OTTAWA – Rising interest rates, hiked by the government to defend a falling dollar, could cost farmers $300 million or more this year, economists say.
“Prairie farmers are double losers in a high interest rate policy,” University of Manitoba agricultural economist Daryl Kraft said. “Higher interest adds to their costs and a high interest rate used to prop up the dollar means they get less for their export crops than they would if the dollar fell lower.”
Most agricultural trade is conducted in U.S. dollars, so a weak Canadian currency means sales in U.S. dollars are worth more in Canadian dollars.
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Prime up one percent
Last week, the trend-setting Bank of Canada bank rate rose almost one full percentage point to 8.21 percent.
Banks then raised their prime lending rates for best customers to 9.25 percent, more than a one-percentage-point rise in less than a week. Most borrowers pay higher rates than that.
Financial analysts last week were predicting interest rates could rise several percentage points more this winter as the government struggles to keep the value of the Canadian dollar above 70 cents U.S.
But even if last week’s level is maintained through much of the year, the effect on Canada’s farm community would be significant.
“Overall, I would say we are looking at a $300 million cost of the latest hikes,” said Kraft.
Agriculture Canada economist Garth Gorsky had a lower estimate. He said the cost to average farmers would be between $400 and $500 in added 1995 debt servicing costs, approximately half Kraft’s estimate.
The actual effect on an individual farm will depend on how much short-term rolling credit is used.
Longer-term credit would not be as affected because most of those loans have locked-in rates. Farmers re-negotiating a five-year mortgage would actually find current rate levels two percentage points lower than rates were five years ago when they locked in.
The bad news does not end with the farm account books.
A farm machinery industry spokesperson predicted that higher interest rates will play havoc with sectors like his that supply farmers, usually on credit.
Brent Hamre of the Canadian Farm and Industrial Equipment Institute said the prospect of higher interest rates on the debt incurred to buy a new $150,000 combine will deter many farmers from making their purchase.
“Farmers will get behind the barrier and dig in, making do with the equipment they have now,” he said from the Burlington, Ont., head offices of the institute.
However, there also is a positive side to the currency markets chaos of the past few weeks.
Kraft noted many farmers have investments and the higher interest rates could mean more income for them.
As well, the value of the Canadian dollar has fallen during the past year, despite higher interest rates. This has helped boost export values.
“For those who export, the increased revenue may just about offset higher interest costs,” said Gorsky.
