The gods have looked down from their lofty home atop Mount Riding and blessed western Manitoba with warm weather this week. That’s ideal for Manitoba Ag Days in Brandon, which poses the yearly challenge to farmers about what to do with your coat when you go to the show. Sometimes it’s relatively cold in the sprawling complex of buildings and booths and it’s OK to wear a winter coat all day as you check out the new machinery, talk to the cheery staff flogging products and services at the thousands of booths in the trade show, or sit and listen to informational and educational sessions. This year it seems to be about 98 degrees inside the buildings, making sweaty types like me feel like a wiener that’s been put on the BBQ still in the plastic wrapper, but with the warm weather outside some are cleverly leaving their coats in their trucks before taking the half-mile walk across the parking lots to the entrance. You wouldn’t want to try that when it’s minus-29 degrees out, as it often has been. So, after posting this, I’m going to drive over to the show, leave my wienerskin in the car, and cheerily tread across the parking lot with merely a long-sleeved shirt between me and the winter.
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Everyone seems very up and optimistic here in Brandon. The worldwide financial and economic crisis seems to have decided to give the farm economy a miss. That was clear not just from the aisles packed with farmers beginning to think about what they’ll need to buy for the coming spring seeding season, but also from comments a number of speakers made about farm credit. This seemed to be me both happy and hopeful and disturbing and alarming. Farm credit is still flowing to grain growers, which seems an obviously good thing. But that, of course, is helping push farmland prices ever higher and leading to higher and higher farm debt levels.
A rather disturbing chart shown by a senior Farm Credit Canada manager showed that Canadian farm debt has almost doubled since 1998, from about $35 billion to almost $60 billion. Much of that debt has been taken-on to pay for higher land prices. So relatively easy credit has allowed farmers to buy farmland, which has pushed up farmland prices, which has inspired farmers to keep buying something that they not only need from an operational standpoint, but which also seems like a good long-term investment because it keeps going up in value.
But what if interest rates spiked? Most farmers don’t carry a lot of long-term debt so most wouldn’t be hurt by this. But three speakers yesterday warned farmers to not take today’s low interest rates for granted, especially if they’re the ones who have pushed farm debt up so high. The man from FCC said farmers need to think about what would happen to them if interest rates rose to 10 percent. Could you make your payments without having to cut other spending on your farm? The Bank of Canada has said it’s not planning to start raising interest rates until at least midsummer 2010, so there’s about half a year of relative safety ahead. But what then? If you’ve financed your farm on the basis of forever-low long term interest rates, you’re naked in the face of that risk.
The FCC man said he didn’t think there was a problem with farm debt levels, either for his lending agency or for farmers. “I would suggest it remains sustainable.” That sounded comforting. But so did those sorts of comforting words from Wall Street luminaries about the packaged subprime loans they were conning pension plans into buying as mathematically low-risk investments. Is there a bubble in farmland prices? That’s a question you could answer if you knew future grain prices. If we’re in a long term commodity bull market and crop prices have moved up to a permanently higher range with occasional spikes that allow farmers to cash out big-time like in 2008, then higher and higher farmland prices make sense, as long as they offer the basis for profitability. If we don’t get that permanently higher range of prices and don’t get those big windfall years, the profit expectations built into higher farmland prices could deflate, taking down the land prices.
My dark thoughts on this matter don’t seem to be shared by many. Recently a newsletter I receive predicted there would be a huge rise in farmland prices across the prairies as investors around the world increase their buying of farmland in safe democracies like Canada. This view says that prairie farmland is significantly undervalued and set for a rise to reasonable levels, so any large increase is not a sign of an overheated farmland market but will simply be the farmland market catching up from an undervalued level. As with earthquakes, as we’ve seen with Haiti recently, when markets move they can move quickly to relieve pressure and adjust to a new long-term equilibrium that can stay unmoving for many years. A seismic shift to the upside of prices would help retiring farmers put aside a comfy nest egg and be good for them. It wouldn’t be so good for young farmers trying to build their acreage to an efficient size. A seismic shift to the downside would wreck many aging farmers’ retirement plans, but help the young people get into the business.
Or perhaps farmland prices will just continue rising year after year after year, gently and predictably. That’s what they have been doing for years now. And, as they say in the markets, “the trend is your friend.” (Until the end, when it bends.)
