Consolidation a key factor | Farm debt in Canada has tripled since 1994
For the 20th consecutive year, Canadian farm debt has hit a new record as farm leaders and bankers warn about the vulnerability of the sector when interest rates rise.
According to Statistics Canada farm debt totals published May 23, Canadian farm debt last year climbed more than six percent, $4 billion, to $72.2 billion.
Last year’s almost-record increase came as net farm income totalled more than $7 billion for the first time.
And figures show that borrowing against unsold crops under the advance payment program has fallen by half over the past five years to less than $1 billion.
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“I guess I would have thought that with income levels as they were, there would have been some pay down,” Canadian Federation of Agriculture president Ron Bonnet said May 27 from his northern Ontario farm.
He speculated that increased debt came from borrowing to finance farm consolidation.
The asset value of farms increased more than 10 percent last year to $360 billion, according to the federal agency.
Bonnett noted that debt servicing is paid for from cash flow, not from growing asset values. Last year, debt-servicing costs increased to almost $2.5 billion despite record-low interest rates.
“We always tell farmers that they have to be very cautious about debt because it is very interest rate sensitive,” he said.
Since 1994 when farm debt began to rise after a decade of double-digit interest rates and relatively stable debt levels, farm debt in Canada has more than tripled.
Meanwhile, with a farm economy usually calculated to be 10 times Canada’s, farm debt in the United States is $230 billion, just three times the Canadian total.
Bonnett said that largely reflects farm subsidies under the U.S. farm bill. “While a lot of our farmers were going under, money kept flowing under the farm bill.”
The CFA president said he does not consider farm debt levels a crisis. “But I think it does put a yellow flag up that we have to be cautious.”
Lenders typically consider growing farm debt a sign of a healthy and optimistic industry but even some bankers offered a cautionary note during a recent Parliament Hill appearance.
Stacey Schrof, manager of agriculture for TD Canada Trust, told the Senate agriculture committee that much of the optimism lenders see in the agricultural sector now 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 Rinneard, director of agriculture and agribusiness for BMO, echoed the concern.
“Without question, debt is escalating and will continue to escalate in the sector,” he told Senators. “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 advice to clients is 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.”
According to the Statistics Canada calculations, chartered banks last year held more that one-third of farm debt, followed by Farm Credit Canada and the federal government and then credit unions with more than $11.5 billion of the debt.
