Gap looms between Bank of Canada rate and what you pay at the bank

Tuesday, February 3, 2009

© AgMedia Inc.

by BETTER FARMING STAFF

Ralph Brodie, an OFA regional director and past president of the Kent Federation of Agriculture, says there are rumours to the effect that credit is tightening on farmers, but it's tightening on everyone, he says. There is a concern that the interest rates farmers pay on their loans are still too high, especially in comparison to the Bank of Canada rate.

"I'm not going to say they are gouging," Brodie says. But usually bank interest rates drop when the Bank of Canada rate drops

Brian Hughes, CEO of ACC Farmers’ Financial, which offers financial services to farmers and administers provincial commodity loans and federal advance payment programs, says, “maybe there is a tendency for the financial institutions to be reducing lines of credit.”

Yet banks are still aggressively looking for business, including from farm operations, he says. But the relationship between the prime rate and the bank's premium has changed and it's causing concern in agricultural circles.

What’s the stumbling block?

A different pricing structure, Hughes says.

Hughes says the Bank of Canada’s decision to slash its rate forced banks to raise premiums in order to meet their dividend goals. He’s heard of instances where bank premiums – over and above the prime lending rate – have grown to three and a quarter per cent.

Loan rates at ACC are also rising and comparable to those available from banks, he says. In the past, the non-profit farm organization’s rates were “extremely competitive and in a lot of cases better than the banks,” he says. Some of the programs ACC administers features interest-free loans. 

But in the big picture, “maybe the overall borrowing costs are down a bit but more controlled,” he says, pointing out when combined, prime and bank premiums for financing inputs are now around six and a quarter per cent and are actually lower than the seven to eight per cent they were a year ago.

Hughes says a trend among input suppliers to substitute third party financing for in-house financing isn’t making it any more difficult than it was before for farmers to obtain input credit.

Maybe it’s more formalized and there’s more paperwork. “But I can guarantee you it’s not excessive.”

Ultimately, the approach saves suppliers money. “It costs an awful lot of money to run a credit department and stay in the business you know,” he says.

He points out that Farm Credit Canada, which operates a financing program for Cargill and other Ontario suppliers, offers a pre-approval program that gives qualifying producers until March, 2010 to pay off their debts and also allows them to pay down at any time.

Hughes says the trend towards third party financing became more prevalent in the last two to three years. Then, when the Canadian dollar peaked in 2008, input suppliers with elevators began jumping on board to free more money for operating costs. ACC helps administer some of these programs.

"It's trying times in agriculture now," Brodie says. The cash cropper hasn't booked his inputs for the spring. He's still waiting for fertilizer prices to drop. Recently the price of urea went up $50 a tonne. "I hope it will drop again before I have to plant." BF