Farm debt levels indicate need for clear fiscal plan

Farm debt reached $62.9 billion in 2009, according to Statistics Canada, marking the 17th straight year that farm debt levels have risen to record amounts in Canada.That is why the recent Bank of Canada decision to raise interest rates by a quarter of a percentage point was not welcome news for farmers.While the increase to .5 from .25 percent is not likely to make or break anyone, it warrants attention when considered in conjunction with farm financial statements.Farm Credit Canada said the industry’s prime rate will increase to 2.5 percent from 2.25 as a result.The debt statistics, as well as farm income and cash receipt figures, should serve as a caution to those in the agricultural industry.In addition to farm debt numbers, Statistics Canada issued a report that showed farm cash receipts have fallen 12 percent nationally for the first quarter of 2010.A third StatsCan report showed realized net farm income is also down slightly to $3.59 billion in 2009 from $3.6 billion in 2008.While it is certainly too early to use the ‘C’ word – crisis – it may signal the ideal time for farmers review business plans, analyze risk levels and appetites, and take steps to remain on sound footing.Across the country, debt levels held by farmers and their ability to manage that debt varies widely. But many financial analysts predict that interest rates will continue to creep upward.Corrective measures by governments of all levels are critical to help bring stability to the industry during uncertain times, and it is important that governments send the proper message to farmers and investors now, rather than waiting until the issue reaches a rolling boil, as we have seen too often in the past.Governments can encourage greater profitability in agriculture by working to open new markets, ease unnecessary regulatory burdens, develop quick and effective risk management tools and fund research and other initiatives that keep Canadian farmers competitive.And although nobody is predicting the double digit interest rates the country went through in the early 1980s and again in 1990, current debt levels should at least prompt those involved to ensure that the debt level is manageable.Farm debt is not inherently bad if it is affordable. Agricultural lenders in the past have opined that rising debt levels are healthy because they signal optimism in the future of individual operations and agriculture in general. There’s obviously a tinge of rose in the coloured glasses worn by these lenders, but there is a hue of truth in the idea. Higher debt and related serviceability of that debt demonstrate that investors have confidence in the industry and their ability to profit and then repay those borrowings. Farmers and others continue to buy land and machinery and make other investments based upon what they believe is good for their businesses.Still, the current figures remind us to learn from past mistakes and monitor market trends and interest rates.Those investing in agriculture should enter into those investments with an eye to long-term viability. Debt servicing is a key consideration.And while confidence is important, it must be tempered with a realistic outlook, a sound plan and a grasp of business fundamentals, including expectations of a reasonable return on investment.