Economists downplay likelihood of farm crisis
Friday, May 29, 2015
by BETTER FARMING STAFF
Farm crisis? What crisis?
That was the consensus of speakers at a conference on farm financing held in Guelph on Tuesday, with caveats.
Farm debt continues to climb, but the consensus was that it’s not a bad thing. The value of farm assets is also on the way up, and there is no sign of a land value crash that might usher in a farm depression.
“I didn’t hear the word ‘bubble’ today,” said J.P. Gervais, chief economist, Farm Credit Canada, the closing speaker at the conference. While it’s unlikely that land prices will continue to rise at the same rapid rate as in the last couple of years, Gervais predicts a “soft landing,” the term used to describe a rate of growth between recession and high inflation.
The conference was sponsored by the Institute for the Advanced Study of Food and Agricultural Policy, an offshoot of the University of Guelph’s department of agricultural economics.
Economists largely based their analyses on 2013 data from Statistics Canada. The numbers on last year’s farm economics will be available in a few weeks.
At the end of 2013, Canadian farm debt was $78 billion. Gervais expects that 2014 farm debt will be $83-84 billion and it will continue to climb for a number of years.
photo: Alfons Weersink
Recent sharp climbs in the value of land traded in Canada have caused concerns. According to University of Guelph agriculture economics professor Alfons Weersink, “Some prognosticators look at what has happened in the past few years, the increase in land values (and) say the same thing happened in the 1970s and look what happened in the 1980s and the cycle is ready to repeat itself.
Previous to the 1980s crisis, the 1970s were characterized by rampant inflation. Interest rates were at 10 per cent, but lower than the rate of inflation. The grain-hungry Soviet Union became a customer for the first time. U.S. Secretary of Agriculture Earl Butz urged farmers to plant crops “fencerow to fencerow,” and farmers borrowed money to invest accordingly.
Then the Soviet Union invaded Afghanistan, grain sales were embargoed, and prices paid to farmers for crops and livestock fell. Exacerbating lower incomes, the new United States Federal Reserve Chairman Paul Volcker mandated high interest rates to bring inflation under control and lending costs in North America zoomed.
Weersink doesn’t see any such “black swan event” overtaking agriculture in the near future.
“Whether we are (about to repeat the cycle) or not, and I think there’s a big ‘if,’ there are lessons to be learned,” said Weersink.
“Farmers have more farm risk management strategies” to work with than in the ’80s, Weersink says. The current commodity price boom lasted longer than in the ’70s. “The demand for non-food uses won’t go away.”
Steve Duff, senior economist for Ontario Ministry of Agriculture, Food and Rural Affairs, said the average farm in Ontario is worth $2.3 million and in 2013, Ontario farmers held assets valued at $136 billion; of that, quota on a value-added basis is worth $12 billion. By contrast, machinery and equipment for all sectors is worth $7.8 billion.
In general, Duff said, farm operators are much better able to handle higher interest costs than they were in 2009 for example. High incomes have allowed farmers to build equity and to invest in technology and capital.
Ken Poon, economic policy analyst at the institute, said “very capital intensive” greenhouse operators carry large amounts of debt and already pay high amounts of interest on loans, but typically field crop farmers “really do not carry that much debt.” Poultry and dairy farmers carry debt but the risk is offset high, stable cash flow.
“The supply managed industries are some of the largest industries that we have in the province. You have to put that into context,” Duff said.
“There’s been a lot of talk about the Trans Pacific Partnership (TPP). The reality is the sector has been very good about reacting to changes,” Weersink said.
FCC’s Gervais stated farmers experienced a record net cash income in 2014. Tighter margins for crops projected in 2015. Agriculture is “doing way better than a lot of the rest of the economy.”
Gervais said FCC is actively engaged in “stress testing” clients who apply for loans, including scenarios where loan repayments are made “with 200 basis points added to the current rate.”
He did offer up some advice to farm business owners who are concerned about rising interest rates. The difference between long-term money and short-term money “has never been so low. You have a great opportunity to lock in low cost money and you should take advantage of that.”
Gervais also said working on efficiencies on the farm makes a big difference in incomes and ability to repay loans.
“The Canadian dollar is the wild card,” Gervais allowed, and it is a huge boost to the farm economy if it falls. It is currently at about 83 cents U.S. “A dollar at 75 cents really changes the picture.” BF