Why isn't farm debt part of the ag policy debate?

Monday, August 5, 2013

Farmers continue to run up debt at record rates, but will they be able to carry their debt load if (or when) interest rates go back up? Financial experts have their doubts

by BARRY WILSON

So let's cut to the chase right off and then back into the wherefores and the whys.

Farm debt in Canada and Ontario is sliding into dangerous territory, reaching record levels every year and sustainable only because of historically low interest rates and record-high commodity prices and gross farm income.

Neither of those situations can continue indefinitely. Likely within the next two or three years, those favourable conditions will begin to turn.

Commodity prices are cyclical and history suggests they will soften sooner rather than later. The Bank of Canada has been warning that interest rates cannot remain at historic lows for long, particularly when the economy begins to rebound from its current sluggish growth level. Yet, every year for the past two decades, farm debt has reached a new height.

In 2012, national farm debt soared six per cent and more than $4 billion to $72.2 billion. Ontario carried 26 per cent of that, increasing more than 10 percent to $19 billion. Nationally, debt-servicing costs rose almost six per cent last year and were in the top five farm operating expenses. And despite this period of record commodity prices, farmers are increasing their debt rather than paying it down.

"I guess I would have thought that, with income levels as they were, there would be some pay down," Ontario farmer and Canadian Federation of Agriculture president Ron Bonnett said when the latest debt numbers were published by Statistics Canada. So why is this happening?

Optimistic lenders and optimistic government officials call it "good debt" – borrowing to expand farms, to consolidate properties, to invest in new equipment or to pay the costs of intergenerational transfer. Farm Credit Canada (FCC) says loans in arrears are rare. FCC regularly notes that farm asset values are increasing faster than debt increases, so what's the problem? Farmers are wealthier even as their debt grows.

But that is something of a false argument. Debt servicing is handled from cash flow, not asset value, so when debt servicing costs rise and cash flow diminishes, there is a problem unless you sell to get the asset payoff.

Lenders, normally the most optimistic of souls, actually have started to sound the alarm about growing farm debt levels.

At a Senate agriculture committee, bankers said there is a need for caution. Stacey Schrof, manager of agriculture for TD Canada Trust, was one of them.

"I am concerned that we have been in the low interest rate environment for quite some time," she said. "People get used to these rates and think they will stay forever. The responsibility of a financial institution is to educate our clients: can the operation sustain the impact of a five per cent interest rate or a seven per cent interest rate. What does that do to the bottom line?"

David Rinneard, director of agriculture and agribusiness for BMO, said he reminds clients that, not so long ago, interest rates were twice as high as now.

Many clients are shocked at the implication. "If you ask anybody, regardless of the industry they are in, whether they can tolerate an interest rate that is twice as high as they are paying today, the response more often than not is 'no.'"

Yet farmers continue to run up debt at record rates, creating a competitive problem with American farmers who face significantly lower debt servicing costs.

Why isn't this part of the Canadian agriculture policy debate? BF

Barry Wilson is a member of the Parliamentary Press Gallery specializing in agriculture.