Rising farm debt loads a concern for agricultural lenders

Challenges ahead Low interest rates are creating a false sense of security, says TD Canada Trust official

Two senior Canadian bank agricultural leaders say the level of Canadian farm debt could be a problem for the sector when interest rates begin to rise.

During a recent appearance before the Senate agriculture committee, representatives of the Canadian Bankers’ Association and five of its large national chartered banks said the booming agricultural sector is a major driver of their business on which they spend billions of dollars servicing.

However, debt levels became an issue when they were asked what challenges are looming.

Canadian farm debt levels have risen 150 percent in the past two decades to yearly record levels, and the 2012 Statistics Canada numbers scheduled to be released in late May are expected to show another record debt level of more than $70 billion.

Stacey Schrof, manager of agriculture for TD Canada Trust, said much of the optimism that lenders see in the agricultural sector is driven by high commodity prices and record low interest rates.

“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 percent interest rate or a seven percent interest rate? What does that do to the bottom line?”

David Rinehart, director of agriculture and agribusiness for BMO, echoed the concern.

“Without question, debt is escalating and will continue to escalate in the sector,” he said.

“In many respects, it has been predicated on a very low interest rate environment. I remind people when I can that it was just six years ago that interest rates were twice as high as they are today.”

He said 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.’ ”

He said BMO advises clients to prepare for interest rate fluctuations by hedging interest rate impacts.

“The problem, as with any business, is that if every dollar you earn is earmarked for debt service, then there is little latitude whatsoever for experimentation.”

Royal Bank of Canada agriculture national manager Gwen Paddock said the environment is a looming farm challenge.

“Agriculture needs to be proactive in adopting farm practices that are scientifically based and where the impact on the environment is managed and minimalized,” she said.

“If it is not done, then we risk losing our social licence to produce, in particular livestock production.”

The bankers were optimistic and saw agriculture as an innovative sector, but they said farmers should not expect banks to bankroll research and development plans in the industry.

“Because of the business model of the banks, because we are using depositors’ money to finance farms, when depositors put money into the bank they expect to get it back,” said CBA economic analysis director Alex Ciappara.

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