Tag Archives: Agriculture

Is the Canadian agriculture falling into a debt trap?

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With agricultural commodities prices falling and the prospect of rising interest rates getting closer, I thought it could be interesting to see where the Canadian agriculture stands debt-wise. In this post, I will look at the indebtedness in two ways.

Firstly, farm indebtedness will be assessed relative to the output of the Canadian agriculture. We start by deflating the farm debt value by the CPI. The output is derived from the value of the production (farm sales and change in inventories) by deflating it by the farm products price index. By building an index, we are able to obtain the change in our ratio [Farm debt / Output].

We do the same with the Gross value added (GVA) of the Canadian agriculture and the total value of farm assets (real estate and quota).

The first graph below presents the evolution of our three ratios. What really stands out is:

  • the significant decrease of the economic efficiency (GVA/Output) of the Canadian agriculture over the period considered here (1981-2014) though it has bounced back a bit over the last 10 years thanks to high prices.
  • from 1995, the divergence of dynamics between, on one hand indebtedness and farm assets value, and on the other economic efficiency.

debt trap CDN_AG

That could be explained mainly by two factors :

  • lower interest rates which are now close to the lowest level they could reasonably be at;
  • the increasing share of off-farm income in the farm households which is not captured by the GVA account, and that provides liquidity to repay debt obligations

Secondly, we will look at the indebtedness in the Canadian agriculture through the ratio (Farm debt outstanding)/(Maximum farm debt).

Maximum farm debt is defined as the long-term debt allowed by the aggregate debt servicing capacity, assuming terms and conditions complying with current best agricultural lending practices:

  • Debt service coverage ratio of 1.1, calculated as Earnings before Interest, taxes, Depreciation and Amortization (EBITDA) divided by Principal plus Interest payment. Using Statistics Canada data, EBITDA is approximated by Net cash income plus interest. Because of the intrinsic volatility of farm income, we will use a 3-year average of net cash income before interest in place of the current value to calculate our debt repayment capacity.
  • Repayment period based on useful life of assets. Usually, it is based on the weighted average of the useful life of the different asset classes. However, in order to assess the maximum level of debt, we could use a 20-year repayment period providing the ratio Maximum debt to total Land value remains below 75%. If that ratio was to be above 75%, we would have to revert to the weighted average, with 15 years a good benchmark.
  • Prudent interest rate: the 5-year conventional mortgage rate which is commonly used to stress-test credit risk of agricultural loans. Comparing it to the apparent average interest rate paid by farms, we could note that from the mid-90’s, the spread between the two interest rates is relatively stable.

The graph below shows that indebtedness capacity became more and more saturated until 2005-2007. Then, lower interest rates, increasing farm products and farmland prices, all contributed to raising the maximum farm debt.

max debt + scen

We note that two provinces stand out : Saskatchewan and British Columbia (BC). The former has experienced a remarkable drop in indebtedness saturation because all the recent trends mentioned previously were amplified here. The latter, a contrario, has experienced a very significant jump with a current indebtedness saturation of more than 100%. How is that possible? Short answer: off-farm income, low interest rate, non-standard lending term and conditions, farmland prices driven by non-agricultural factors.

Now, we will assume that the interest rate gradually reverses to its 20-year mean over 10 years while debt repayment capacity, farm debt and land value remain constant. That sole change would lead to increasing saturation of the indebtedness capacity. However, we could construct realistic scenarios which would lead to a much faster saturation.

As far as I am concerned, the debt problem of the Canadian agriculture is not a problem of solvency. The Canadian agriculture is solvent. I do not foresee any collapse of crisis-scale within the next decade. It is a problem of restricting the ability of the Canadian agriculture to sustain, over the long term, a level of investment consistent with the competitive pressure, the pace of innovation and of demographic change.

Then, questions come to mind: Why debt? Are there other sources of capital available? 

This is a first-level analysis at a very aggregated level. To assess the risk identified here adequately, we need to dig deeper and go to disaggregated levels. Preliminary results show differences along industry and farm-size lines.

A lesson from the 2006-2010 Canadian hog crisis : ASRA, efficiency, vertical integration and the cash flow which saved the Quebec hog industry

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Quebec hog producers have been long benefiting from an income stabilization program called ASRA (Assurance Stabilisation du Revenu Agricole) and launched in 1975. This program is an income insurance program that guarantees a compensation to farmers when the market price is below a benchmark cost of production. The farm’s contribution is partly subsidized by the provincial government. The ASRA program covers among other products hog, sows, corn and soya.

By its design, the ASRA program tends to overcompensate the most efficient producers. In 2010, a controversial change was introduced to the calculation of the benchmark cost of production (exclusion of the bottom quartile, the least efficient farms of the sample), but it was subsequently abrogated. Changes were also introduced, at this time, to modulate the level of the farm’s contribution according to the size of its operations relative to the benchmark model (The subsidy decreases from two third to half of the contribution when the operation is at least thrice larger than the benchmark model).

Quebec hog farmers have always strategically optimized their legal structure in order to maximize the level of income stabilization. Initially, it was by separating all production activities in order to get ASRA for crops (corn and soya), even though they may be used as feed for hogs, as well as ASRA for hogs and sows by doing farrowing and finishing in separate legal entities. Then, when the level of subsidy was indexed to the size of the operations, it was time again to adapt the legal structure to the new environment.

Disaggregating farming operations in different legal entities was the backbone of the business model of the main vertically-integrated groups but it was also chosen by medium to large independent farrow-to-finish farms. During the period 1995-2006, when hog production boomed in Quebec, this allowed the most efficient producers to greatly benefit from the ASRA program while the financial position of the program itself was deteriorating.

Some of the hog producers invested that excess cash outside agriculture (say residential real-estate, sometimes in Florida). Others were focusing on developing their business, especially among what would become the main family-owned vertically-integrated hog groups, which then were then able to consolidate the scope of their activities from feedmills to meat processing.

From 2006 to 2010, the Canadian hog industry went through a series of crisis – porcine reproductive and respiratory syndrome, porcine circovirus, H1N1 (‘’swine flu’’), appreciation of the Canadian dollar, COOL legislation in the US, all ending up in severe margin squeeze. They had the cumulative effect of eating away the equity of many hog farms. This culminated in 2009 when the federal government had to intervene drastically through two federal emergency programs (Hog FarmTransition Program and Hog Industry Loss Loan Program). Yet, in Quebec, these programs were not widely used.

During that time, I held different positions in banks involved in financing hog production, positions which gave me a privileged insight into some of the dynamics underlying the restructuring of the Canadian hog industry. Statistics and business news showed that the Quebec hog value-chain weathered quite well this string of crisis, without having to reduce significantly its herd nor going through major bankruptcies, contrary to the Western provinces.

The resilience of the Quebec hog industry can be, at least partly, explained by the fact that the major players of the industry had enough cash reserve going into the crisis. Because of the business model I have described above, vertically-integrated groups had benefited from large ASRA payments over the years, especially since their hog-producing operations were generally much more efficient that the benchmark model used by the ASRA program to calculate compensation. When the businesses were well-managed, that extra cash was used to shore-up their financial position and develop their activities along the whole value-chain. Hence, at the time of the crisis, they were able to keep cash flowing into the system, offering much needed liquidities by contracting with farmers who were otherwise considering exiting the hog production altogether. It is worth noting also that the high prices for grain and oilseeds, while squeezing hog margins, were facilitating this restructuring as many farmers could thus divest only partly their hog operations (usually giving up on farrowing to focus on finishing).

What greatly contributed to save Quebec hog industry during the crisis were not that much ASRA payments to small to medium-sized independent farrow-to-finish hog farms, but the large payments that many thought were unduly received by integrated groups. Therefore, I am wondering whether the hog industry in Quebec would have been in such a good position at the outset of the crisis should the vertically-integrated groups have been excluded from the ASRA program along the line proposed by the working group on income security in agriculture (See report here, in French).

La politique québécoise de sécurité du revenu en agriculture se dirige-t-elle vers une impasse ?

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Cette question s’est imposée à la suite de la lecture du rapport final du groupe de travail sur la sécurité du revenu en agriculture au Québec, des premières réactions qu’il a suscitées, et des résultats obtenus lors de récents mandats de recherche.

Pourquoi cette impression d’impasse ? Parce que l’évolution des politiques agricoles de soutien au revenu ne semble pas répondre aux enjeux réels induits par la complexité croissante à laquelle doivent faire face les agriculteurs, les entreprises agricoles, les filières agroalimentaires et agro-industrielles, ainsi que les territoires ruraux où se déploient les activités agricoles et où vivent les agriculteurs. Cette complexité rend totalement caduc le concept de ferme familiale où un ménage fournit la majorité du travail et du capital, vit sur la ferme et entend transmettre son patrimoine à la génération suivante.

Je ne développerai pas ici l’ensemble de mon analyse et les conclusions que j’en tire quant à l’évolution des politiques agricoles et des stratégies d’affaire des entreprises liées au monde agricole. Je mentionnerai uniquement quelques éléments factuels qui nourrissent mes réflexions.

Tout d’abord, un détail qui me semble révélateur. L’introduction de ce rapport mentionne : ‘’ 28,000 exploitations agricoles qui génèrent des revenus de marché de l’ordre de 8 milliards de dollars’’. Or, selon le recensement agricole de 2011, nous aurions pu écrire qu’un peu plus de 8,500 exploitations agricoles génèrent de l’ordre de 7 milliards de dollars de revenus de marché, ou qu’environ 4,100 exploitations contribuent au chiffre d’affaires de l’agriculture québécoise à hauteur de 5 milliards et demi de dollars. Les politiques de soutien au développement de la production agricole concernent à toutes fins utiles moins de 10,000 entreprises, dont certaines ont des propriétaires communs, accentuant ainsi l’effet de concentration économique.

BLOG_securite revenu 1

On retrouve un effet de concentration au niveau territorial. Ainsi, en 2011, 60% du chiffre d’affaires agricole était généré sur 35% de la surface agricole, 80% sur 58% de la surface agricole (selon les données au niveau des sous-divisions du recensement agricole). Par contre, nous pouvons constater que la surface agricole est répartie de manière relativement égale entre les diverses classes de taille économique des entreprises agricoles. Ainsi, les politiques de préservation et d’orientation de l’utilisation du territoire agricole devraient toucher toutes les entreprises agricole. Le découplage des aides à vocation territoriale de la contribution à l’économie agricole semble donc tout indiqué.

Si nous nous déplaçons maintenant au niveau du revenu des agriculteurs et des ménages agricoles, nous pouvons observer l’importance de la pluriactivité dans l’économie des ménages agricoles. Ainsi, dans de nombreux ménages agricoles, le revenu total des agriculteurs est essentiellement composé de revenus non agricoles. En outre, à partir de données de Statistiques Canada, on constate que les paiements directs au titre des politiques de sécurité du revenu agricole contribuent peu au revenu total dans les petites fermes (moins de $100,000 de chiffre d’affaires agricole).

BLOG_securite revenu 2

Si l’enjeu est le revenu des agriculteurs, alors les politiques de sécurité du revenu devraient privilégier les petites exploitations. Cependant, dans le cas de ces petites fermes, qui représentent tout de même plus de 50% des fermes québécoises, nous pourrions dire que la pluriactivité est bien plus efficace pour gérer le risque agricole au niveau de l’économie des ménages que les programmes de sécurité du revenu. Or, il me semble que c’est bien au niveau de l’économie des ménages que se joue l’enjeu de la sécurité du revenu pour ces agriculteurs. Peut-être que la meilleure politique de sécurité du revenu pour ces entreprises-là est une politique de développement des territoires ruraux, dont la composante agricole serait centrale, mais pas unique. En particulier, un soutien accru à l’industrie agroalimentaire pourrait permettre le développement de filières permettant une meilleure valorisation des produits agricoles, notamment dans les régions périphériques.

Un autre élément qui motive mes réflexions est la diversité et la complexité des structures et des projets sous-jacents aux activités agricoles déployées sur le territoire québécois. La multiplicité des structures des entreprises agricoles se retrouve, par exemple, dans les statuts juridiques des entreprises agricoles, dans les formes de diversification des productions, ou, comme nous l’avons vu, dans la diversification des revenus des ménages agricoles, ou encore dans les modes de coordination des activités de production agricole aux activités connexes dans les filières agroalimentaires et agroindustrielles. Elles traduisent ainsi la diversité des modes de mobilisation du travail, du capital et du foncier, ainsi que les arbitrages vis-à-vis de leur coût d’opportunité respectif.

Bien que son interprétation ait de nombreuses limites, une typologie des entreprises agricoles individuelles proposée par Statistiques Canada donne une idée de la diversité des projets des agriculteurs – entre la ferme d’agrément et la grande ferme commerciale – et de leur importance relative (voir tableaux ci-dessous).

BLOG_securite revenu 3

Ces projets pourraient se regrouper dans plusieurs grandes catégories. Par exemple : maximisation du profit à divers niveaux (entreprise, holding, filière), maximisation du bien-être du ménage, maximisation des bénéfices fiscaux des statuts des entreprises agricoles, maximisation de la viabilité patrimoniale (transmission intergénérationnelle intrafamiliale), etc.

Cet aspect m’a amené à m’interroger sur la manière dont la fiscalité des entreprises agricoles détermine les projets et les structures de ces dernières. En particulier, il me semble que l’outil fiscal pourrait être utilisé pour répondre aux enjeux soulevés par le marché du foncier agricole. À ce titre, la révision du programme de crédits de taxes foncières agricoles par la Commission permanente de révision des programmes me semble une excellente occasion de repenser la fiscalité du foncier agricole dans le contexte des évolutions récentes des rapports entre exploitants et propriétaires agricoles, et notamment de leurs conséquences sur l’installation de la relève agricole.

Revenant  à la politique québécoise de sécurité en agriculture,  de quel revenu cette politique cherche-t-elle à garantir la sécurité : Le revenu net des entreprises agricoles ? Le revenu des ménages agricoles ?

Et dans quel but : Pour créer les conditions économiques favorables à la continuité de l’approvisionnement des activités de transformations agroalimentaires ou agroindustrielles ? Pour  promouvoir le développement durable des territoires ruraux à travers le Québec ?

Finalement, au-delà des actualisations, développements et simplifications proposés dans le rapport, il me semble que l’hétérogénéité et la complexité du monde agricole québécois appellent à un changement de paradigme, et donc à l’élaboration de politiques publiques véritablement nouvelles, construites à partir d’une approche systémique reconnaissant et intégrant la diversité des projets, des structures, des échelles géographiques et des horizons temporels.

Bertrand Montel ©, 2015.