OTTAWA – Canadian farmers are a record $25.7 billion in debt and the news provoked recent words of caution about the dangers of assuming too heavy a debt load.
In the past two years, despite strong commodity prices and higher farm incomes, debt has actually increased more than nine percent.
Agriculture minister Ralph Goodale said rising debt may be good news if it means farmers are investing in expansion or diversification. He noted the value of farm assets also has increased
But low interest rates and high commodity prices should not lull farmers into assuming debt they cannot service if conditions change.
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“I think it is important for everyone in the agriculture sector to be very prudent about overheating the system,” he said in an interview. “We saw what that could lead to in the 1980s.”
Canadian Federation of Agriculture president Jack Wilkinson issued a similar warning.
“I am not surprised the debt has gone up but I think there is a real potential here for a problem,” he said. “Interest rates likely will go up some. Commodity prices probably will come down some. We have lost a lot of our safety net. People should be cautious about getting over-leveraged.”
While industry watchers were unclear about reasons for the increasing debt, they speculated farmers could be borrowing to expand or to buy out their parents who want to retire.
Russ Holm, executive vice-president of operations for the Farm Credit Corporation, said the government decision to end transportation subsidies for prairie grain farmers also could have jolted many farmers into borrowing.
“Perhaps with the end of the Crow, farmers have had to look at revamping their operations to accommodate that,” he said from Regina.
Holm also speculated some of the “farm” debt may actually be agribusiness debt, since the FCC has been loaning more to farmer-owned businesses that serve the farm sector.
“I would like to see the definition because I expect the definition has been broadened and some of what is considered farm debt now would not have been a few years ago,” he said.
Whatever the reasons, officials noted with a debt that high, a one percentage point increase in interest rates adds more than $20 million to the annual cost of servicing the debt.
“That’s a lot of money,” said University of Saskatchewan agricultural economist Murray Fulton. “I would say it could be a good sign of expansion but it also could be an added burden to the farm sector, particularly if revenues drop or interest goes up.”
One area of concern is that farm debt levels in the United States have fallen in the past decade while they have increased in Canada.
“I would say that could be a competitive advantage for the Americans,” said Holm.
During the past two years, farm debt has stayed constant in Saskatchewan but increased 19 percent in Manitoba, four percent in Alberta and 14 percent in British Columbia.
“You have to be a bit nervous that we are not making the same mistake we made in the 1970s,” said Saskatchewan grain farmer and Reform party MP Elwin Hermanson.
“If the money is being borrowed to diversify or go into cattle, it could be a prudent decision but if it is for land, I’d be nervous. Those farmers could be vulnerable.”
