted the current ratio of Canadian agriculture - the ability of an enterprise to cover its short-term (current) liability with current assets (i.e. its liquidity) - declined to 2.20, the lowest since 2.11 in 2006 but well above a 20-year low of 1.93.
Generally, a current ratio above 1.5 is considered healthy. More specifically, a healthy current ratio depends on the type of operation and payment frequency.
“For instance, we expect a grains and oilseeds farm with a single harvest per year to have a higher current ratio than a dairy farm that produces milk throughout the year,” Nkapnang Djossi wrote. “Although the current ratio for Canadian agriculture declined, its aggregate level remains healthy.”
Meanwhile, the current assets of Canadian farms stayed stable, decreasing by only 0.2% in 2019 – a stagnation attributed to a 1.5% decline in inventories stemming from a 9% decline in the value of oilseeds and an estimated 3 million acres left unharvested in the wake of last fall’s poor Prairie weather.
On the other hand, current liabilities grew nearly 5% in 2019 from tighter cash flow and higher input costs, which has increased the demand for short-term financing for production inputs.
“Cash is king,” Nkapnang Djossi said. “Producers need to continue to monitor their balance sheets and ensure that they have sufficient cash available to deal with liquidity challenges.”Click here to see more...