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Farm Income Forecast Highlights

Agriculture and Agri-Food Canada, in collaboration with the provincial governments and Statistics Canada, has finalized its farm income forecast for 2005 and 2006.

The farm income forecast is a federal-provincial consensus on the outlook for 2005 and 2006. Actual farm income may differ from this forecast for a number of reasons. This is of particular importance for 2006 due to the rapid rise in and historically high machinery fuel prices faced by farmers in 2005, the unusually rapid rise in the value of the Canadian dollar that has been observed over the past three years, as well as the uncertainty surrounding how the Canadian cattle market continues to re-adjust to the resumption of trade with the United States in live cattle under thirty months of age (UTM).

This farm income outlook is based on information available up to the end of December. Some of the more important assumptions upon which the forecast was based include:

The forecast is an aggregation of many different commodity receipt and expense items, which tends to mask the result of any particular item. For example, in 2006 total livestock receipts are expected to increase due to a strong performance in the cattle industry, which masks the fact that hog receipts are forecast to decline. Similarly, it should be noted that income from individual farm operations can vary greatly because of the commodities they produce, the weather in the area, management and many other factors.

Farm income forecast for 2005

Farm Income

Net Cash Income (NCI) in Canada is forecast to decrease by two percent in 2005 and be four percent lower than the 2000-04 average. An expected five percent decrease in crop receipts and a small one percent increase in expenses are the major factors behind the drop in NCI, these factors are expected to more than offset strong growth in livestock receipts.

On a provincial basis the prairie provinces are expected to register a decrease in farm income as a result of lower crop receipts which can be attributed to significantly lower crop prices as well as an increase in expenses due to record high prices for machinery fuel and high fertilizer prices. Farm income in Manitoba is expected to be particularly hard hit as a result of significant flooding in the spring of 2005

Realized Net Income (RNI), which takes depreciation into account, is expected to decrease by eight percent at the Canada level in 2005 which can be attributed to expected decreases in RNI in the prairie provinces and in Prince Edward Island. Saskatchewan and Prince Edward Island (P.E.I.) are forecast to have negative RNI in 2005.

Total Net Income (TNI), which adjusts for changes in farm inventories, is expected to decrease by twenty six percent during 2005.

The Canadian dollar continued to strengthen during 2005, with the annual exchange rate averaging $0.825 compared to US$0.768 during 2004. Since prices of many agriculture commodities are determined in US markets and priced in US dollars, the stronger currency continued to place significant downward pressure on commodity prices in Canadian dollar terms.

Crop Receipts

Crop receipts are expected to decrease by five percent at the Canada level in 2005 as a result of significantly lower prices for grain and oilseed crops, more than offsetting expected strong growth in receipts in the vegetable sector and floriculture and nursery sectors.

Grain and oilseed receipts are forecast to decrease substantially in 2005 due to the expectation of significantly lower prices for the major crops, which is expected to more than offset an increase in volumes marketed. Higher North American production and a stronger Canadian dollar contributed to these lower grain and oilseed prices. Farmers across Canada, with the exception of Manitoba, enjoyed above average yields. Manitoba suffered from excessive moisture that prevented the seeding of larger areas of crop land, resulted in a lot of seeded acres being abandoned, and significantly decreased yields in the most affected areas.

Sectors that are expected to exhibit strong growth are the floriculture and nursery sector as well as the greenhouse and other vegetable sector with receipts for each forecast to grow by six percent. Floriculture and nursery receipts are expected to continue to grow at a rapid rate reflecting strong consumer demand resulting from growth in personal disposable income.

Livestock Receipts

Livestock receipts are forecast to rise by five percent in 2005, driven by strong gains in the cattle and calf sectors which are expected to more than offset a significant decrease in the hog sector.

Cattle receipts are expected to increase strongly during 2005 but will still remain lower than pre-BSE levels. Both prices and marketings for cattle are expected to show significant increases as a result of the resumption on July 18 of trade in live cattle under thirty months of age with the United States. The resumption of trade is expected to result in a partial re-linking of Canadian cattle prices with United States cattle prices, with the exception of live cattle and meat from cattle over thirty months (OTM) of age which are still not allowed for export. Marketings of cattle are forecast to increase by ten percent, driven almost entirely by the resumption of international exports of UTM cattle while slaughter is forecast to remain at historically high levels

Calf receipts are forecast to increase by sixteen percent in 2005 as substantially higher prices more than offset a slight decrease in marketings. The higher calf prices reflect improved prospects for the Canadian fed cattle market.

Hog receipts are forecast to decrease by eleven percent, driven by lower prices and a decrease in marketings for both domestic slaughter and international exports. Hog production is expected to remain profitable despite the drop in receipts as prices are expected to remain relatively high on a historical basis while feed grain is expected to be relatively inexpensive due to large available feed supplies.

Receipts from the supply-managed commodities are expected to increase due mainly to an increase in dairy prices.

Program Payments

Direct program payments are projected to increase slightly in 2005 to $4.9 billion and to attain record levels for the second year in a row. A large increase in CAIS payments is expected during calendar year 2005 as the program responds to the severe income difficulties experienced by the cattle industry in 2004. Federal and provincial programs have responded decisively to difficulties in the cattle and grains and oilseeds sectors with high payments to affected producers. Since the beginning of the BSE situation in 2003, governments have issued $14.5 billion to help producers through this difficult period.

Expenses

Operating expenses are expected to be virtually unchanged as higher input prices, particularly for machinery fuel, fertilizer and the cost of purchasing livestock, offset lower feed costs. Fuel prices in Canada have reached record highs due to international political uncertainty and slow growth of crude oil supplies relative to the strong growth in fuel demand. This has been further exacerbated by the loss of refinery capacity in the U.S. Gulf Coast caused by Hurricanes Katrina and Rita. Fertilizer prices have also increased strongly during 2005 due to tight supply/demand fundamentals as well as higher energy prices. Following the reopening of the US border to trade in live cattle, cattle and calf prices are expected to climb sharply, resulting in higher livestock purchase costs. On the other hand, feed prices are expected to decline significantly as a result of large feed supplies and a stronger Canadian dollar.

Farm income forecast for 2006

Farm Income

In 2006, Net Cash Income is forecast to decrease by 16 percent at the Canada level as lower program payments combined with increased operating expenses are expected to offset small increases in receipts for both livestock and crops.

Provincially, NCI is forecast to improve in Alberta, British Columbia, Newfoundland, New Brunswick and Prince Edward Island. NCI is forecast to decrease in the rest of the provinces with Manitoba suffering a sixty seven percent drop in NCI as the province continues to cope with the effects of widespread flooding in 2005 which is expected to significantly draw down grain and oilseed stocks available to be marketed in 2006.

After accounting for depreciation, RNI is expected to be negative in Manitoba, Saskatchewan and Prince Edward Island.

Crop Receipts

Crop receipts are expected to increase by three percent in 2006 due to an increase in grain and oilseed marketings following the large harvest in 2005. Near record high corn and soybean production in the US in 2005 combined with good crops in Canada is expected to result in much higher supplies and burdensome carry-out stocks. When combined with the continued strengthening of the Canadian dollar, these large grain and oilseed supplies are expected to result in declines in the price of most grains and oilseeds. Wheat, barley and corn are expected to exhibit small improvements in price in 2006, but remain stubbornly low as crop prices in 2005 were extremely low. Receipts for special crops are forecast to decrease by twelve percent.

Horticulture receipts are forecast to increase during 2006, with fruit and vegetable receipts as well as floriculture and nursery receipts expected to continue to exhibit healthy increases. Potato receipts are forecast to rise as an increase in price is expected to more than offset a decrease in marketings.

Livestock Receipts

Livestock receipts are expected to increase by two percent in 2006, driven higher by a continued improvement in the cattle industry. Cattle receipts are forecast to increase by seven percent as cattle prices and marketings are expected to increase benefitting from a full year of exports to the United States of UTM cattle, as well as the resumption in trade with Japan in beef from cattle under twenty months of age.

Hog receipts are forecast to decline by another 4% in 2006 as a result of lower expected prices for hogs, more than offsetting an expected increase in marketings.

Farm cash receipts from supply managed products are expected to be virtually unchanged in 2006 as a forecast increase in receipts for dairy resulting from expected increase in the milk prices is expected to offset a slight decrease in receipts for poultry as the price of chickens is forecast to decrease.

Program Payments

Direct program payments are forecast to decline by fifteen percent in 2006, but will still be the fourth highest amount on record. The reduction in program payments is due mainly to the termination of special assistance programs for the cattle industry as the sector progresses on its recovery from BSE.

Expenses

Operating expenses are forecast to increase by three percent due mainly to higher feed prices, higher interest and farm labour costs. The higher feed prices reflect relatively high demand for feed and lower feed supplies. Interest costs are expected to increase due to a combination of higher farm credit outstanding and higher interest rates driven by a stronger Canadian economy in 2006. Farm labor expenses are expected to increase due to higher wage rates. On the other hand, livestock purchases costs are expected to decline due to lower livestock purchases in Canada as a result of higher UTM cattle exports to the US. Machinery fuel prices are forecast to moderately increase in 2006.

Farm Cash Receipts, Expenses and Income, 2005 and 2006

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 2005. 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. It is assumed that the duty of US$1.65 per bushel on corn entering Canada from the United States will remain in place for the entire calendar year 2006. While it is expected that the Government of Canada will arrive at a decision by the middle of 2006 as to whether this duty will be terminated or extended, the forecast for 2006 is based on policies that were announced or already in place at the end of December. The assumption of an exchange rate of US$0.825 for 2005 and $0.855 for calendar year 2006 has been used in the preparation of this forecast.
  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 a consensus forecast and the true value may be found to differ considerably. 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 11% increase in realized net income of $2.8 billion.
  5. The reference year (2004) represents the estimates released by Statistics Canada on November 25, 2005.