Weak dollar, cheap oil expected to boost farm income

Thursday, February 18, 2016

by JIM ALGIE

The good news pretty much outweighs bad news in Agriculture and Agri-Food Canada’s 2016 outlook released in Ottawa, Friday, although Ontario results appear to lag the western provinces.

First, the bad news: economists with the federal agriculture department expect continued world commodity weakness through 2016. The good news is that Canadian dollar weakness and relatively low cost petroleum fuel pretty much shield Canadian farmers from the impact of lower world prices for most of what they grow. Longer term, Agriculture Canada expects growing world demand for food through economic and population growth to contribute to a positive outlook for Canadian agriculture, farm economics analysis director Rodney Myer said.

Myer released his agency’s 25-page analysis of “very positive” financial performance data for both 2015 and 2016 and fielded reporters’ questions in a conference call, Friday. The report predicts another record for net cash farm income at $15 billion in 2015, up about six per cent from the previous record set in 2014.

The outlook report includes breakouts for individual provinces. Data for Ontario shows a net cash income decline for 2015, likely the result of lower hog prices. The Ontario appendix estimates net cash income of $2.5 billion in 2015, a seven per cent decrease from 2014; but still up about four per cent from the 2010 to 2014 average. The Ontario report forecasts 2016 net cash income for Ontario of $2.06 billion a further decline of about 18 per cent.

Even so, the balance sheets of Canadian farm businesses remain strong with assets growing faster than liabilities, the report says. Although commodity price weakness appeared in 2015 and is expected to continue this year, lower costs for fuel and a favourable currency exchange rate are “expected to provide considerable support to farm cash receipts” in 2016, Myer told reporters.

The Agriculture Canada forecast predicts a “modest decline” in net farm income during 2016 to about $13.6 billion. That’s down about nine per cent from 2015 but still above the $11.9 billion average for 2010 to 2014.

“Fundamentals in world commodity markets deteriorated considerably in 2015 driven by a stronger supply of most major commodities,” Myer said. “Prices in U.S. dollars for most commodities and beef, pork and milk weakened over the course of 2015 and are expected to register modest declines in 2016,” he said.

“In Canada, producers have been largely insulated from this weakness in world commodity markets as the Canadian dollar has declined and lower crude oil prices have translated into lower machinery fuel and heating fuel expenses,” Myer said.

The Canadian dollar has declined from an average value in U.S. currency of 91 cents to 77 cents in 2015. Myer’s report forecasts a 2016 rate of about 75 cents and should provide continued support to Canadian agriculture which sells most of its commodities on markets priced in U.S. currency.

The bench mark price for West Texas crude oil fell from $100 in the summer of 2014 to an average of $49.88 during 2015, saving Canadian farmers about $500 million. 2015 was also a good growing year for Canadian farmers despite concern about drought in some western regions, Myer said.

“Timely, late summer rainfall” helped rejuvenate damaged crops and led to principal field crop production of 83.9 million tonnes, the second highest on record, he said. As a result, field crop receipts of $30.7 billion contributed a two per cent increase in cash receipts for farmers.

Livestock farmers contributed $26.2 billion in receipts and cattle farmers had a particularly good year, Myer said. Despite some weakening in cattle prices during 2015, receipts from cattle sales contributed a 14 per cent increase in farm income. In 2016, cattle receipts are expected to weaken further as “the effects of breeding herd expansion over the past two years become apparent through higher cattle supplies.”

Hog receipts showed a 20 per cent decline in 2015 as prices softened because of larger world supplies, particularly in the United States where farmers have essentially recovered from the impact of the PED virus. The 2016 forecast shows a one per cent drop in cash receipts from hogs.

As a result of recent years of prosperity, government program payments to farmers have also declined. The report projects 2015 receipts from program payments at about $2.1 billion, a one per cent decline from 2014. Total program payments for 2016 are expected to rise by about 18 per cent mainly because of higher payments to cover losses among hog farmers and in drought-affected areas of Western Canada.

The rising value of farm assets, notably land, has contributed significantly to increasing net worth for Canadian farms. The 2016 outlook report estimates net worth of $2.6 million for the average Canadian farm.

High farm income and relatively low borrowing costs has help support increasing prices for farm land in recent years. The outlook report predicts total debt-to-asset-value ratio of 17 per cent for 2016 continuing a decline over the past 10 years. A chart annexed to the report estimates average liabilities for Canadian farms at $538,868, up four per cent over 2014 and 16 per cent over the last five years.

However, Myer said the increased value of farm assets more than makes up for increased debt.

“Farm assets are going up more quickly than farm debt,” Myer said. “The overall net worth of Canadian producers is on the rise,” he said. BF