Short-term and floating rate loans are so cheap that they’re hard to say no to.
But there is much fear that interest rates might start rising, and some call for rapidly escalating rates in a future inflationary environment.
What does Canada’s dominant farm lender think farmers should do when taking out debt: lock in rates now, or take the risk of variable rate loans?
That was the question Keystone Agricultural Producers member Butch Harder asked a senior Farm Credit Canada official.
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“Which way do we go with this?” asked Harder.
He got a non-committal answer from Lyndon Carlson during a panel discussion.
It’s a hard thing to predict. It’s a hard guess to know what rates will do in the longer term,” said Carlson.
“We certainly encourage our customers to have some of their portfolio of debt locked in and some of it variable.”
According to Carlson, FCC holds a portfolio of $20 billion in farm debt, which dwarfs its nearest competitor, which has less than $5 billion. Of that $20 billion, 80 percent is in variable rate loans.
Farmers are opting for variable rates, Carlson surmises, because of the giant spread between floating rates and fixed rates.
“I know why our portfolio is so variable, in terms of percent, because it’s what I call the insurance premium of a locked-in rate is so high,” said Carlson.
Farmers believe their best option is to pay at least temporarily lower interest rates and pay down principal with the savings, rather than pay higher interest rates over the entire life of a loan.
Carlson said he was confident that interest rates were not going to return to the conditions that applied 30 years ago, when their rates were 16.75 percent on locked-in 29 year loans.
“I don’t think we’re on a path to drastically increased rates,” said Carlson.
“I don’t think we’re going to see double-digit interest rates any time in our forecast.”
