Flat revenue, higher expenses squeeze Canadian farmers

Keystone Agricultural Producers president says the trend to higher operating expenses adds to farmers’ risk when revenues are stagnant

KAP president Bill Campbell says farmers face more uncertainty than ever today. Photo: Keystone Agricultural Producers

No matter how you measure it, Canadian and Manitoban 2018 farm income took a big, double-digit, hit in 2018.

The two biggest culprits were flat revenues, in part because of trade restrictions, and higher expenses, including for commercial feed, interest and machinery fuel.

Minto, Manitoba, farmer Bill Campbell, having felt the “squeeze” in his own operation, isn’t surprised.

“I can see a trend that is concerning,” Campbell, president of the Keystone Agricultural Producers (KAP), said. “We are continually paying more expenses and not necessarily generating more revenue as an industry.”

In its May 28 farm income report Statistics Canada says 2018 Canadian and Manitoban farm net cash incomes fell 20.7 and 18.5 per cent to $11.6 billion and $1.46 billion, respectively (see ‘Movers and Shakers’ further down).

For Canadian farmers that’s the biggest percentage drop in net cash income, defined as the difference between farm receipts and farm operating expenses, since 2003, a StatsCan analyst said.

The last time Manitoba’s net cash income fell by more was 2015 (19.6 per cent).

But Canadian and Manitoba farmers have seen worse years.

While 2018 saw the lowest Canadian realized net farm income since 2009, it’s still higher when compared in constant dollars (adjusted for inflation) than most of the 1990s and between 2003 and 2007, the analysis said.

Concerned

Still, Campbell who farmed during tough times, is uneasy.

“I feel more vulnerable now than I did at any point in my farming career because of the high expenses and the geopolitical atmosphere as far as trade goes,” he said. “I aways felt in the ’80s and ’90s that our farm would survive. We had cattle and we had grain and we would self-insure and we have always grown a crop in our particular area. But I’m not as sure that production now will carry you through… where we’re spending more and getting less. I’m more concerned now for the future than at any point in my 63 years of existence.”

Farmers are facing headwinds, but J.P. Gervais, Farm Credit Canada’s chief agricultural economist, remains optimistic about Canadian agriculture long term.

“We are in a downturn, I don’t think there’s any doubt when you have a decline in net cash income of 21 per cent, but we are getting into this from a position of strength,” Gervais said. “Margins are positive on average, but more operations are faced with tighter margins and in some cases zero margins. To put things in perspective we are back to where we were in 2011 in terms of net cash income… Is this a bad thing? Not necessarily when you account for the tremendous growth in the industry.”

Unexpected jump

Gervais was surprised to see Canadian farm expenses in 2018 up by 6.6 per cent.

“Back in September (2018) they were trending at around three, 3.4 and four (per cent) tops,” he said. “Come the end of the year and now they are 6.5 (per cent). That’s a big jump.”

While Canadian net cash income in 2018 fell almost 21 per cent from the year before, realized net income, and total net income declined by even more — 45 and 60 per cent.

Canadian farm receipts, including farm program payments, increased just 0.1 per cent to $62.2 billion, but farm operating expenses jumped 6.5 per cent to $50.6 billion. The difference left Canadian farmers with net cash income of $11.6 billion.

Manitoba’s 2018 net cash income, realized net income, and total net income dropped 18.5, 33 and 54 per cent.

Manitoba’s 2018 farm cash receipts were down one per cent to $6.6 billion, but farm operating expenses jumped five per cent to $5.15 billion leaving $1.46 billion in net cash income.

When assessing farm income Gervais said he prefers net cash income, which is farm receipts minus operating expenses.

“Revenues versus cash costs and that gives you a pretty good idea of what the market environment is,” he said.

Realized net income is net cash income minus depreciation, plus income in kind, while total net farm income is realized net income adjusted to take changes in the value of farm product inventory into account. Both measures have their place, but net cash income is a consistent yardstick by which to measure the state of farmers’ income, Gervais said.

A small change in farm receipts and/or expenses can result in a significant percentage shift in farm income going up or down, he added.

“I don’t want to sugar-coat anything,” Gervais said.

“We’ve got market access issues with pulses, for canola. That’s something significant. There’s maybe some upside for some of the grains because of weather challenges in the U.S. But overall I think there are headwinds in 2019. But long term I see no reason to change the outlook, which is positive in my mind. The demand for ag commodities is still very strong. The demand for food is strong. We have a dollar at 75 cents (U.S.) that’s supportive of margins. We have Canadian products and a good reputation. All those things are positive. But I don’t want to downplay the fact there are headwinds in the short term that are creating some real challenges for farm operations.”


Movers and shakers

Farm income took a hit across Canada in 2018 for a number of reasons

Crop receipts

  • While crop producers noted falling prices, they actually brought home just 0.9 per cent less in 2018, or a total of $35 billion
  • That’s because non-durum wheat and cannabis revenues offset a decline in income from canola.
  • Non-durum wheat income climbed by 11.6 per cent as exports to China tripled.
  • Corn receipts climbed by 9.9 per cent on rising prices and larger sales.
  • Canola receipts fell by 6.5 per cent on reduced exports, accounting for the lion’s share of losses.
  • Indian duties imposed late in 2017 on lentils and peas curtailed exports, sharply lowering prices. Dry pea revenue fell 19.7 per cent.

Livestock

  • Falling hog receipts pushed Canadian livestock receipts down 0.2 per cent to $25 billion in 2018.
  • Canadian hog receipts were down 8.9 per cent on lower prices as North American inventories reached record highs in 2018, a picture that has since greatly improved.
  • Pork tariffs imposed on the United States by China and Mexico also contributed to the surplus of hogs in the United States, reducing demand for Canadian exports.

Program payments

  • Program payments to producers fell 8.9 per cent to $2.2 billion in 2018.
  • Crop insurance payments were down 27.2 per cent.

Expenses

  • Increased 6.5 per cent in 2018 totalling $50.6 billion.
  • It was the largest percentage increase since 2012.
  • The biggest expense increase was for commercial feed, up $627 million or 9.6 per cent to $7.2 billion.
  • Interest charges, up $593 million or 19.5 per cent from 2017, ranked second, fuelled by rising interest rates and higher debt levels.
  • It was the largest increase in interest expenses since 1981.
  • Interest charges, on average, accounted for 7.3 per cent of total Canadian farm expenses in 2018.

This article was originally published in the June 6, 2019 issue of the Manitoba Co-operator.

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