Farm Liquidity Lower but Still Strong

The liquidity of Canadian farms may be trending lower, yet remains healthy, according to Farm Credit Canada chief economist J.P. Gervais.

In a website post Tuesday, Gervais discussed the current ratio, or liquidity, of a subset of Canadian farms for the 2013-2017 period. The current ratio – which is found by dividing current assets by current liabilities - measures a business' ability to meet financial obligations as they come due, without disrupting normal operations.

There are no hard and fast rules about current ratios, but financial literature suggests a ratio higher than 1.5 is healthy. If an operation’s current ratio is too high, it may not be using cash as efficiently as possible. A current ratio of 1 to 1.5 indicates a farm is technically liquid, but it could be exposed to financial challenges if market conditions worsen.

Meanwhile, a current ratio less than 1.0 means that a farm lacks the current assets to cover short-term liabilities. If working capital is the first line of defence, its absence can force an operation into secondary means of repayment (refinancing of debt) or possibly even selling assets.

As seen on the graph below, the current ratio for Canadian beef, pork, dairy and grain and oilseed farms remain well within the range the industry considers healthy.

In looking at the grains and oilseeds sector in more detail, Gervais noted its current ratio has trended down over the last five years, reaching its lowest point in 2017.

“Two things stand out to me,” Gervais wrote. “The first is that the magnitude of the change is relatively minor. Even at the low end of the five-year period, the ratio is still strong.

“The second is that the 2017 ratio reflects specific trends in revenues and expenses. Crop revenues dropped in 2017 for the first time in four years, while the cost of crop inputs climbed. That applied more pressure to grains and oilseeds operations’ working capital.”

Looking ahead, Gervais said he expects the relatively solid financial foundation of Canadian agriculture to be put to the test in 2019, as net cash income will likely flatten despite an expected 2% year-over-year gain in revenues. And while he said he expects net worth to also grow, both expenses (including interest expenses) and total liabilities will probably increase alongside them.

farm current ratio

Source: DePutter Publishing Ltd.

Information contained herein is believed to be accurate but is not guaranteed by the parties providing it. Syngenta, DePutter Publishing Ltd. and their information sources assume no responsibility or liability for any action taken as a result of any information or advice contained in these reports, and any action taken is solely at the liability and responsibility of the user.