Cash advance interest increases

Farmer participation in the federal Advance Payments Program (APP) is expected to see continued growth thanks to record-low interest rates, higher per-farm eligibility limits and a streamlined administrative process, according to two of the country’s largest program administrators.

This year, APP applicants will be eligible to receive up to $1 million per farm — up from $400,000 — to assist with short-term cash-flow needs.

The first $100,000 of each advance will be interest free. The remaining amount — as much as $900,000 per farm based on harvested grain inventories — will be provided at a record-low interest rate of prime minus 0.75 percent through programs offered by two of the APP’s largest administrators, the Canadian Canola Growers Association (CCGA) and the Alberta Wheat Commission (AWC).

Based on current prime rates at commercial lending institutions, farmers can now borrow $1 million at a blended rate of about 1.5 percent annually, a rate that would have farmers from a generation ago shaking their heads in disbelief.

Both the AWC and the CCGA are accepting post-harvest applications through their respective APP programs.

Dave Gallant, director of finance and operations at the CCGA, said farmer interest in the APP program is growing thanks to low interest rates and higher eligibility limits.

Economic fallout from the COVID-19 pandemic has also resulted in a significant reduction in commercial lending rates over the past six months or so.

The prime lending rate at chartered banks now sits at 2.45 percent, putting CCGA’s rate on the interest-accruing portion of an advance at 1.7 percent.

Gallant said APP rates offered through CCGA are now at their lowest levels ever. The CCGA had been administering the program for 35 years.

Attractive borrowing rates are prompting even well-established growers in good cash flow positions to reassess their financing options, he added.

The advances now hold considerable appeal not only to farmers who have pressing short-term cash flow requirements but also to operators in good cash flow positions that are considering major capital expenditures.

Gallant said a $1 million APP advance secured at prime minus 0.75 percent could result in savings of $10,000 to $20,000 per year compared to the same loan secured through a commercial lender at prime or prime-plus.

“We are seeing, over the last couple of years, an increased use of the program by farmers,” Gallant said.

“I think the minister’s change last year to up the limit to $1 million had a big impact on the program.”

Syeda Khurram, chief financial officer at the Alberta Wheat Commission, said participation in AWC’s cash advance program, FarmCash, has also shown solid year-over-year growth.

FarmCash, which also offers advances at prime minus 0.75 percent, has been administering an APP program in Alberta for two years.

Khurram said FarmCash saw a 55 percent year-over-year increase in its portfolio between Year 1 and Year 2.

Thirty-eight percent of applicants in Year 2 were new applicants who had never before applied for a cash advance.

“With the increase in limits, farmers are taking advantage (of the program)…,” Khurram said.

A rapidly changing economic environment and fluid market conditions could result in future changes to the prime rate but as it stands, more Alberta farmers than ever are applying for advances.

Still, fewer than one in three Canadian farmers are participating in the APP program.

In Alberta, an estimated 27 percent of farmers are taking part. Among all grain farmers in Western Canada, the number is closer to 25 percent.

Participation among livestock producers is even lower at about 10 percent of potential applicants.

Both Khurram and Gallant said steps are being taken to increase producer awareness and to promote the program among growers who are either unaware or have chosen in the past not to participate.

“We’re trying to make sure farmers are aware of the program,” Gallant said.

In addition to low interest rates, the program affords growers greater marketing flexibility, which typically translates into greater farmgate returns.

“The whole purpose of the program is to put money in farmers’ pockets right now because as they’re harvesting, a lot of bills are coming due,” Gallant said.

“A cash advance allows them to not sell their product (off the combine) at a time when spot prices are historically at their lowest.”

“It allows them to put that grain in the bin, to sit on the grain and price it forward into the winter and next spring and achieve a much higher value for their product.”

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