FARM INCOME FORECAST PROVIDES SEVERAL LESSONS
Originally published on February 7, 2002
Agriculture Canada recently revised its 2001 farm income forecast. The report shows that Canadian farm income in 2001 increased in comparison to the previous five-year average. Details of this revised forecast are illustrated in table one. In table two, I have reported the five-year average.
By comparing table one with table two, we can see there was indeed more cash available to western Canadian farmers in 2001. What else can we learn from these forecasts?
■ Farm cash income is not shared equally.
While I didn't think this was a big secret, I was surprised to discover the extent to which Agriculture Canada has already segregated Canadian farms into specific categories.
The categories are listed in table three. I was also able to gather some empirical data on the distribution of these farms. I have listed that data in table four.
In Saskatchewan large farms earned 48.5 percent of market receipts while very large business-focused farms earned 18.5 percent, for a total of 67 percent. Put another way, 14,645 farmers, or 40 percent of Saskatchewan's farming population, control 67 percent of sales.
For Canada as a whole, large farms took 34.1 percent of the nation's farm market receipts and very large business-focused farms took 5.5 percent.
Is it logical to conclude that these larger farms control an equally proportionate share of the overall net cash income? Not necessarily. An Agriculture Canada official told me the margins for each type of farm vary considerably. He said it is not uncommon for a smaller, efficient and well-managed farm to be more profitable than a larger peer.
Likewise, farmers of equal size in the same municipality do not report the same net farm incomes.
■ We are in an era of transition.
This is particularly significant in Saskatchewan. While we all hate generalizations, let's go there for a moment. Forty percent of Saskatchewan farmers control approximately 67 percent of the market receipts. Some of them will continue to grow. Their mantra has been heard often — "more acres for less margin". Their labour and capital may be stretched, but they will do their best to keep a long-term perspective. Others will fail. Still others will leave on their own terms.
Another 30 percent of Saskatchewan's farmers could be categorized as pension and lifestyle farmers. These guys probably have their land paid for and have been "weathering the storm" for the last few years. The returns haven't been great, but they enjoy what they do. Transition will apply to this group. Some will be looking to leave and will retire as soon as the right offer comes along. Others might be considering expansion.
The remaining 30 percent are a mixed bag. This group might include the farmer raising saskatoon berries profitably on 40 acres. It will also include the low income and small to medium business focused farmers who are having a tough go. Some will have to look at some kind of value-added enterprise or simply leave farming with the equity remaining.
While there has always been an exodus from agriculture, I would bet this transition will move at a much faster rate. I have yet to talk to a farmer who thinks global subsidies will end soon or that the federal government will move us to an equal global subsidy footing. Change and diversity are happening and while government policy can affect the speed of change, it cannot affect the direction.
■ Government program funding is important.
The ever-increasing rate of transition means that program support will continue to be needed. Without program payments, Western Canada would report a loss in 2001 of $274 million, on an accrual basis, or total net income. Saskatchewan alone would have a loss of $819 million.
■ Pay attention to the language.
Agriculture Canada's forecast speaks in cash terms. For many farmers, the reality is in the empty grain bin. Realized net income ignores the changes in the balance sheet.
If my crop insurance arrives, but I have no grain in the bin, or on my balance sheet, then cash gives me only part of the picture. Total net income is the only Agriculture Canada measure that attempts to take the balance sheet into account. Agriculture Canada uses it in an attempt to measure the change in on-farm inventory using average crop prices.
The drought of 2001 has hurt the balance sheet of most prairie farmers.
In our review of the financial statement for a number of well-managed farms, we can clearly see the effect of drought and low profitability.
Losses are ultimately absorbed by the balance sheet either through lower inventory balances, an increased operating line, higher long-term debt or new sources of equity.
Farmers who have practiced accrual reporting should know what their 2001 loss is and how it will be managed.
The returns are not where they should be. In Saskatchewan, table four says it best. The return on net worth averages only 2.39 percent and this does not take into consideration the cost of the farmer's own labour and management. How much of the 2.39 percent is left once we consider labour and management costs? It's disturbing to think that the policy makers in our agricultural industry would expect farmers to continue to accept this poor return.
If politicians try to tell you 2001 produced a record amount of farm cash, then simply agree.
The fact is that your 2001 cash may include your 2000 crop sales, your 1999 Agricultural Income Disaster Assistance payment plus your 2001 crop insurance proceeds. What is left to turn into cash in 2002?
Allyn Tastad, chartered professional accountant, is a partner in the accounting firm of Hounjet Tastad Harpham in Saskatoon at 306-653-5100, e-mail at email@example.com or website www.hth-accountants.ca. All data and information provided is for informational purposes only. Readers are cautioned that laws and regulations are subject to change. Consult your accountant for current professional advice tailored to your situation.