Canadian farmers facing higher prices for fertilizer, fuel, farm chemicals and machinery will soon have another cost increase to contend with.
In late January, the Bank of Canada warned that that interest rates will need to increase to control the country’s rising inflation rate.
Canada’s consumer price index inflation rate was calculated at 4.8 percent in December, the highest rate the country has seen in roughly 30 years.
The U.S. inflation rate increased to 7.5 percent in January 2022, the highest rate that country has seen since 1982.
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Most financial analysts are projecting a Bank of Canada rate increase of at least 0.25 percent at the beginning of March.
Beyond that, many analysts believe the Bank of Canada rate could rise another 100 basis points before the end of the calendar year, adding significantly to debt servicing costs on loans linked to commercial prime.
“We want to clearly signal that we expect interest rates will need to increase,” the Bank of Canada said in a Jan. 26 statement.
“A lot of factors are contributing to the uncomfortably high inflation we are experiencing today.
“With Canadian labour markets tightening and evidence of capacity pressures increasing, the (bank) expects higher interest rates will be needed to bring inflation back to the two percent target.”
It is unclear how higher borrowing costs will affect the financial situation of Canadian farmers and agri-food businesses.
Canada’s outstanding farm debt as of last June was estimated at a record $121.9 billion, according to Statistics Canada.
Much of that is long-term debt, negotiated at fixed rates, which are protected from Bank of Canada interest rate fluctuations for the term of the loan.
But loans with floating rates could see interest rates increase almost immediately.
For several months now, Canada’s largest farm lender, Farm Credit Canada, has been warning farm sector borrowers about the potential for higher borrowing costs.
The total value of FCC’s lending portfolio was estimated at more than $41 billion last year.
In a June 2021 news release, FCC said Canadian farm debt is under control, but warned that a sudden increase in interest rates could have a significant impact on the ability of farm operations to service their debt.
Higher borrowing costs, combined with trade disruptions, unfavourable weather conditions and rising farm input costs, could impact farm revenue and debt servicing capabilities, FCC added.
“With the level of debt in the farm economy, producers must be aware of the potential for higher interest rates and factor that into their risk management plans,” FCC chief economist J.P. Gervais said at the time.
Last month, Gervais suggested the Bank of Canada’s overnight lending rate could increase to 1.5 percent by the end of 2022, up from 0.25 percent currently.
Based on that, prime lending rates offered by Canada’s commercial banks could increase to the range of 3.5 or four percent within the next 11 months.
“If you look at 2022, the expectation of financial markets is that the Bank of Canada overnight rate is going to be up by 125 basis points between now and the end of 2022 … so that’s 1.25 percent,” Gervais said.
The Bank of Canada’s next interest rate announcement is scheduled for March 2.
In an interview earlier this month, Gervais said growers should take the opportunity to reassess their risk exposure in the expectation of higher interest rates.
In some cases, highly leveraged growers may want to reorganize or consolidate debt.
Overall, the ability of growers to service their debt loads shouldn’t be significantly impaired unless farmgate revenue falls due to crop failures, market disruptions or geopolitical tensions that affect global trade, he added.
“It’s always about evaluating your risk,” Gervais said.
“Rates are going to change … and we also know that inputs are really high right now and we know currently that commodity prices are really high … but we don’t know if that’s going to be sustained throughout 2022.”
Despite uncertainty, Gervais said the outlook for farm revenues remains strong.
Last month, FCC projected that Canadian farm cash receipts would increase by 4.6 percent in 2022, following an 11.9 percent year-over-year increase in 2021.
