Thank you for having me.
Let me thank the committee for the invitation to testify on debt in the agricultural sector and its effects.
I am the current president of the Canadian Agricultural Economics Society, and professor and director of the Institute for the Advanced Study of Food and Agriculture Policy at the University of Guelph. The society's mandate is to further our understanding of the economics that govern the food, agricultural, and resource sectors. While the institute has multiple mandates, its primary one is to attract students into the food and agricultural sector. Prior to joining Guelph, I was a professor at the Department of Agricultural and Resource Economics at the University of Arizona. While I have not published specifically on farm debt, I have in the past two years published peer-reviewed articles on closely related topics, including crop insurance, price volatilities, economic impact of disease outbreaks, and yield resilience and climate.
The ability to obtain a managed debt is critical to a sector's economic success. This is very true in the farm sector. In fact, because of the growing concern about increases in both farm debt and land values, in May 2015 the institute held a conference titled “Are we headed for another farm financial crisis?” The consensus, which included speakers Dr. Gervais and professors Weersink and Deaton—all of whom you have or will have heard from—was that we are not headed for another farm financial crisis.
Currently, the debt-to-asset ratio is relatively low, and farm cash receipts are strong. Hence, many have testified that debt is not a significant issue for the sector at this time, and I would agree. That said, the complexity of managing debt rises as risk increases, and I expect risk to increase in the future. I will focus my comments today on risk and the efficacy of the government programs that are meant to assist producers in managing risk. I will break risk into three categories: those related to production, those related to the market, and those related to policy.
Production risk can arise from such things as mortality, disease, genetics, weather, etc. Part of my research program deals with modelling crop yields. This research has revealed a number of interesting points related to yield risk. I will focus on corn yields. First, year-to-year yield volatility has doubled over the past 50 years. Second, the increased volatility has not been symmetric. That is, low yields are becoming relatively more volatile than higher yields. Third, this increased volatility can be mostly attributed to innovation rather than a change in climate.
Consider the following example. Over the past 50 years, seed innovations have allowed the planting density per acre to double, thereby increasing average yield per acre. However, the distribution of precipitation has remained constant during this period. While precipitation rarely limited crop yields in the 1960s, given increased planting densities, it does today. Our research shows that insufficient precipitation is now an order of magnitude more likely to cause lower yields because of innovation. As new technologies are adopted, the climate-yield relationship changes. At least historically, that change has increased yield risk, making the management of debt more complicated.
Market risk can arise from input and output prices, interest rates, and exchange rates. Interest rates appear to be relatively stable and low for the foreseeable future, but that can quickly change with changes in monetary policy. Increases in non-food uses, coupled with growth in global population and income, will increase long-run demand for agricultural goods. Long-run supply will be a function of expected returns in productivity growth, the latter driven by research and development expenditures. Overall, I expect long-run output prices to be constant or marginally increased as growth in demand is likely to outpace supply. Short-run prices will fluctuate with current supply, current income, and stocks. Exchange rate risk will continue as in the past, affecting both output and input prices. Our exchange rate is, and will continue to be for the foreseeable future, highly correlated with world crude prices.
Currently, policy risk is at the forefront, given rhetoric regarding a NAFTA renegotiation and component pricing and supply management.
Sometimes rhetoric turns into reality, as in the case of the softwood lumber countervailing duty. As an agriculture sector that depends heavily on trade or protection from trade, policy is perhaps the biggest risk facing Canadian producers right now.
The impacts of changing policy are most often manifested in changing prices as seen from mandatory country-of-origin labelling. Policy changes can have dramatic effects on producer income and, consequently, their ability to meet debt obligations. Moreover, policy changes can rapidly alter the value of assets such as land quota and machinery. Given the increasing global sentiment for stronger borders and the uncertain behaviour of the U.S., I expect policy risk to remain high in the short to medium term.
Business risk management programs like AgriInvest, AgriRecovery, AgriStability, and AgriInsurance assist farmers with the financial consequences of poor production outcomes. In fact, the suite of programs offers producers a significant amount of coverage in this respect. Moreover, the public sector has natural endowments that allow it to deliver protection more efficiently than the private sector.
While these programs shield producers from production risk, they do very little to shield producers from price risks caused by market or policy shocks. In this respect, producers' ability to make debt payments are vulnerable. It is noteworthy that Ontario and Quebec have provided farmers with a commodity-specific gross margin-based insurance program that assists producers in managing price risk. Also notable, the U.S. crop insurance program provides commodity-specific revenue insurance, which covers producers against both price and production risk.
In summary, I believe the current level of debt is not a cause for great concern given current asset levels and farm cash receipts. The greatest risks to the producers' ability to meet their debt obligations in the short run is policy risk related to stronger or weaker borders, always-present exchange rate risk, and interest rate risk. In the long run, greater attention in developing a business risk management policy, which assists producers to manage risk while not incentivizing risky practices, is needed.
Designing this policy, which provides adequate risk without incentivizing producers to adopt riskier practices, is challenging. That challenge will be exacerbated by uncertainty with respect to changing climate, consumer demands, and policy.
Thank you for the opportunity to speak to you today. I look forward to answering your questions.