For years financial advisers, analysts and economists warned farmers to prepare themselves for higher interest rates.
And for years, more than a decade now, they have faced skepticism from many when their caution did not seemed to be borne out by the ultra-low interest rate environment that followed the 2008-09 financial crisis.
“You tell me rates are about to rise, but for the past 20 years I’ve come out on top (by ignoring interest rate risk),” said Farm Credit Canada’s J.P. Gervais, summing up a common farmer response to presentations he and other experts have made for years.
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Interest rates have just never seemed to go up.
However, that’s now changing as interest rates recently started to climb and some analysts are predicting they will march steadily higher as long as U.S. economic growth remains good.
That will likely create a profit squeeze for most farmers, unless crop and livestock prices surge higher, as higher debt payments eat into the production margin.
But for young farmers, it is a much greater challenge, farm management experts say, because they are dealing with something they have never dealt with before, and they are in the stage of life when debts are prone to rising the fastest.
With thousands of young farmers under pressure to take over their parents’ land and operations, taking on debt is often the only realistic option to allow for orderly succession. That might now be happening against the tide of higher rates, high land prices and a weak Canadian dollar.
Interest rates are still historically low, but have been marching higher. The Bank of Canada rate is independently set, but closely follows the path of the U.S. Federal Reserve Bank system. The Fed has recently boosted its rates and removed guidance language that suggested a deliberate support for low rates.
Now the Fed is operating like conditions are “normal” again, and in the past that meant that good economic growth and low unemployment required higher interest rates.
The Bank of Canada rate has steadily increased since mid-2017, and most banks and other lenders roughly match its moves. That’s making mortgage debt, equipment loans, leases, lines-of-credit and other forms of farm debt more expensive.
At the same time, crop and livestock prices have weakened, producing lower profits and making debt payments a proportionately bigger burden.
While the older generations of farmers needed to survive the high interest rates of the 1980s and most carry the lessons of that era with them today, younger farmers didn’t have those lessons to draw upon. It has been more than 10 years since interest rates seemed to threaten profitability, but even in the mid-2000s that threat was more than mitigated by the surge in crop prices that began in 2006. Higher interest rates happened while crop prices shot higher, hiding the increased debt cost.
When the global economy slumped during the crisis, interest rates were slashed, then commodity prices quickly rebounded and most farmers recall most of that era as some of the best times ever in farming.
However, the low interest rates since 2009 have had a major impact on farm economics, with most analysts attributing much of the skyrocketing price of farmland to the extremely low cost of carrying debt during the ultra-low interest rate era. Farmers might not have seemed to have been taking on much of an interest burden by buying property, but their indebtedness level soared as they acquired land.
For young farmers trying to get up to a reasonable scale, to achieve the operating efficiencies most advisers say are essential for long-term success, that has meant piling up the farmland debt. With many farmers wanting to retire, their farming children have often faced pressure to buy land sooner than they might have wanted.
Gervais said the challenges of farm succession are significant enough for the agency to hire specific succession specialists to help farmers think through the complexities.
Now that debt is getting harder to carry, interest rates are coming back into risk management calculations. Farmers need to begin incorporating it in their calculations.
“It’s a changing environment,” said Gervais.
We just need to be smart about risk management. We need to know our risk profile.”
Rising interest rates, if they continue, are one additional risk to farm profitability, but Gervais said farmers need to look at the issue holistically, as part of the plethora of risks their farm faces. By itself, the interest rate is just one factor. However, when combined with low crop and livestock prices and a desire to expand, it needs to be fitted into a farm’s general level of risk.
