23 Follow us on Twitter: @PrairieFarming Better Farming | November/December 2023 rates, says Olson. And they certainly never came across anything like the farm financial crisis of the 1980s when the BoC’s overnight rate at one point exceeded 20 per cent. “While interest rates are rising now, they are still low compared to that time period, and did not take the sudden and dramatic jump up like they did then,” says Alfons Weersink, an agricultural economist at the University of Guelph. Weersink adds the farming sector today is in a better overall financial position due to favourable prices over the last two decades and rising asset values compared to the ’80s. But that’s not to say farmers are out of the woods. “A drop in commodity prices now could be the major driver to change the situation and narrow margins considerably,” Weersink warns. Higher debt servicing costs The reverberations of today’s relatively high interest rates have been felt throughout the farming sector. Weersink says the effects will ultimately depend on how much debt an individual farmer has and how it’s structured. “Rising rates will increase expenses for everyone, but those who are highly leveraged, and those with high operating lines and/or long-term debt that will be refinanced soon will be most impacted,” Weersink says. Gervais adds that rising rates will often translate to higher debt servicing costs, with the impact being felt more for those with capital expenditure requirements, which are often financed via loans. “Those farms that are the most leveraged and capital-intensive – borrowing to add or replace equipment – would tend to be most exposed to rising rates,” Gervais explains. “In contrast, those that have healthy cash flows and have less of a need to borrow are least exposed to rising rates.” However, rising rates add risks not only to farmers who borrow, but also to those who don’t. “That’s because higher rates tend to act as a drag for the whole Canadian economy, reducing economic growth and impeding demand for commodities as a result,” Gervais says. One sector that could be most affected by high interest rates is dairy, according to Olson. Dairy farmers are typically able to borrow more than cyclical production sectors because of the guaranteed income flow that comes from supply management. With higher debt levels than other farm sectors, dairy farmers may feel greater pressure to make decision-making changes, he says. Less borrowing Of course, they’re not the only ones re-evaluating their decisions, and Olson says farmers in general are thinking twice about borrowing money while looking harder at their purchasing options. Gervais also sees softer demand for credit emerge as the sector adjusts. But strength in farm cash receipts over the last several years has allowed farmers to increase the use of cash in investment decisions, including the purchase of farm inputs and assets, he says. Farm cash receipts remained strong the first two quarters of 2023 – up $4.3 billion versus the same time a year ago to $48.3 billion, according to Statistics Canada. However, FCC reports yearend 2023 and first-half 2024 crop receipts will come under pressure from an estimated 13 per cent drought-related cut to grain, oilseed and pulse output. Additionally, farm net income recorded a major boost in 2022 due to the increased value of inventories from 2021’s drought thanks to a production rebound in ’22. “These stocks can and have been converted to cash, although this was done in 2023 at lower prices on average than the prices recorded in 2022,” Gervais notes. He adds that sectors hit by adverse growing conditions and/or low comInflation & interest rates Some producers are experiencing rising rates for the first time. Tracy Miller photo
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