Farm community critical of bank rate hike

Monday, May 31, 2010

by SUSAN MANN

The Bank of Canada’s decision to raise its interest rate by a quarter percentage point today will affect some farmers on the edge but won’t make or break most growers, says a University of Guelph economist.

Alfons Weersink, a professor with the university’s department of food, agriculture and resource economics, calls the increase to 0.5 per cent from 0.25 per cent significant but not large.

The increase will likely lead to an increase in the prime rate banks charge their best customers.

Don Stevens, vice president and treasurer for Farm Credit Canada, says it’s industry standard for banks and credit unions to increase their prime rate when the Bank increases its rate. The industry's prime rate will increase to 2.50 per cent from 2.25 per cent on Wednesday.

Short-term, variable mortgage rates will rise but longer term, fixed mortgage rates aren’t expected to change for now.

“If you have a prime-based loan of any type the rate will be going up by a quarter of a per cent tomorrow,” he says.

Stevens says people with existing prime-based loans won’t see an increase in their payment. Instead, they’ll pay more on the interest and less on the principle component of their loan. That means it will take longer to pay off the loan.

He downplays the increase: “It’s not like it’s going to have a major impact on farmers.”

Weersink predicts farmers will see rising interest expenses for their mortgages and operating loans. Farmers have taken on more debt partially because of lower interest rates and also due to the good crop prices from 2006 to 2008, he explains.

He questions whether the increase marks the start of a steady climb upwards to significantly higher rates. “We’ve had record low rates and whether this is a movement out of that valley” is a key question for the long term, he says.

Bette Jean Crews, president of the Ontario Federation of Agriculture, says a significant number of farmers have variable rate mortgages or lines of credit and “any increase is going to make those payments harder to reach.”

The general economy may be on the rebound but Crews says it takes agriculture a little longer to recover. In addition, the recession is one in a list of a half dozen crises farmers are facing. “It’s just one player in all of these things that are making it hard for us to cover our costs.”

Henry Stevens, president of the Christian Farmers Federation of Ontario, says the Bank increased the rate too soon.

“It’s a false economy that we’re in right now with our (high) debt loads and everything else,” he says. Economic difficulties in some European countries and conflicts, such as those in North Korea and the Middle East, will have a negative impact on the economy.

Sean McGivern, Ontario coordinator for the National Farmers Union, says many farmers are concerned about interest rate increases because “the commodity prices are so low to start with and also due to the limited earning potential that’s there. Any added costs of any amount are going to have an effect.”

This was the central bank’s first interest rate increase in three years. Canada’s economy grew by a robust 6.1 per cent in the first quarter, led by housing and consumer spending, it says in a Bank of Canada press release. Employment growth has resumed.

The next scheduled date for an interest rate announcement is July 20. BF