In 2015, total liabilities on Canadian farms increased at a faster pace than asset values for the first time in more than five years. Farm debt increased 8.9 per cent to $86.8 billion, while asset appreciation slowed to 6.2 per cent. This trend was consistent across all provinces.
Statistics Canada’s latest Balance Sheet of the Agricultural Sector signals a softening in an otherwise very healthy financial picture for Canadian farms. When evaluating the overall health of Canadian agriculture, we like to use three popular ratios — liquidity, solvency and profitability. These financial measures are also useful for benchmarking individual operations.
- Liquidity. This indicates Canadian agriculture’s ability to meet financial obligations. A widely accepted ratio is the current ratio. It compares current assets such as cash, accounts receivable and inventory to current liabilities. In 2015, the current ratio decreased from 263 per cent to 238 per cent — its lowest point since 2009. The most recent five-year average is 264 per cent. This means Canadian farms are in a weaker position to meet short-term financial commitments.
- Solvency. The debt-to-asset ratio indicates whether a farm has sufficient assets to cover all liabilities. In 2015, total farm debt increased faster than total farm assets. As a result, the debt-to-asset ratio increased, changing direction from the past six years. Despite the small increase, the debt-to-asset ratio remains historically low at 15.5 per cent, compared to the previous five-year average of 15.9 per cent and the 10-year average of 16.5 per cent.
- Profitability. Return on assets indicates how profitable a farm is relative to its total assets. This is calculated by comparing net income to total farm assets. In 2015, record net income resulted in an increase in the profitability ratio to 2.3 per cent from 2 per cent in 2014; however, this is well below the 3.9 per cent in 2013. The five-year average is 2.7 per cent. Canadian farms appear to be achieving a slightly lower return on the value of their assets.
Overall, these ratios tell me that Canadian agriculture is strong, but liabilities are currently increasing faster than asset values. This softens overall farm health and signals a bit of caution moving forward.
How does your operation stack up to the national trends and figures? Explore the numbers further with the Outlook for Farm Assets and Debt 2016-17 report, available online at www.fcc.ca/FarmAssetsReport, from the FCC Ag Economist team.