Why no alarm bells about rising farm debt?

Saturday, August 8, 2015

Canadian farm debt has tripled over the last two decades. But low interest rates and high commodity prices can't last forever and safety net programs have been reduced – all reasons that farm leaders should be watching warily

by BARRY WILSON

When Canadian economists, analysts and their business media followers wanted a break from furrowing their brows over falling oil prices through the first half of the year, they often turned their attention to growing Canadian indebtedness.

Too many Canadian households are awash in debt, they warned. Too many Canadians are addicted to debt and are just one job layoff or pay cut away from being unable to meet their debt obligations. Headlines screamed that debt servicing costs, even with record low interest rates, were a "ticking time bomb" for consumers and homeowners.

In June, Bank of Canada governor Stephen Poloz joined the chorus. "We judge that the vulnerability associated with household indebtedness is edging higher," he said, which in muted Bank of Canada speak is akin to a sharp warning.

For the sake of their stress levels, it is just as well these sage economic doomsayers did not turn their attention to farm debt levels. Every year since 1993 has seen another record farm debt level in Canada. Statistics Canada says that between 2013 and 2014, Canadian farmers piled on another $5 billion in debt to reach $84.4 billion – a more than three-fold increase in two decades and six per cent in the past year.

During those years, the number of Canadian farms has fallen by one-third. In Ontario, while debt has risen four-fold to more than $22 billion during those years, the number of farms has fallen by one-quarter. Comparatively, farm debt levels in the United States are less than half Canadian levels – a clear competitive advantage.

There are obvious reasons for the debt pile-on by Canadian farmers and plenty of calculations to explain why most economists are not yet furrowing their brows over sharply escalating farm debt.
As older or smaller farmers retire or go out of business, their neighbors borrow to buy the property and expand. As farm businesses grow and buildings or equipment need expanding and replacing, capital investment is imperative.

Recent years of high prices for most commodities and record or close-to-record farm incomes have injected optimism into the industry. Rising capital values give farmers leverage to borrow more and debt-to-asset ratios remain reasonable. Interest rates at historic lows make borrowing attractive and farm debt arrears are low.

But still, there also are plenty of reasons why farm leaders, farmers and business analysts should be casting a wary eye on this orgy of farm debt accumulation. To name just a few:
Interest rates cannot, will not, remain at these low levels forever and the cost or servicing debt will rise. Even at these low interest rate levels, debt servicing is one of the fastest-growing farm expenses.

As players in a cyclical industry, farmers should not expect that current prices and income levels are the new permanent reality. Incomes and cash flows inevitably will fluctuate. Debt levels and servicing costs can go in only one direction – up.

Rising asset values are not a hedge against higher debt except at time of asset sale. Debt is serviced by fluctuating cash flow, not asset worth.

When the next income downturn arrives, producers will quickly realize that changes made to safety net programs in the 2013 iteration of the Growing Forward policy framework have sharply reduced their protection when prices and incomes go south.

For the moment, few farm debt alarm bells seem to be ringing on the political, financial or farm organization radar, but it is not difficult to imagine that this decade's easy money could be the basis for significant sector pain down the road. BF

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