Caution advised if eyeing cheap credit

Borrowing too much when interests are low may be asking 
for trouble, but using it to refinance can 
be a smart move

What do you do with historically low interest rates and oceans of cheap debt available to people with good credit?

That’s a question confronting flush farmers and other creditworthy businesspeople in Canada and around the world.

Fortunately, most analysts think farmers have plenty of time to ponder the question.

“In the short to medium term, we don’t expect rates to increase,” said Sebastien Pouliot, an economist with Farm Credit Canada.

Falling interest rates have been an ongoing story since the 2008 global financial meltdown, but in the last few years have fallen into territory most never expected to see.

In Europe, some countries’ central banks have dropped interest rates into the negative, actually charging people for holding government debt rather than paying any interest whatsoever.

Those rates set the basis for commercial loans across the banking spectrum with high quality commercial borrowers, low quality commercial borrowers and consumers paying higher rates.

Canada, the United States, the United Kingdom and some other advanced economies have not yet trodden into the negative rates area, but their central bank rates are historically low.

Canada’s central bank governor, Tiff Macklem, said in mid-July that the current 0.25 percent overnight rate would likely remain “for a long time.”

Central bank watchers said that implies a two-to-three-year period.

Farmers, like other commercial borrowers, would pay more than that for money they borrow, but another feature of recent years is the narrowing of the basis between top quality and lower quality lending rates. For most, borrowing now is the cheapest ever.

Should farmers make capital purchases today taking advantage of super-low rates to modernize their farms? Should they lever up with debt to buy land? Should they re-finance existing debt?

Pouliot has a word of caution about over-borrowing for new spending during the current world situation.

“For sure, a lower interest rate helps, but the lower interest rate is because of COVID-19,” he said.

P.I. Financial adviser David Derwin agrees with that caution.

“They’re not always a good thing,” said Derwin, about loading up with cheap debt when the economic future is cloudy.

However, if they allow holders of maturing debt with higher rates to be refinanced with cheaper money, lower rates could reduce a farmer’s existing financial risk.

“You might as well capture these lower rates while you can,” said Derwin, who also expects low rates to last for at least the short term.

“I don’t think they’re going up, but if you can get some low financing, all the better.”

And for normal borrowing, whether for purchases or operating, lower rates are obviously better than higher rates.

The challenge is being able to take advantage of the low rates created by the aftermath of the global financial crisis and today’s pandemic while not taking on additional risk due to those problems.

In that, farmers are facing the same situation as every other businessperson.

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