Similar but Different: the diverging fortunes of US and Canadian farmers

Note: this article first appeared in PEI Agri Investor February 13, 2018 www.agriinvestor.com

US farmers have had a tough time since 2013 when net farm incomes reached a record $135.6 billion after a stunning increase of 82% in just 4 years.  Since those heady days, US net farm incomes have been in decline, and the USDA recently predicted further declines in 2018 – to levels not seen since 2006.

North of the boarder, the story has been very different. Canadian net farm cash receipts have enjoyed an 8-year run of continuous increases.  Since 2013, net cash receipts have increased 27% in Canada, even as they have declined by 28% in the US.

DIFFERING FORTUNES – Canadian vs US Farm Profits (2000 = 100)

Sources: USDA – Net Farm Income; and Statistics Canada – Net Cash Receipts

It is a testament to the attractiveness of farmland as an investment asset, that US farmland values have not declined significantly since 2013, despite big declines in farm incomes. Farmers, after all, don’t react to short-term commodity price swings by selling land that is the cornerstone of their long-term business.  According to USDA figures, average cropland values across the US are largely unchanged since 2014.  In Canada, however, steadily increasing farm incomes have led to steadily increasing farmland values since 2014, in line with long-term historic averages of 6% to 8% per year.

Several years of belt tightening have deteriorated the balance sheets of many US farms, whereas most Canadian farms have maintained low debt levels and good liquidity. Farm Credit Canada (“FCC”) recently concluded that the “overall liquidity position of Canadian agriculture is strong”.  The average current ratio (current assets divided by current liabilities) of all Canadian farmers was 3.0 in 2015 (the latest year for which figures are available), with the grain and oilseed sector especially strong at 3.6.  By comparison, US farmers have experienced a decline in their current ratio from 2.87 in 2012 to 1.55 in 2016, according to FCC.

So, what explains the differing fortunes of US farmers and their Canadian cousins?

Exchange rates are a big factor.  Declining corn and soy prices since 2013 coincided with a surging US dollar – a double whammy for US farmers.  In Canadian dollar terms, corn and soy prices have not deteriorated to the same extent.

But beyond exchange rates there are important structural differences that have given Canadian farmers a significant advantage. Most investors don’t realize, for example, the extent to which the fortunes of US farmers are determined by just two crops – corn and soy.  A stunning 55% of all US farmland – an area the size of France – is annually seeded to just those two crops.  By contrast only 13% of Canadian farmland typically grows corn or soy each year in Canada.  Far more Canadian farmland is used to produce crops which are not widely grown in the US, and which continue to enjoy strong demand (and prices) on world markets, such as canola and lentils.  The result is a Canadian agriculture sector with a more evenly diversified mix of products that makes it better positioned to withstand declines in prices for any single crop.

Even within the corn sector Canadian farmers appear to have an economic advantage over many US producers.  Using corn planting budgets and prevailing yield data from USDA and OMAFRA, we estimate Southwest Ontario corn producers have a 32% economic advantage over producers nearby in the US Mid-West, owing primarily to differences in land and input prices in local currency terms.  Economic advantages like those can mean the difference between a profit and a loss when corn prices are low – like now.

Will the fortunes of Canadian and US farmers continue to diverge?  In the short-term, corn and soy prices will determine the answer. But in the longer-term, Canuck farmers have some powerful structural advantages that should help them continue to prosper.  Unlike most US farmers, Canadian farmers will see net benefits from a changing climate.  While most US farmers are facing increasing heat and drought, Canadian farmers will benefit from more heat units, a longer growing season and access to plentiful stores of clean, renewable water.  Most importantly, Canadian farmers are world leaders in sustainability.  The Economist Intelligence Unit’s 2017 Sustainability Index, ranked Canada’s primary producers 2^nd only to Germany, and 1^st amongst the world’s major exporters. By comparison, the US ag sector ranked 19^th behind the likes of China and Ethiopia.  In an increasingly hot, polluted and dry world, sustainability will be the most important competitive advantage any farmer can have.