Impact of Debt on Ontario Swine Farms

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1 Impact of Debt on Ontario Swine Farms Prepared by: Randy Duffy and Ken McEwan University of Guelph, Ridgetown Campus November 2011

2 Funding support for this project. This project is funded in part through the Agricultural Management Institute (AMI). The AMI is part of the Best Practices Suite of programs for Growing Forward, a federal provincial territorial initiative. This report was also made possible with the support of Ontario Pork.

3 Acknowledgements The report Impact of Debt on Ontario Swine Farms was made possible through the support of many individuals and organizations. The authors wish to thank the following for their contributions: Ontario Pork Ontario Ministry of Agriculture, Food and Rural Affairs Steve Duff (OMAFRA) Greg Pate (OMAFRA) Ken Poon (University of Guelph) Carolyn Lucio (University of Guelph, Ridgetown Campus) Lynn Marchand (University of Guelph, Ridgetown Campus) Statistics Canada United States Department of Agriculture University of Guelph, Ridgetown Campus Page i

4 Executive Summary Total Canadian farm debt has been increasing since 1992 and as of December 31, 2010 it was estimated the total liabilities on all Canadian farms was $66.4 billion. The three farm types of grains and oilseeds (33%), dairy (25%), and beef (15%) combined account for 73% of the total farm debt in The Canadian swine industry accounted for a 6% share of the total Canadian farm debt in 2009, the most recent data available. This was an average of $850,435 per farm or $2.8 billion in total. The total Ontario farm debt for the entire agricultural industry was estimated to be $16.4 billion in Debt on Ontario swine farms has become a concern as the industry endured a prolonged period of financial losses from late 2006 to early 2010 as a result of many factors that caused revenue and costs to fluctuate widely. According to the Farm Financial Survey, the average Ontario swine farm experienced an increase in total liabilities from $551,288 in 2006 to $749,126 in Fortunately, interest rates have stayed relatively low which has helped producers keep their interest expenses lower. The other factor during this time that has helped swine farms that own land is the increased value of this farm land. This increased value has provided additional collateral for assuming higher debt levels. However, there is potential risk that when interest rates start to increase this will cause extra financial burden and hardship on Ontario swine farms. It is beneficial for the Ontario swine industry to know how it compares relative to producers in other major swine producing regions and other Ontario commodities in terms of their debt levels and their ability to meet financial repayments should interest rates rise from their current historically low levels. As well, it is important to know how Ontario swine producers compare across different farm sizes and production types. The specific objectives for this project were to: 1. Calculate Ontario industry averages for debt related financial ratios using a variety of data sources. These could include Ontario Farm Income Database (OFID), Ontario Data Analysis Project (ODAP), Farm Financial Survey or Canadian Farm Financial Database data. This will be done for the entire industry as well as by production system and farm size. 2. Calculate financial ratios for pig producers in other provinces and the U.S. These other jurisdictions are competitors to the Ontario pig industry so it is important to understand their financial situation. 3. Identify differences, if any, in farm debt repayment ability for the various production stages or for different farm sizes. This will help show if there are certain types of farm sizes or production types that may be more vulnerable to interest rate increases. 4. Develop a tool that producers and industry partners can use to input individual farm data that allows for comparison to the industry averages. Use of the tool will give producers information on their financial situation with respect to debt and repayment ability and how their farm business compares to others in the industry. Depending on what the comparison reveals to the producer it may encourage them to develop business risk management strategies, or seek out training and business management advice. University of Guelph, Ridgetown Campus Page ii

5 Various data sources were used in the analysis. These sources included the Farm Financial Survey (i.e. FFS, Statistics Canada), the Canadian Farm Financial Database (i.e. CFFD, Statistics Canada), the Agricultural Resource Management Survey (i.e. ARMS, United States Department of Agriculture), Ontario Data Analysis Project (i.e. ODAP, University of Guelph, Ridgetown Campus), and the Ontario Farm Income Database (i.e. OFID, Ontario Ministry of Agriculture, Food and Rural Affairs). Each of these sources is considered to be representative indicators of the financial performance of farms in Ontario and other regions but they also have some limitations. By using several different sources, this allows for a more complete picture of the debt situation on Ontario swine farms. Specifically, the results of the analysis using the FFS/CFFD/ARMS data showed that: Relative to swine farms in other regions and other Ontario farm types, Ontario swine farms typically have higher debt to equity ratios than swine farms in Manitoba and the U.S. but lower ratios than Quebec swine farms. Debt to equity ratios are also higher than most other farm types in Ontario. Beef and grains & oilseeds farms in Ontario have the lowest ratios. Ontario swine farms have lower % equity positions than U.S. swine farms and other Ontario farm types, similar positions to Manitoba, and higher positions than Quebec. Ontario swine farms have more of their debt structured for long term repayment rather than short term relative to the other swine regions and most other Ontario commodities. Dairy and poultry & egg farms have relatively more of their debt structured long term than Ontario swine farms. The financially difficult period from 2007 to 2009 caused current ratios (i.e. current assets to current liabilities) to drop to 1.4 at the end of Ratios had been close to the 2.0 level from 2003 to Debt to total revenues averaged 1.25 during the period which is higher than all other Ontario farm types except dairy. The interest expense to total revenue ratio has averaged 7% on Ontario swine farms during the period, well below the recommended 20 25% guideline. In other words, for every $1.00 of total revenues, $0.07 was paid out in interest expense. The ratio of working capital to total revenue has averaged 21% during the period, well within the recommended 10 30% guideline. However, the ratio slipped to 11% in Total estimated debt using the CFFD source for the Ontario swine industry in 2009 was $944 million while total interest expenses were estimated to be $74 million. The impact of a 2% interest rate increase suggested that this would have resulted in an average increase of $3 $7 per pig in interest expenses over the 2003 to 2009 period. This would have translated into an additional cost of $17.0 $43.6 million for the entire Ontario swine industry depending on the year. The results of the analysis using the ODAP data showed that on a small sample of land based Ontario farrow to finish farms: Debt to equity ratios, % equity positions, and current ratios all worsened in 2009 compared to the 2003 to 2008 levels. Debt levels per sow have increased during the period. Equity levels have decreased during the period but at the end of 2009 were still higher than levels in Appreciating asset values (i.e. land) have kept pace with the increased debt levels. This has provided additional collateral for farms with secured debt. The debt servicing requirement ratio in 2009 at 16% of total revenues was well within the historical range. University of Guelph, Ridgetown Campus Page iii

6 Return on assets was in the 3 7% range from 2003 to 2008 but dropped to slightly above 0% in Return on equity was in the 2 8% range from 2003 to 2008 but was 2% in The overall trend during the 2003 to 2009 period has been downward. The impact of a 2% interest rate increase suggested that this would have resulted in an average increase of $3 $4 per pig or $10,000 $21,000 per farm in interest expenses over the 2003 to 2009 period depending on the year. Previous research using the ODAP data to analyze profitability has shown that economic size, debt levels, and pigs sold (i.e. productivity) are each important but were not found to be statistically significant as determining factors in terms of a farm being profitable. This is likely due to the variability that exists within the industry. The results of the analysis using the OFID data showed that: There is a great deal of variability that exists within the data. Often, more variability exists within categories than across categories (i.e. different farm sizes or production types). Total estimated debt for the industry has increased from 2007 to 2009 as a result of the large losses experienced by the industry. Total estimated debt in 2009 was $1.1 billion while total interest expenses were $38 million. In terms of farm size, a farm likely needs to have at least $300,000 in total revenue to generate sufficient funds to provide an operating profit margin that allows for debt repayment and provide a return to the farm owner. Profitability is not necessarily related to farm size, production type, or debt level. Data disaggregated into quintiles by operating profit margin generally showed that regardless of size, type or year the bottom 20% of farms were not profitable while the top 20% of farms were very profitable. Debt levels and interest expenses per farm increase as farm size increases. Debt levels are in acceptable ranges if proportional to farm size but achieving the appropriate balance can be difficult. Debt coverage ratios were fairly consistent over the period. Depending on the year, the 40% 60% most profitable farms for the most part can pay their debt. Statistical significance tests showed that comparisons across farm sizes, production types, the top/bottom 20% of farms vs. the other 80% of farms were not significantly different in most instances. This is likely due to the high variability existing within the data. The impact of a 2% interest rate increase suggested that this would have resulted in an average increase of $2 $3 per pig or $13,000 $29,000 per farm in interest expenses over the 2003 to 2009 period depending on the year. In summary, there are several key observations from this analysis: 1. The total debt estimated for the Ontario swine industry in 2009 ranged from $944 million with interest expenses of $74 million using the CFFD database to $1.1 billion of debt and interest expenses of $38 million using the OFID database. The exact reasons why these interest expense numbers vary are unknown, but remember both are calculated numbers. A significant portion of swine debt would be in long term assets (ie. land and buildings) which would have a higher interest rate than that which was used in the calculation. 2. Overall, the detailed data by farm size (gross revenue) seems to indicate that debt levels increase as farm size increases, debt levels do not necessarily relate to profitability, and the relative balance between manageable debt levels and farm size is important. Using the OFID, it University of Guelph, Ridgetown Campus Page iv

7 was shown that the farm size categories of $500,000 $1,000,000 (22%) and greater than $1,000,000 (60%) carried over 82% of industry debt. 3. In general, the detailed data by production type seems to indicate that debt levels do not necessarily relate to production type or profitability. In 2009, 87% of industry debt was carried by the following production types: farrow to finish (48%), finish (22%) and farrow to feeder (17%). 4. There is a great deal of variability within the OFID data in terms of estimated debt, EBITA and operating profit margins. As a result of this variability, there are no clear patterns or statistically significant differences between farms of different gross revenue sizes or production types. This variability can be seen by the range in quintile averages and standard deviations. However, when EBITA per farm by gross revenue category from 2003 to 2009 was analyzed, the farm size that performed best financially through the tough 2007 to 2009 time period was the $500,000 $1,000,000 category. When EBITA per farm by production type was reviewed, all farm types experienced small to negative returns during the 2007 to 2009 time period. 5. On an aggregate industry level, debt levels and debt servicing requirements on average do not appear to be the major determining factor in profitability. However, due to the variability within the industry, there are quintiles (i.e. farms) within each gross revenue or production type category that are struggling financially and there are quintiles within each category that are doing very well financially, regardless of the year. The 40% least profitable farms are facing a lot of financial pressure. This may be a result of high debt levels, low equity positions, high debt servicing requirements, swings in hog prices and revenue, swings in costs of production or a combination of these factors. 6. For farms of any gross revenue size or production type it is important to not extend their debt servicing capacity beyond levels that are sustainable. A key factor appears to be the ability to maintain a debt level that is balanced with the farm s ability to generate revenue and control costs. The ratio or balance of total debt to total revenue will be unique to each farm due to the many other variables (i.e. management, productivity, importance of off farm income, etc.) that can affect profitability. While there was no statistical evidence to suggest a standard rule of thumb between total debt and total revenue, the simple average between 2003 and 2009 of the three farm size categories with gross revenues over $300,000 showed the ratio was close to 1.00 or greater. This would mean that a reasonable target would be one dollar of farm revenue for every dollar of debt. To conclude, given the information available Ontario swine farms do carry more debt than their U.S. counterparts. This heavier debt load makes the Ontario industry more vulnerable during high interest rate times. However, the evidence supplied in this report illustrates tremendous variability in profitability and debt load regardless of production type or economic size. There was no statistical correlation between high profit farms and low debt levels. While the analysis of current ratios show the values are above 1.0, the trend has been downward and it is important to remember that livestock inventory values do vary considerably from year to year. The tough economic times of 2007 to 2009 have eroded equity and increased debt on most farms. Still the debt levels as of 2009, appear manageable on an industry basis. University of Guelph, Ridgetown Campus Page v

8 Table of Contents 1.0 Introduction Canadian Farm Debt Situation Ontario Farm Debt Situation A Brief Summary of Recent Research and Articles on North American Farm Debt Objectives Methodology Results FFS/CFFD/ARMS ODAP OFID Results by Gross Revenue Range Results by Production Type Statistical Significance of OFID Results Impact of a 2% Interest Rate Increase Comparison of Results from the Different Data Sources Summary References Appendix A Ontario Farm Income Database Tables by Gross Revenue (Farm Size) Appendix B Ontario Farm Income Database Tables by Production Type Appendix C Examples of Selected Variable Calculations For Ontario 2009 Figures Appendix D Selected Methodology, Ontario Farm Income Database List of Figures Figure 1 Total Canadian Farm Debt Outstanding by Lender, at December 31, 2003 vs Figure 2 Provincial Share of Total Canadian Farm Debt Outstanding, at December 31, 2003 vs Figure 3 Estimated Commodity Share of Total Canadian Farm Debt, 2003 vs Figure 4 Average Total Farm Debt Per Farm by Commodity, Canada, 2003 vs Figure 5 Ontario Monthly Revenue and Cost Per Market Hog, 2005 to Figure 6 Total Operating Revenues, Ontario Swine Industry, 2003 to Figure 7 Total Liabilities and Equity, Ontario Swine Industry, 2003 to Figure 8 Total Liabilities and Equity Per Pig Produced, Ontario Swine Industry, 2003 to Figure 9 Total Interest Expenses, Ontario Swine Industry, 2003 to Figure 10 Total Interest Expenses Per Pig Produced, Ontario Swine Industry, 2003 to Figure 11 Debt to Equity Ratio, Swine Farms, 2003 to Figure 12 Debt to Equity Ratio, Various Ontario Farm Types, 2003 to Figure 13 % Equity Ratio, Swine Farms, 2003 to Figure 14 % Equity Ratio, Various Ontario Farm Types, 2003 to Figure 15 Debt Structure Ratio, Swine Farms, 2003 to Figure 16 Debt Structure Ratio, Various Ontario Farm Types, 2003 to Figure 17 Current Ratio, Swine Farms, 2003 to Figure 18 Current Ratio, Various Ontario Farm Types, 2003 to Figure 19 Debt to Total Revenues Ratio, Swine Farms, 2003 to Figure 20 Debt to Total Revenues Ratio, Various Ontario Farm Types, 2003 to University of Guelph, Ridgetown Campus Page vi

9 Figure 21 Interest Expenses to Total Revenues Ratio, Swine Farms, 2003 to Figure 22 Interest Expenses to Total Revenues Ratio, Various Ontario Farm Types, 2003 to Figure 23 Working Capital to Total Revenues Ratio, Swine Farms, 2003 to Figure 24 Working Capital to Total Revenues Ratio, Various Ontario Farm Types, 2003 to Figure 25 Debt to Equity Ratio, Ontario Farrow to Finish Swine Farms, 2003 to Figure 26 % Equity Ratio, Ontario Farrow to Finish Swine Farms, 2003 to Figure 27 Current Ratio, Ontario Farrow to Finish Swine Farms, 2003 to Figure 28 Debt Servicing Requirement Ratio, Ontario Farrow to Finish Swine Farms, 2003 to Figure 29 Debt per Sow and Equity per Sow, Ontario Farrow to Finish Swine Farms, 2003 to Figure 30 Debt per Pig Produced and Equity per Pig Produced, Ontario Farrow to Finish Figure 31 Swine Farms, 2003 to Return on Assets and Return on Equity, Ontario Farrow to Finish Swine Farms, 2003 to Figure 32 Total Operating Revenue, Ontario Swine Industry, 2003 to Figure 33 Total Estimated Debt, Ontario Swine Industry, 2003 to Figure 34 Total EBITA, Ontario Swine Industry, 2003 to Figure 35 Share of Total Industry Operating Revenue by Gross Revenue Range, Figure 36 Share of Total Industry Operating Revenue by Gross Revenue Range, Figure 37 Estimated Debt per Farm by Gross Revenue Range, 2003 to Figure 38 Figure 39 Estimated Debt to Total Operating Revenue Ratio by Gross Revenue Range, 2003 to Interest Expense to Total Operating Revenue Ratio by Gross Revenue Range, 2003 to Figure 40 EBITA per Farm by Gross Revenue Range, 2003 to Figure 41 Share of Total Industry Operating Revenue by Production Type, Figure 42 Share of Total Industry Operating Revenue by Production Type, Figure 43 Estimated Debt per Farm by Production Type, 2003 to Figure 44 Estimated Debt to Total Operating Revenue Ratio by Production Type, 2003 to Figure 45 Interest Expense to Total Operating Revenue Ratio by Production Type, 2003 to Figure 46 EBITA per Farm by Production Type, 2003 to Figure 47 EBITA by Operating Profit Margin Quintile, Farrow to Finish Farms, 2003 to Figure 48 Figure 49 Estimated Debt by Operating Profit Margin Quintile, Farrow to Finish Farms, 2003 to Scatter Diagram of EBITA vs. Estimated Debt, Farrow to Finish Farms by Operating Profit Margin Quintile, 2003 to Figure 50 Scatter Diagram of EBITA vs. Estimated Debt, $500,000 $1,000,000 Gross Revenue Farms by Operating Profit Margin Quintile, 2003 to List of Tables Table 1 Data Sources Table 2 List of Farm Debt and Profitability Measures Used in the Analysis Table 3 Average Number of Farms Used in the Analysis, 2003 to Table 4 Share of Total Industry Debt by Gross Revenue Range, 2003 vs Table 5 Share of Total Industry Debt by Production Type, 2003 vs Table 6 % of Variation in EBITA Explained by Variation in Estimated Debt by Production Type Table 7 % of Variation in EBITA Explained by Variation in Estimated Debt by Gross Revenue Range University of Guelph, Ridgetown Campus Page vii

10 Table 8 Scenario of a 2% Increase in Interest Rates Using CFFD Table 9 Scenario of a 2% Increase in Interest Rates Using ODAP Table 10 Scenario of a 2% Increase in Interest Rates Using OFID Table A1 Number of Ontario Swine Farms by Gross Revenue Range and Operating Profit Margin Quintile, 2003 to Table A2 Estimated Total Pigs Sold Per Farm by Gross Revenue Range and Operating Profit Margin Quintile, 2003 to Table A3 Operating Profit Margin Per Farm by Gross Revenue Range and Operating Profit Margin Quintile, 2003 to Table A4 EBITA Per Farm by Gross Revenue Range and Operating Profit Margin Quintile, 2003 to Table A5 Estimated Debt Per Farm By Gross Revenue Range and Operating Profit Margin Quintile, 2003 to Table A6 Debt Coverage Ratio Per Farm by Gross Revenue Range and Operating Profit Margin Quintile, 2003 to Table B1 Number of Ontario Swine Farms by Production Type and Operating Profit Margin Quintile, 2003 to Table B2 Estimated Total Pigs Sold per Farm by Production Type and Operating Profit Margin Quintile, 2003 to Table B3 Operating Profit Margin Per Farm by Production Type and Operating Profit Margin Quintile, 2003 to Table B4 EBITA Per Farm by Production Type and Operating Profit Margin Quintile, 2003 to Table B5 Estimated Debt Per Farm by Production Type and Operating Profit Margin Quintile, 2003 to Table B6 Debt Coverage Ratio per Farm by Production Type and Operating Profit Margin Quintile, 2003 to University of Guelph, Ridgetown Campus Page viii

11 1.0 Introduction 1.1 Canadian Farm Debt Situation Total farm debt levels on Canadian farms have been increasing since 1992 (Statistics Canada). As of December 31, 2010, it was estimated that total liabilities (both farm related and personal portion) on all Canadian farms was $66.4 billion. This is an increase of $19.5 billion or 42% since Figure 1 shows the distribution of farm debt by lender for 2003 and Figure 1. Total Canadian Farm Debt Outstanding by Lender, at December 31, 2003 vs $25,000,000, Farm Debt Outstanding at December 31 $20,000,000,000 $15,000,000,000 $10,000,000,000 $5,000,000,000 $0 Chartered banks Federal government agencies Source: Statistics Canada cansim Provincial government agencies Credit unions Insurance, trust Private and loan individuals and companies others Lender Advance payments for crops In 2010, chartered banks held the largest portion of debt at $23.6 billion or 36% of the total. This was an increase of $3 billion from 2003 but the share of total farm debt actually decreased from the 44% held in Farm debt has increased for every lender type from 2003 to 2010 but shares of the total have changed slightly. The major change is in debt held by federal government agencies, the second largest lender. The share has increased from 19% in 2003 to 28% in Credit unions are the third largest lender with a 16% share in University of Guelph, Ridgetown Campus Page 1

12 Figure 2 shows the provincial share of total Canadian farm debt in 2003 vs Shares are relatively similar for both years. Approximately two thirds of the total debt is held by three provinces in 2010, Quebec (18%), Ontario (25%) and Alberta (22%). Figure 2. Provincial Share of Total Canadian Farm Debt Outstanding, at December 31, 2003 vs % Provincial Share of Farm Debt Outstanding 20% 15% 10% 5% 0% Source: Statistics Canada cansim Province University of Guelph, Ridgetown Campus Page 2

13 Figure 3 shows the share by commodity of the total Canadian farm debt in 2003 vs Swine farms accounted for 7% of the total debt in 2003 and 6% of the total debt in The three farm types with the largest shares in 2009 were grains and oilseeds (33%), dairy (25%) and beef (15%). Combined, these three farm types held 73% of the total debt in Figure 3. Estimated Commodity Share of Total Canadian Farm Debt, 2003 vs Estimated Commodity Share of Total Canadian Farm Debt 35% 30% 25% 20% 15% 10% 5% 0% Farm Type Source: Statistics Canada, Canadian Farm Financial Database, Farm Financial Survey University of Guelph, Ridgetown Campus Page 3

14 Figure 4 shows the average total debt per farm by commodity in Canada in 2003 relative to 2009 as this is the most recent available data for this source. The average swine farm held $525,506 in This increased 62% to $850,435 per farm in The farm types with the highest average debt per farm in 2009 included potato ($1,249,543), dairy ($983,556) and poultry and egg ($824,568). Most farm types experienced an increase in total debt per farm from 2003 to The largest % increases from 2003 to 2009 were experienced by potato (87%), dairy (76%), fruit and tree nuts (75%), swine (62%), other vegetable and melon (59%), poultry and egg (58%), and grains and oilseeds (54%). Figure 4. Average Total Farm Debt Per Farm by Commodity, Canada, 2003 vs $1,400,000 Average Farm Debt Per Farm by Commodity $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200, $0 Source: Statistics Canada, Canadian Farm Financial Database, Farm Financial Survey Although debt levels per farm for most farm types have increased significantly it should be noted that data for all Canadian farms shows that total revenues, total assets and total equity have also increased during this period. This means that while the increased debt levels are concerning, it appears that the increased debt has likely been used to incorporate technology and/or expand production leading to increased farm revenue. Asset appreciation has for the most part been through increases in land values which has provided additional security for lenders. 1.2 Ontario Farm Debt Situation Farm Type Total farm debt levels for the entire Ontario agricultural industry have increased from $12.7 billion in 2006 to $16.4 billion in 2010, an increase of 29.5% (Statistics Canada). The increase from 2009 to 2010 alone was 10.0%. In 2010, the breakdown of major debt holders was: chartered banks (41.1%); federal government agencies (34.7%); private individuals and supply companies (14.7%); credit unions (6.2%); insurance, trust companies and other (1.2%); advance payment programs (1.8%); and provincial government agencies (0.2%). University of Guelph, Ridgetown Campus Page 4

15 Since 2006, times have been especially difficult for swine farms in Ontario and debt levels have increased significantly on some farms. According to the Farm Financial Survey (FFS), the average Ontario swine farm saw total liabilities increase from $551,288 in 2006 to $749,126 in 2009, an increase of $197,838 or 36%. As a comparison, the Ontario Data Analysis Project (ODAP) undertaken at University of Guelph, Ridgetown Campus showed the average farrow to finish farm had total liabilities of $905,504 in 2006 compared to $1,217,646 in This was an increase of $312,142 or 34%. As a result of many different factors, revenues and costs in the swine industry have fluctuated widely. Figure 5 shows the Ontario estimated monthly revenue and cost per market hog from 2005 to Profits were realized in the industry in parts of 2005 and 2006 but losses were incurred over the entire three and a half year period from late 2006 to early This explains why debt levels have increased significantly on some Ontario swine farms. Figure 5. Ontario Monthly Revenue and Cost Per Market Hog, 2005 to 2011 $200 $190 $180 Revenue Cost $170 $ / head $160 $150 $140 $130 $120 $110 $100 $90 $80 J FMAMJ JASONDJ FMAMJ JASONDJ FMAMJ JASONDJ FMAMJ JASONDJ FMAMJ JASONDJ FMAMJ JASONDJ FMAMJ JASOND Source: Ontario Ministry of Agriculture, Food and Rural Affairs, Monthly Swine Budgets. University of Guelph, Ridgetown Campus Page 5

16 Using data from the Canadian Farm Financial Database (CFFD), Figure 6 shows the estimated total operating revenues for the Ontario swine industry from 2003 to Total revenue has been over $1 billion each year but has fluctuated up to $200 million depending on the year to year comparison. Also shown in the figure is the % that the Ontario swine industry represents of the Ontario total operating revenues for all farms. This has varied from 12% in 2005 to 9% in Figure 6. Total Operating Revenues, Ontario Swine Industry, 2003 to 2009 $1,300,000,000 $1,250,000,000 Total Operating Revenues Total Operating Revenues % of ON 14% 12% Total Industry Operating Revenues $1,200,000,000 $1,150,000,000 $1,100,000,000 $1,050,000,000 10% 8% 6% 4% Swine Industry as % of Ontario $1,000,000,000 2% $950,000, Year Source: Statistics Canada, Canadian Farm Financial Database, Farm Financial Survey 0% University of Guelph, Ridgetown Campus Page 6

17 Figure 7 shows the estimated total liabilities for the entire Ontario swine industry from 2003 to Total liabilities for the industry have ranged from $834 million in 2003 to $1.2 billion in Total liabilities for the Ontario swine industry have accounted for 8% 11% of the total liabilities for all farms in Ontario during this period. Total swine debt in 2009 was estimated to be $944 million by Statistics Canada. Figure 7 also shows the estimated total equity for the entire Ontario swine industry from 2003 to Total equity for the industry has ranged from $1.5 billion to $2.1 billion depending on the year. From 2006 to 2009, total equity has decreased approximately $367 million. Total equity for the Ontario swine industry has accounted for 3% 5% of the total equity for all farms in Ontario during this period. Figure 7. Total Liabilities and Equity, Ontario Swine Industry, 2003 to 2009 $2,500,000,000 $2,000,000,000 Liabilities Liabilities % of ON Equity Equity % of ON 12% 10% Total Industry Liabilities Total Industry Equity $1,500,000,000 $1,000,000,000 8% 6% 4% Swine Industry as % of Ontario $500,000,000 2% $ Year Source: Statistics Canada, Canadian Farm Financial Database, Farm Financial Survey 0% University of Guelph, Ridgetown Campus Page 7

18 Figure 8 shows the same total liabilities and total equity as in Figure 7 only on a per pig produced basis. Total pigs produced for the entire Ontario industry were estimated as the sum of Ontario origin pigs slaughtered in Canada (AAFC) plus live feeder pigs and market hogs exported to the U.S. through Michigan and New York state border points (USDA). The estimated total pigs produced for the entire Ontario industry have ranged from a high of 8 million head in 2004 to a low of 6.5 million head in Total liabilities per pig produced were approximately $109 in 2003 and were $146 in 2009 after peaking in 2007 at $165 per head. On the equity side, total equity per pig produced was approximately $225 in 2003 and had increased to $270 in However, within the period, equity peaked at $292 in 2006 and dropped to $206 in Figure 8. Total Liabilities and Equity Per Pig Produced, Ontario Swine Industry, 2003 to 2009 $ Total Liabilities Total Equity $ Total Liabilities Per Pig Produced Total Equity Per Pig Produced $ $ $ $50.00 $ Year Source: Statistics Canada, Canadian Farm Financial Database, Farm Financial Survey, Agriculture and Agri Food Canada, University of Guelph Ridgetown Campus calculations University of Guelph, Ridgetown Campus Page 8

19 Looking at the interest expense only portion of debt servicing requirements, Figure 9 shows that total interest expenses for the entire Ontario swine industry were as low as $57 million in 2005 and as high as $74 million in Total interest expenses for the Ontario swine industry have accounted for 9% 12% of the total interest expenses for all farms in Ontario during this period. As a reference point, Figure 9 also shows the historical bank prime interest rate plus 1% during the 2003 to 2009 period. Despite the bank interest rate decreasing from 2007 to 2009, interest expenses have increased as a result of the higher debt levels. Figure 9. Total Interest Expenses, Ontario Swine Industry, 2003 to 2009 $80,000,000 Interest Expenses Interest % of ON Bank Prime Rate + 1% 14% $70,000,000 12% Total Industry Interest Expenses $60,000,000 $50,000,000 $40,000,000 $30,000,000 $20,000,000 10% 8% 6% 4% Swine Industry as % of Ontario Bank Prime Rate + 1% $10,000,000 2% $ Year Source: Statistics Canada, Canadian Farm Financial Database, Farm Financial Survey 0% University of Guelph, Ridgetown Campus Page 9

20 Figure 10 shows the same total interest expenses in Figure 9 only on a per pig produced basis using the same calculation mentioned in the discussion of Figure 8. Total interest expenses per pig produced were approximately $8.34 in 2003 but had increased to $11.43 per head in Figure 10. Total Interest Expenses Per Pig Produced, Ontario Swine Industry, 2003 to 2009 $12.00 $10.00 Interest Expenses Per Pig Produced $8.00 $6.00 $4.00 $2.00 $ Year Source: Statistics Canada, Canadian Farm Financial Database, Farm Financial Survey, Agriculture and Agri Food Canada, University of Guelph Ridgetown Campus calculations Fortunately, as shown in Figure 9 interest rates have stayed relatively low which has helped producers keep their interest expenses lower. The other factor during this time that has helped swine farms that own land is the increased value of this farm land. This increased value has provided additional collateral for assuming higher debt levels. Statistics Canada figures show that Ontario farm land values have gone from $4,201 per acre in 2006 to $4,767 per acre in 2009, an increase of 13%. If the period is extended to include 2010, the average value per acre is $5,061 or an increase of 20% from This is substantiated by figures from the FFS. The average total assets per farm increased from $1,875,082 in 2006 to $2,138,776 in 2009, an increase of $263,694 or 14%. The majority of this increase ($253,118) was in long term assets of which land is included. Accordingly, the ODAP results showed total assets increased from $2,765,701 per farm in 2006 to $2,902,379 in 2009, an increase of $136,678 or 5%. The land component of the ODAP asset values increased from $1,224,753 in 2006 to $1,405,161 in 2009, an increase of $180,408 or 15%. However, there is potential risk that when interest rates start to increase this will cause extra financial burden and hardship on Ontario swine farms. For example, what will happen to the ability of Ontario swine farms to cover the increased interest expense if interest rates rise 2% from their current levels? It is beneficial for the Ontario swine industry to know how it compares relative to producers in other major swine producing regions and other Ontario commodities in terms of their debt levels and their ability to meet financial repayments should interest rates rise from their current historically low levels. University of Guelph, Ridgetown Campus Page 10

21 As well, it is important to know how Ontario swine producers compare across different farm sizes and production types. University of Guelph, Ridgetown Campus Page 11

22 2.0 A Brief Summary of Recent Research and Articles on North American Farm Debt Included below are key points regarding farm debt reported in other publications. a. Robert A. Hoppe. U.S. Farm Structure. USDA, ERS. Amber Waves Volume 8, Issue 3, September 2010, pp Agricultural production continues to shift to larger operations, while the number of small commercial farms and their share of farm sales continue a slow, long term decline. There are a large number of small commercial farms that have negative operating profits however total household income on these farms is supplemented by off farm income. Large and very large farms typically have higher returns. This competitive edge will result in a continually decreasing number of small farms as production is shifted to the large farms. b. Brian C. Briggeman. The Role of Debt in Farmland Ownership. Choices, a publication of the Agricultural & Applied Economics Association. Accessed September 1, 2011 from magazine/theme articles/farmland values/the roleof debt in farmland ownership. Most farmers need access to credit in order to purchase land especially with land prices at historically high levels. Farm land debt in the US is held primarily by the Farm Credit system and commercial banks rather than being held privately by individuals. Total outstanding farm real estate debt in the US is estimated to be between $132 billion and $141 billion depending on the source. There is concern about how much land values and debt levels have increased however the USDA suggests that net farm income will increase by 20% in 2011 due to tight supplies and increased demand. c. Jason Henderson and Maria Akers. Agricultural Finance Conditions Turn. Agricultural Finance Databook, National Trends in Farm Lending July Federal Reserve Bank of Kansas City. Accessed September 1, 2011 from 07 ag findb.pdf, p. 1. The price of land has increased due to high commodity prices and farm profitability. Even though farm input costs have risen, agricultural banks have reported improved profits however, there is potential risk in the future with respect to the ability of farms to repay their debt if input costs remain high. d. USDA, ERS. Farm Income and Costs: Assets, Debt and Wealth. Accessed September 1, 2011 from There are three key factors that are increasing farm asset values. These factors are: 1) higher income from production assets; 2) low costs associated with borrowing; and 3) the anticipated growth of future returns on these investments. The values of real estate are expected to increase by 6.6% from $2.18 trillion in 2010 to $2.32 trillion in 2011 while farm debt is expected to decrease from $246.9 billion to $242.1 billion. This will result in an increase in farm equity from $1.93 trillion in 2010 to $2.08 trillion in A comparison of debt to asset and debt to University of Guelph, Ridgetown Campus Page 12

23 equity ratios for these two years indicates that the farm sector is more solvent in 2011 than in Interest rate movement is important to agriculture because the interest rate affects the value of outstanding debt and therefore the solvency of the sector. Also, agriculture is very capitalintensive so it is sensitive to movements in the interest rate. Short term financing costs incurred during the growing season are influenced by the interest rate as are the costs associated with longer term capital investments. e. Statistics Canada Value of Farm Capital Agriculture Economic Statistics, Catalogue no X, vol. 10 no. 1. May 2011, p. 6. The value of Canada s farm capital increased to $308 billion in 2010, an increase of 4.6% over 2009 and 16.4% higher than the previous five year average (2005 to 2009). The value of land and buildings accounted for 82.7% of total farm capital value and increased by 4.6% in 2010 over the 2009 level to reach $254.7 billion. On a per acre basis, the value of land and buildings for Eastern Canada and Western Canada averaged $3,953 and $1,112 respectively. Farm machinery and equipment accounted for $40.2 billion or 13.0% of total farm capital. Tractors, combines and other farm machinery represented 84.9% of the total value of this category and their value increased by 5.4% in Cattle and hog numbers have been declining in Canada due to a combination of rising input costs, weak slaughter prices and Country of Origin Labeling (COOL) legislation implemented in the United States in f. Statistics Canada Balance Sheet of the Agricultural Sector Agriculture Economic Statistics, Catalogue no X, vol. 10, no.1. June 2011, pp. 5, 6, 10, 39. Equity in Canada s farm sector continued to increase in 2010, rising 3.1% or $8.6 billion to reach $282.4 billion. Asset values outpaced an increase in liabilities when comparing 2009 and 2010 values. In 2010 total farm assets increased by $12.1 billion to reach a value of $343.3 billion. Farm land values had the largest impact on the total asset value. Land increased by $6.1 billion in 2010 to reach $232 billion. Farm liabilities increased to $60.9 billion, growing by $3.5 billion over This report also generates a historical balance sheet of the agricultural sector for each province. For comparison purposes, in 1981 Ontario farm assets were valued at $30.5 billion, liabilities $4.2 billion and equity $26.3 billion. By December 31, 2010 Ontario farm assets were estimated to be $86.4 billion, liabilities $15.2 billion and equity $71.2 billion. This means between 1981 and 2010 assets have increased in value by 183% while liabilities increased by 262% and equity rose by 171%. Therefore farm liabilities have risen by a greater percentage than the rise experienced in farm assets during this 30 year time period. The major asset class was farm real estate valued at $61.95 billion while most debt was held in the long term category. It is interesting to see that Ontario s quota value increased from $2.41 billion in 1981 to $10.7 billion in 2010 (i.e. 344% increase). The debt to asset ratio rose from 13.7% to 17.6% over the 1981 to 2010 time period. University of Guelph, Ridgetown Campus Page 13

24 g. Statistics Canada Farm Debt Outstanding Agriculture Economic Statistics, Catalogue no X, vol. 10, no. 1. May 2011, pp 5, 9, 15. At the national level, farm debt outstanding at December 31, 2010 rose to $66.4 billion up 6.1% from 2009, and continuing the steady trend upwards that has been occurring since It should be noted that this value of farm debt is slightly different than the estimate provided above in Statistic Canada s balance sheet report (i.e. $60.9 billion vs $66.4 billion). A partial explanation for this difference in debt estimates seems to depend on whether farm household liabilities are included or not. The main holders of mortgaged farm debt were: Federal government agencies eg. Farm Credit Corporation (45.1%); chartered banks (20.7%); individuals (16%); credit unions (9.9%); and provincial government agencies (4.2%). Non mortgaged debt was primarily owed to chartered banks (52.2%) and credit unions (22.4%). When debt levels for Ontario are examined, in 1981 the total outstanding debt was $4.8 billion with the three major lenders being chartered banks (49%); private individuals and supply companies (24%); and Federal government agencies (22%). In 2010, the total outstanding debt was $16.4 billion and the major lenders were: chartered banks $6.8 billion (41%); Federal government agencies $5.7 billion (35%); and private individuals $2.4 billion (15%). This means that during the 1981 to 2010 time period, banks have lost some market share while Federal government agencies have increased their relative proportion. Also, total farm debt for Ontario has increased 2.4 times during the 30 year time period. h. Mussell, Al, T. Moore, K. McEwan and R. Duffy. Testing the Structure of Canadian Farm Incomes. Report prepared for Canadian Agri Food Policy Institute (CAPI), September 1, This paper looks at the farm income issues at a disaggregated level. It shows that there can be more variability of farm profitability within a specific sales class, than there is between sales classes. While farm income in the aggregate has not been increasing, there are farm operations that are increasing their profitability, and size is not the only means to profitability. Farm management skills seem to be an underlying necessity for achieving farm level profitability. i. AgCanda.com. BMO Sounds Warning Bell On Interest Rates Canada's farmers owed $63B in both mortgage and non mortgage debt in 2009, a 4.7% rise from the previous year. Article written by Ron Friesen. Monday, June 21, Accessed September 1, 2011 from This article provides information on strategies the Bank of Montreal (BMO) is offering to help Canadian farmers manage their debt in preparation for higher interest rates over the next three to five years. BMO indicated that interest rates could increase by three to five percentage points by 2015 and this could really impact farmers, particularly those that are highly leveraged. In the article, a comparison of the amount of debt in Canada in 2010 is made to debt levels in 1981 and it has increased almost 3.5 times. In contrast, US farm debt increased 20 per cent during the same time. University of Guelph, Ridgetown Campus Page 14

25 Concern is expressed about the ability of farmers in Canada to carry increasing debt loads. In the 1980s the average debt to income ratio was seven to one and by 2007 it was 40 to one. It was recognized however that not every farm in Canada is dealing with high debt levels. j. McEwan, Ken and L. Marchand. Success Factors For Innovative Farmers: Case Study of Swine Farms In South Western Ontario. Report prepared for Agriculture and Agri Food Canada. May, For this project two workshops were held with progressive Ontario swine producers located in south western Ontario. The producers that were selected to participate have been in the pig production industry for many years; they have little, if any off farm income and rely primarily on income from the pig enterprise; they have grown their farm business over time; and these producers have had a long working relationship with the lead author. During the workshops five farm level factors were discussed with respect to how they may influence the competitiveness and long run success of Ontario swine farms. These factors were: adoption of technology; management process; entrepreneurship and risk taking; farm size; and family and community. It is important to stress that the information obtained through the workshops is not a statistical representative sample of the Canadian or Ontario swine industry. Rather, the findings are a collection of thoughts and ideas shared by a group of swine producers that have been successful in the business. Each participant was encouraged to share their own point of view however the producers seemed to agree with each other on most opinions expressed. The workshop participants all agreed that the essential ingredients for success relate to the manager having a positive attitude, having a plan or strategy of where the farm is going, and having the courage to implement the plan. k. George Morris Centre. Advancing a Policy Dialogue Series 1: Understanding the Structure of Canadian Farm Incomes. Prepared for the Canadian Agri Food Policy Institute (CAPI). February Accessed September 1, 2011 from icpa.ca/destinations/capi_advancingpolicydialogue.pdf. The Canadian Agri Food Policy Institute (CAPI) commissioned the George Morris Centre to complete a series of short papers in 2009 and 2010 that highlight what the key issues are relating to farm viability in Canada. In the sixth paper, Understanding Farm Debt in Canada, it is noted that in Canada and the US farm debt has been increasing over time but if farms are able to service the debt then it can be used to expand an operation. The series of papers found that farms in Canada carry almost two times the amount of debt that US farms do and farm debt in Canada is increasing faster than in the US. Also, it was reported that debt repayment likely takes longer in Canada because the farms have higher debt/earnings ratios. This is the situation for farms of all sizes although large farms in both countries can service debt better than small farms. The market value of assets has been increasing but earnings are low compared to the level of debt on farms. University of Guelph, Ridgetown Campus Page 15

26 It was also found that off farm income is very important. For example, on farms that have less than $100,000 in sales, off farm income represents 76% or more of the family s total income. Farming families have lower total income than the average Canadian family but their net worth is three times higher than the average. The appreciation of farm business assets contributes greatly to the economic well being of farmers. The research also found that farm size is not indicative of the amount of farm income generated. Farms that generate little income can be small or large in terms of economic size. In summary, there is concern within the U.S. about higher land values and input costs because of the potential risk in the future of farmers not being able to repay their loans. However, U.S. farm debt is expected to decrease from $246.9 billion to $242.1 billion between 2010 and Key factors that are increasing farm asset values are: 1) higher income from production assets; 2) low borrowing costs; 3) anticipated growth of agricultural returns. In Ontario, similar comments have been made, however liabilities have risen by a greater percentage than farm assets between 1981 and Further, there has been research done in Canada that shows there can be more variability of farm profitability within a specific sales class than there is between different sales classes. Farm management skills are a necessity to achieving farm level profitability. University of Guelph, Ridgetown Campus Page 16

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