Farm Credit Canada’s chief economist says accumulated farm debt levels are manageable as long as incomes can be sustained in their current range.
J.P. Gervais said Canada’s accumulated farm debt, which reached $84 billion last year, is not a cause for concern, but it must be managed wisely.
“Obviously $84 billion at the end of 2014 is a big number … (but) I think they are manageable because of the levels of income that we’re seeing in the marketplace and because of where we’re at in terms of interest rates,” Gervais said.
“But more than interest rates, I think it’s really the level of income that really matters. If we can sustain net cash income in both crops and livestock, I think we’re going to be all right.”
Canada’s farm debt levels have been rising steadily over the past 20 years. In recent years, analysts have suggested that even a modest in-crease in interest rates could leave many of the country’s largest producers in a precarious financial spot.
Total farm debt levels increased to $50 billion in 2005 from $25 billion in 1995. Since 2005, total farm debt has risen another $34 billion.
The country’s total farm lending portfolio increased by nearly $6 billion between 2013 and 2014 alone, or eight percent, which is the largest single year increase ever recorded.
Gervais downplayed concerns over rising interest rates, saying farm loans are stress tested to assess the borrower’s ability to service debt under a variety of economic circumstances.
However, borrowers should lock in historically low interest rates for long-term financing.
“I would argue that right now is a pretty good time to do some sound risk management and lock in some of the low rates for long-term money that we’re seeing in the marketplace,” Gervais said.
In the shorter term, the Canadian dollar bodes well for export sales.
Debt accumulation during the past few years has occurred during a period of historically strong and in some cases record commodity prices. Farmers used that opportunity to make significant capital purchases such as land acquisitions and machinery purchases.
Gervais said major capital expenditures are expected to slow this year.
Accumulated farm debt will continue to rise, but at a more moderate level.
Accumulated farm debt has increased by an average of 4.5 percent a year over the past 30 years.
“I think in terms of growth, I think we’re going to see some slower growth than what we’ve seen in 2013 and 2014 when it comes to farm debt,” he said. “As long as we’re managing risk and making the investments to become more productive, I think we’ll be all right.”