Farm Income Forecast for 2003

FEBRUARY 2004 FORECAST

SUMMARY

Agriculture and Agri-Food Canada, in collaboration with the provincial governments and Statistics Canada, has revised its April forecast for 2003 (see notes). The compounding effects of Bovine Spongiform Encephalopathy (BSE), the increase of the Canadian dollar and droughts in Western Canada in 2002 and 2003 have resulted in a significant drop in farm income in 2003. Realized Net Income (RNI) at the Canada level is expected to be $-13.4 million for 2003. In response to these difficulties federal and provincial governments issued an all time record high of nearly $5.0 billion in program payments during 2003, with significant payments yet to come during 2004.

The impacts of these factors on farm income are as follows:

• The Canadian dollar that appreciated by 17 percent against the weaker U.S. dollar has resulted in significant commodity price pressures. Farmers faced high priced inputs (from the low dollar in the Spring) and low priced outputs (from the high dollar with Fall marketings) - a large part of Canadian production is closely tied to the U.S. market situation. Prices for hogs, cattle and most crops are heavily affected.
• BSE has resulted in significantly lower marketings and prices in 2003 for cattle. This means there is a shortage of cash flow and a build up of inventories (which are not reflected in cash income).
• There was extreme drought across much of the Prairies in 2002 and continuing in Saskatchewan in 2003. This has adversely affected marketings and cash receipts from crops.

FORECAST HIGHLIGHTS FOR 2003

Farm Income

• In 2003, RNI for Canada is forecast to decline by 100 percent which will result in negative income at the national level for the first time in history (see Tables - Farm Cash Receipts, Expenses and Income and NISA Forecast). This poor result can be attributed to the combined effects of BSE, a rapidly appreciating Canadian dollar, and successive droughts in western Canada.
• RNI is expected to decline in all provinces except Newfoundland and Quebec where the beef industry represents a smaller portion of the agricultural economy. RNI is expected to be negative in New Brunswick, Ontario, Saskatchewan and Alberta, with RNI in the latter two provinces being extremely negative.
• Both crop and livestock receipts in 2003 were dealt a major blow by the strengthening Canadian dollar. The Canadian dollar began 2003 at US$0.638 and finished the year at US$0.771. Since most agricultural commodities are valued in US dollars, this appreciation of our currency adversely affects farm gate prices. All other factors held constant, this increase in the value of the Canadian dollar would tend to result in a 17 percent decline in Canadian agricultural commodity prices over the course of 2003.
• Income from individual farm operations can vary greatly because of the commodities they produce, the weather in the area and many other factors.
  

Crop Receipts

• Crop receipts are expected to decline by 8 percent in 2003, with the most serious losses occurring in the prairie provinces. Severe drought during 2002 in Saskatchewan and Alberta and moderate drought in Saskatchewan during 2003 resulted in reduced marketings of grains, oilseeds and special crops.
• Prices of major grains and oilseeds were lower in 2003 due mainly to the rapidly appreciating Canadian dollar, as well as larger supplies of coarse grains in western Canada.
• Horticulture receipts are expected to show moderate growth in 2003, with a strong increase in fruit and floriculture and nursery receipts more than offsetting lower potato receipts caused by lower prices.

Livestock Receipts

• Livestock receipts are forecast to decline by 12 percent in 2003 due almost entirely to difficulties in the beef sector. Cattle marketings and prices in Canada were drastically reduced as a result of the BSE-induced border closure, with the most significant impacts being felt in the prairie provinces. With the partial re-opening of beef trade in September 2003, the number of cattle slaughtered and prices began to pick up in the later part of 2003. Total domestic cattle slaughter is expected to be off by about 12 percent for the year. International cattle exports ceased as of May 20, 2003, resulting in live cattle exports for 2003 being only about one-third of the previous year’s level.
• Hog receipts are expected to increase by 5 percent in 2003 due to a small increase in both prices and marketings. While the market registered strong growth of about 13 percent in US hog prices, the majority of this increase was offset by a stronger Canadian dollar, resulting in a hog price increase of only 1.5 percent in Canadian dollar terms.
• Receipts from the supply-managed commodities are projected to increase in 2003 due to higher dairy and poultry receipts. Dairy marketing is expected to be up in 2003 due to relatively higher dairy demand while dairy prices should continue to rise due to higher support prices. Poultry receipts should increase in 2003 due mainly to higher chicken prices. Egg marketing and prices will continue to increase for most of the provinces as demand for eggs continues to rise with a steady growth rate.
  

Program Payments

• Program payments from the federal and provincial governments are expected to total a record of nearly $5.0 billion. This includes Crop Insurance ($1.8B), BSE Recovery Program ($426M), Net Income Stabilization Accounts (NISA) ($759M), Federal Transition Funding ($446M), Producer Assistance Program 2003 - CAIS interim payments ($22M), Canadian Farm Income Program (CFIP) ($402M)
• Large payments under CAIS for the program year 2003 will be paid in 2004 as well as the payments under the BSE Cull Animal Program announced on November 21st. In addition, there is $4 billion in NISA accounts which will be available for withdrawal in 2004 as the program winds down.

Expenses

• In 2003, operating expenses are expected to increase as major crop input, farm labor and fuel costs are rising. Fertilizer and pesticide expenses are expected to increase in 2003 as result of higher fertilizer prices and pesticides usage, particularly in the prairies because of higher natural gas prices and grasshopper infestation. Seed prices are forecast to be higher as the dry conditions in western Canada severely reduced the quality and quantity of seeds for 2003.
• Farm labor and machinery fuel expenses are expected to increase due to higher prices and usage. On the other hand, livestock purchases are expected to be reduced significantly due to the closure of beef export markets caused by a single cattle carcass infected with BSE. Feed prices are also expected to decline as a result of relatively large feed supplies and stronger Canadian dollar. Depreciation charges should increase slightly in 2003.

NOTES:

1. The farm income forecast was prepared by the department in collaboration with provincial governments and reflects information and policies in place up until the end of December. AAFC is responsible for preparing a preliminary forecast based on a set of quantity and price assumptions and for consulting the provinces to obtain their input and to reach a consensus on the forecast and its release to the public.
2. The results for 2003 differ from the April forecast as they better reflect the actual production, price and trade environment that currently prevails. Briefly, the January forecast indicates that farm income will be drastically lower compared to the April forecast due to the combined effects of BSE, an unexpectedly strong Canadian dollar, and an unanticipated drought in Saskatchewan in 2003.
3. NET CASH INCOME measures farm business cash flow (gross revenue minus operating expenses) generated from the production of agricultural goods. It represents the money available for debt repayment, investment or withdrawal by the owner. REALIZED NET INCOME measures the financial flows, both monetary (cash income) and non-monetary (depreciation and income-in-kind), of farm businesses. It represents the net farm income in a given year regardless of the year the agricultural goods were produced. TOTAL NET INCOME measures the financial flows and stock changes of farm businesses. It values agriculture economic production during the year that the agricultural goods were produced. It represents the return to owner’s equity, unpaid labour, management and risks.
4. Although the forecast is presented as a single number, each number is in fact the mid-point of a forecast range or confidence interval which is implicit but not stated. A minor change in cash receipts or expenses can have a significant impact on net income levels. For example, a 1% increase in farm cash receipts of $30 billion would result in a 12% increase in realized net income of $2.8 billion.
5. NISA payments only represent the producers’ withdrawals from Fund 2 (governments’ fund). The large amounts accumulated in Fund 1 (producers’ fund) and unrealized triggers in Fund 2 are not included. The program is designed on a whole farm and individual basis and the producers are not obliged to withdraw triggered payments from the account.
6. The reference year (2003) represents the estimates released by Statistics Canada on November 25th, 2003.
   

TABLES

• Click here to view the February 2004 Forecast — Farm Cash Receipts, Expenses and Income for 2002 and 2003
• Click here to view the February 2004 Forecast — Net Income Stabilization Account (NISA) for 2003

For further information, please contact Lambert Gauthier at (613) 759-7414 or by e-mail at gauthil@agr.gc.ca.