The amount of debt Canadian farmers collectively carried relative to the value of their assets increased in 2016 for the first time since 2009, putting operators at heightened risk of going out of business should the next two or three years treat them poorly.
Further, roughly 70 per cent of farm assets are tied up in land. The value of land is expected to continue to climb but not as fast as it has in the past, according to Farm Credit Canada (FCC), the country's largest agricultural lender.
While FCC is confident the industry's financial resilience remains healthy, many challenges remain: Interest rates are rising, growth in farm revenue is sliding and the Canadian dollar is strengthening. And farmers have not paid down any of their collective debt since the early 1990s. This means some agricultural producers across the country could hit a financial crisis if an extended stretch of unfavourable weather or volatile markets hammered the industry.
Drought in large swaths of Western Canada, coupled with excess moisture in the East, are expected to hurt this year's farm income. Agricultural producers will be able to handle this year's bumps, but need a cushion in case more "shocks" are in the cards, according to J.P. Gervais, the FCC's chief agricultural economist.
"It is really a matter of planning for the next two, three years and making sure you're facing the right amount of risk for your own operation," he said in an interview.
Canada's farmers held a record $90.8-billion of debt (excluding household debt such as home mortgages and car loans) in 2016, up 7.5 per cent from a year prior. Meanwhile, total farm assets in 2016 reached $591.1-billion, up 5 per cent compared with 2015, according to Statistics Canada. The agricultural industry's debt-to-asset ratio remains in better shape compared with the 15-year average, according to FCC.
"The balance sheet of agriculture is healthy, but could face some challenges as farm income flattens and land appreciation slows," FCC concluded in a report being released on Tuesday.
The lender noted farmland and buildings appreciated at an average of 10.9 per cent a year between 2011 and 2016, while farm debt grew by 7 per cent a year over the same stretch. Low interest rates and strong farm revenue boosted land values and debt is "strongly connected" to land prices, FCC said.
But now FCC predicts the value of farmland and buildings will gain just 4 per cent in 2017 and 1 per cent in 2018. The dramatic cooling, the lender said in its report, comes owing to higher borrowing costs and weaker growth in farm revenue.
Darrin Qualman is a former executive director and former head of research at the National Farmers Union. He is worried farmers will not be able to survive should adverse conditions – particularly those caused by climate change – sweep the industry.
"How resilient is an agricultural sector with $100-billion in debt to, say, a multiyear drought?" Mr. Qualman said in an interview last week. "A multiyear drought sounds alarmist, but we've had those. There are still people alive that remember the last one."
Statistics Canada has tracked farm debt since 1971. The last time Canadian farmers paid down their collective debt was 1993. (Farmers also made progress in 1992, 1989, 1988 and 1987).
"We came through a long farm income crisis starting about 1985 – and some people think it ended," Mr. Qualman said. "I would dispute that given the debt numbers and how fast farmers are being pushed out of agriculture.
"If times have been better over the last 10 years, you would expect [the debt] trend line to sort of flatten out and turn downward as people took their expanded net incomes and used it to retire some debt," he said.
"We really seem to be going down a dead end road."