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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 2006 and 2007.

The farm income forecast is a federal-provincial consensus on the outlook for 2006 and 2007. Actual farm income may differ from this forecast for a number of reasons. For example, the value of the Canadian dollar and the price of oil have exhibited considerable volatility in recent years. Since both directly affect farm income, unanticipated changes in either can result in actual farm income differing from the forecast.

This farm income outlook is based on information available up to the end of December, 2006. 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 remain virtually unchanged due to a strong performance in the cattle industry, which masks the fact that hog receipts are forecast to exhibit a substantial 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 2006

Farm Income

Net Cash Income (NCI) in Canada is forecast to decrease by 4% in 2006, largely due to an increase in operating expenses, which are forecast to go up by 4%. An expected 10% increase in crop receipts and steady revenue in the livestock sector will not offset the combined effect of rising input costs and lower program payments.

On a provincial basis, Saskatchewan and Alberta are expected to register increases in farm income as a result of higher crop receipts which can be attributed to an expected increase in the prices received for grain crops combined with higher marketings. Farm income in Ontario, Quebec and Manitoba is expected to be dragged down as a result of a significant decline in receipts in the hog industry. Higher prices for animal feed, machinery, fuel continue to have a negative effect on farm income nation-wide.

Realized Net Income (RNI), which takes depreciation into account, is expected to decrease by 13% at the Canada level in 2006.

Total Net Income (TNI), which adjusts for changes in farm inventories, is expected to decrease by 61% during 2006, as strong marketings of crops and livestock significantly draw down inventories.

The Canadian dollar continued to strengthen during 2006, with the annual exchange rate forecast to average US$0.881 compared to US$0.825 during 2005. 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 increase by 10%, setting a new record. With $14.8 billion expected in 2006, crop revenue is driven by significantly higher receipts for the major grain and oilseed crops, along with healthy growth in other major crop sectors.

Grain and oilseed receipts are projected to increase significantly in 2006, driven mainly by substantially higher marketings and prices for canola and non-durum wheat. Most of the major grain and oilseed crops are expected to show price gains in 2006 after extremely low prices in 2005. Strong demand for feed grains from the livestock sector and the biofuel industry coupled with a decrease in supply among major exporting countries is behind the improved prices in 2006.

After declining in 2005, receipts in the floriculture and nursery sector are expected to improve by 3% in 2006. Total fruit receipts are expected to increase 16% and total vegetable receipts are expected to rise 2%. Potato receipts are expected to rise 20% as a result of improved prices and strong marketings in the latter half of 2006 due to record yields.

Livestock Receipts

Livestock receipts are forecast to be virtually unchanged in 2006, as strong gains in the cattle and calf sectors are expected to more than offset a significant decrease in the hog sector.

The year 2006 is the first full year of an open border for live cattle under thirty months of age. As a result, cattle receipts are expected to increase by 8.5% during 2006 as Canadian cattle prices have been partially re-linked with United States cattle prices. Higher cattle marketings in 2006 are driven entirely by international exports of UTM cattle, as slaughter in Canada is forecast to decrease significantly.

Calf receipts are forecast to increase by 9.5% in 2006 as 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 almost 14% in 2006, driven by an expected 12% drop in prices as marketings are expected to remain stable with an increase in international exports just offset by a slight drop in slaughter. Hog producers have struggled to remain profitable at these prices, as feed grain prices rose in the latter half of 2006.

Program Payments

Program payments are forecast at $4.5 billion in 2006, compared to the record high level of $4.9 billion reached in 2005. Total program payments in 2006 will reach the fourth highest level of payments ever made to farmers in Canada. Excluding the recent abnormal years where large payments were made to compensate for BSE (2003 to 2005), the 2006 program payments would be the highest level ever reported.

Program payments are forecast to decrease by 10% in 2006 compared to the previous year, due mainly to the termination of the Farm Income Payment Program and BSE-related programs such as the Cattle and Calf-Set Aside programs. In addition, lower Production Insurance payments are expected in 2006.

Partially offsetting these lower payments, substantial assistance through the Grains and Oilseeds Payment Program (GOPP), the CAIS Inventory Transition Initiative (CITI), and CAIS-related enhancements in Alberta are expected to help maintain program payments in Canada at a high level in 2006.

Additionally, payments under the Canadian Farm Families Options Program (CFFOP), a two-year pilot program committing a total of $550 million, are not included in the program payments forecast, as this program has been deemed to not be business income for statistical purposes.

Expenses

Operating expenses are expected to increase by 4% in 2006 due mainly to higher input prices, particularly for machinery fuel, fertilizer, feed and interest 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. Fertilizer prices have also increased strongly during 2006 due to tight supply/demand fundamentals as well as higher energy prices. Interest rates are also forecasted to increase due to the continued overall strength of the Canadian economy. This is expected to result in a 13.8% increase in interest costs in 2006. Moreover, the commercial feed prices are expected to increase as the supplies of feed had tightened considerably given the growth in the biofuel industry.

Farm income forecast for 2007

Farm Income

In 2007, Net Cash Income is forecast to decrease by 2% at the Canada level, as continued growth in operating expenses combined with lower program payments once again are expected to offset increasing receipts in the crops sector.

After accounting for depreciation, RNI is expected to decline by 13% in Canada and to increase for most provinces except Quebec, Ontario, New Brunswick and British Columbia.

Crop Receipts

Crop receipts are expected to increase a further 14% in 2007, also setting a new record, due to continued improvement in the prices for all the major crops in Canada. A continued strong demand for feed grains from the livestock and biofuel sectors is expected to provide strength in grain and oilseed prices for 2007.

Potato receipts in 2007 are projected to rise 10%, the result of a good 2006 crop and stronger prices, as major growing areas in North America continue to work together to better match supply with demand. Floriculture and nursery receipts are projected to increase by 2% in 2007. Despite strong consumer demand for floriculture and nursery products resulting from healthy growth in personal disposable income, a projected decline in housing starts and increased competition from offshore companies is expected to place pressure on this sector in 2007. Total vegetable receipts in 2007 are expected to remain stable while fruit receipts are projected to be down 6%.

Livestock Receipts

Livestock receipts are expected to decrease slightly in 2007, driven lower by declining receipts in the cattle, calf and hog industries. Cattle receipts are forecast to decrease by 4.5% as cattle prices are expected to soften while marketings are expected to remain stable.

Farm cash receipts for hogs in Canada are forecast to fall a further 3% in 2007, as hog prices are expected to further deteriorate by about 3%. With this expected price drop and expected further increase in the prices of feed grains, the hog industry in Canada could be faced with negative profitability in 2007.

Program Payments

Program payments in 2007 are forecast at $3.7 billion, down 17% from 2006 and 15% lower than the 2001-2005 average. These lower program payments are mainly driven by the termination of the Grains and Oilseeds Payment Program (GOPP) and by producers winding down their NISA accounts.

Additionally, payments under the Canadian Farm Families Options Program (CFFOP), a two-year pilot program committing a total of $550 million, are not included in the program payments forecast, as this program has been deemed to not be business income for statistical purposes.

Expenses

Operating expenses are forecast to increase by 4% in 2007 due mainly to higher fertilizer prices, higher interest and feed costs as well as increasing farm labour costs. Higher fertilizer prices reflect expected relatively high natural gas prices and strong demand for fertilizer, supported by general improvements in world commodity markets and growing demand for bio-fuels. Interest costs are expected to increase, as the prime rate is forecast to increase by 2% in 2007. Commercial feed prices should continue to increase in 2007 given the growth of the biofuel industry. Farm labour expenses are also expected to rise due to higher labour prices.

Farm Cash Receipts, Expenses and Income, 2006 and 2007

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 2006. Agriculture and Agri-Food Canada 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. 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.
  3. 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.
  4. The reference year (2005) represents the estimates released by Statistics Canada on November 24, 2006.

Forecast by province:

For more information on this publication, please e-mail: Econ_Research@agr.gc.ca.