Farm Equity Gains Continue but Debt Indicators Rising

The value of Canadian farm equity continued to rise in 2020, although producers remained weighed down by a rising debt load.

A Statistics Canada report released Thursday pegged the total value of Canadian farm equity as of Dec. 31, 2020 at $563.2 billion, up 4.4% from the previous and largest year-over-year gain since the 6.4% increase recorded in 2017. In 2018 and 2019, Canadian farm equity rose by 3.7% and 3.4%, respectively.

However, the report also showed that two debt-related indicators this past year reached their highest levels since 2009. The debt-to-asset ratio reached 0.17 in 2020 (see table below) while the debt-to-equity ratio increased to 0.21. Both ratios have been trending upwards since 2014 and indicate a ‘growing share of productive agricultural assets are financed by creditors as opposed to farm owners,’ StatsCan said.

A high debt-to-asset ratio indicates farm may be putting itself at risk of default on its loans if interest rates were to rise suddenly. Meanwhile, the debt-to-equity ratio is a measure of the degree to which farm is financing its operations through debt versus wholly owned funds. More specifically, it reflects the ability of farm equity to cover all outstanding debts in the event of a business downturn.

Regardless of the rising debt, StatsCan noted strong growth in net income in 2020 pushed the return on assets and return on equity up to near 10-year averages, following recent lows in 2018. As earlier reported by StatsCan, realized net income for Canadian farmers surged 84.2% to $9.9 billion in 2020, as strong growth in receipts outpaced slightly higher expenses. The increase followed a more modest 10.5% gain in 2019 and a 32.7% decline in 2018.

Farm equity rose in every province in 2020, with Alberta and Ontario (both up 4.4%) accounting for over one half of the national increase.

The increase in 2020 nationwide farm equity came despite the fact the rise in total farm liabilities (+5.8%) outpaced the increase in total assets (+4.6%) for the third straight year.

Farm real estate values, the largest component of farm assets, increased by $25.4 billion (+5.2%) in 2020, accounting the vast majority of the nearly $30 billion annual increase in total assets. “Significantly higher commodity prices in the latter half of 2020, combined with strong demand for agricultural products and low interest rates all contributed to the increased value of farm real estate,” StatsCan said.

Additionally, the value of farm machinery rose 3.8% to $59.3 billion, the largest annual percentage increase since 2016. Further, the value of crop inventories rose 3.1% on higher prices, boosted by strong demand.

Moderating the increase in farm assets was the 8.4% decrease in the value of poultry and market livestock inventory to $7.9 billion — its lowest level since 2012. Backlogs at processing facilities related to the COVID-19 pandemic put downward pressure on cattle prices throughout the year.

On the other hand, the value of total liabilities increased $6.3 billion (+5.8%) to $115.7 billion in 2020, the smallest gain since 2014.