Impacts from declining profitability

With the substantial reduction in grain prices over the past five months, the profitability picture in the crops sector has dimmed considerably. That appears to be having an impact on the farmland market while making AgriStabililty look more appealing.

Let’s start with AgriStability, a program which many farmers have dropped. Slightly less than half of Saskatchewan farm cash receipts are covered under the program. While the premium is inexpensive, an average of only 69 cents an acre in Saskatchewan, the program hasn’t had big payouts in recent years.

Payments to Saskatchewan producers were over $145 million for 2018, but only $76 million for the drought year of 2021 and $48 million thus far for 2022. These amounts pale in comparison to the billions in support provided by crop insurance.

The difference for 2024 is that crop insurance support is going to drop because insured grain prices have declined. If you have a poor crop, it’s going to mean a lot bigger income decline. As well, many areas have had strong returns the past number of years which will improve reference margins and make AgriStability payments more likely.

Many of the producers that have dropped AgriStability will consider it too big a hassle to provide all the necessary information to get back in. That could be costly.

For producers that are enrolled, here’s a piece of advice passed to me from Doyle Wiebe, a farmer from near Langham, SK who crunches numbers closely. Wiebe says don’t underestimate your end of year inventory for 2023.

Some producers have grain carts with scales and know their grain inventory with great precision. Many others make an educated estimate and there can be a tendency to estimate on the conservative side. However, if you underestimate your carryover, you’ve shortchanged your 2023 income while boosting your 2024 income in what might be a claim year.

For the same reason, it’s important that deferred grain tickets and/or contracts yet to be filled are considered as accounts receivable for 2023. In many cases, these prices will be higher than the yearend default price set by AgriStability.

Now to the farmland market. One Saskatchewan farm real estate company believes dropping income prospects are a factor in some of the changes he’s seeing. Tim Hammond, CEO of Hammond Realty says farmland sales and prices surged after harvest, but the optimism has now moderated.

Hammond tracks the number of MLS farmland listings and while not all farmland for sale is listed, this is still a relevant barometer. For 10 years, the number of listings had been dropping, but in the past year the trend has seen a modest reversal.

Hammond says investor sentiment is adjusting. It has become more enticing to sell land and invest the cash. This applies to family-owned land as well as land owned by investor companies. Cash rents aren’t generally paying as much as what you could earn with the money invested in a GIC.

There’s still lots of buyer interest, but Hammond says where there were once 10 offers on a parcel of land for sale, it’s now more typical to see three or four. Dwindling profit margins and the high price of land have dampened enthusiasm.

When farmland price statistics are released for 2023, they are likely to show price hikes continuing. For this year, the outlook isn’t as certain.

With world grain stocks at comfortable levels, the crop sector might be facing a prolonged downturn with wide-ranging ramifications.