by BETTER FARMING STAFF
Farm crisis? What crisis?
That was the consensus of speakers at a conference on farm financing held in Guelph on Tuesday, with caveats.
Farm debt continues to climb, but the consensus was that it’s not a bad thing. The value of farm assets is also on the way up, and there is no sign of a land value crash that might usher in a farm depression.
“I didn’t hear the word ‘bubble’ today,” said J.P. Gervais, chief economist, Farm Credit Canada, the closing speaker at the conference. While it’s unlikely that land prices will continue to rise at the same rapid rate as in the last couple of years, Gervais predicts a “soft landing,” the term used to describe a rate of growth between recession and high inflation.
The conference was sponsored by the Institute for the Advanced Study of Food and Agricultural Policy, an offshoot of the University of Guelph’s department of agricultural economics.
Economists largely based their analyses on 2013 data from Statistics Canada. The numbers on last year’s farm economics will be available in a few weeks.
At the end of 2013, Canadian farm debt was $78 billion. Gervais expects that 2014 farm debt will be $83-84 billion and it will continue to climb for a number of years.
photo: Alfons Weersink
Recent sharp climbs in the value of land traded in Canada have caused concerns. According to University of Guelph agriculture economics professor Alfons Weersink, “Some prognosticators look at what has happened in the past few years, the increase in land values (and) say the same thing happened in the 1970s and look what happened in the 1980s and the cycle is ready to repeat itself.
Previous to the 1980s crisis, the 1970s were characterized by rampant inflation. Interest rates were at 10 per cent, but lower than the rate of inflation. The grain-hungry Soviet Union became a customer for the first time. U.S. Secretary of Agriculture Earl Butz urged farmers to plant crops “fencerow to fencerow,” and farmers borrowed money to invest accordingly.
Then the Soviet Union invaded Afghanistan, grain sales were embargoed, and prices paid to farmers for crops and livestock fell. Exacerbating lower incomes, the new United States Federal Reserve Chairman Paul Volcker mandated high interest rates to bring inflation under control and lending costs in North America zoomed.
Weersink doesn’t see any such “black swan event” overtaking agriculture in the near future.
“Whether we are (about to repeat the cycle) or not, and I think there’s a big ‘if,’ there are lessons to be learned,” said Weersink.
“Farmers have more farm risk management strategies” to work with than in the ’80s, Weersink says. The current commodity price boom lasted longer than in the ’70s. “The demand for non-food uses won’t go away.”
Steve Duff, senior economist for Ontario Ministry of Agriculture, Food and Rural Affairs, said the average farm in Ontario is worth $2.3 million and in 2013, Ontario farmers held assets valued at $136 billion; of that, quota on a value-added basis is worth $12 billion. By contrast, machinery and equipment for all sectors is worth $7.8 billion.
In general, Duff said, farm operators are much better able to handle higher interest costs than they were in 2009 for example. High incomes have allowed farmers to build equity and to invest in technology and capital.
Ken Poon, economic policy analyst at the institute, said “very capital intensive” greenhouse operators carry large amounts of debt and already pay high amounts of interest on loans, but typically field crop farmers “really do not carry that much debt.” Poultry and dairy farmers carry debt but the risk is offset high, stable cash flow.
“The supply managed industries are some of the largest industries that we have in the province. You have to put that into context,” Duff said.
“There’s been a lot of talk about the Trans Pacific Partnership (TPP). The reality is the sector has been very good about reacting to changes,” Weersink said.
FCC’s Gervais stated farmers experienced a record net cash income in 2014. Tighter margins for crops projected in 2015. Agriculture is “doing way better than a lot of the rest of the economy.”
Gervais said FCC is actively engaged in “stress testing” clients who apply for loans, including scenarios where loan repayments are made “with 200 basis points added to the current rate.”
He did offer up some advice to farm business owners who are concerned about rising interest rates. The difference between long-term money and short-term money “has never been so low. You have a great opportunity to lock in low cost money and you should take advantage of that.”
Gervais also said working on efficiencies on the farm makes a big difference in incomes and ability to repay loans.
“The Canadian dollar is the wild card,” Gervais allowed, and it is a huge boost to the farm economy if it falls. It is currently at about 83 cents U.S. “A dollar at 75 cents really changes the picture.” BF
Comments
One of the flaws of an education in economics is that one can become an economist without ever taking any course in capital budgeting and/or investment analysis and, in particular, never once study anything about the vitally-important role of price/earnings multiples. On the other hand, anyone who:
(1) obtains a degree in business
(2) takes the Canadian Securities Course
(3) follows the investment strategies of Warren Buffett
enshrines these things and the differences between the two ways of looking at things show in this story, and glaringly-so.
When business and investment people discuss whether things are over-priced, the first thing to be analysed is P/E multiples - when ag economists get together, it would seem that P/E multiples are the last thing to be discussed, if at all.
More particularly, while there are many differences between the land price spiral in late 70s and now, the one common element is, or course, runaway price/earnings multiples which, presciently, became a cover story for one issue of Fortune magazine in 1979 - nothing has changed. Investors in farm land then, and investors in farmland now, all eschew any concept of price/earnings multiples when making investment decisions.
And, ironically, the wisdom of the investment adage, well-known to any commodities trader - "Things always look the rosiest just before the crash" seems to have been lost on this crowd as they, as if with one voice, chant the mantra that there is no sign of a land value crash. In particular, when Professor Weersink opines about there being no "black swan" on the horizon, nobody, except those who believe in the wisdom of P/E multiple-based investment strategies, ever sees one until it's too late.
Finally, I well-remember hearing the same "no cause for alarm" rubbish from the same type of talking heads in the late 1970s as they blithely ignored the same price/earnings multiple warning signs their successors are equally as blithely ignoring today
Sigh!
Stephen Thompson, Clinton ON
So you have land for sale again to take advantage of the price ?
You know it does not matter what it is worth until you sell it !
FCC supports the loan policies of FCC. What a surprise!
FCC has the largest ag. loan portfolio, $20 Billion, an ag. sector portfolio 4 times bigger than FCC's nearest competitor. About 80% of those loans have floating interest rates.
How did FCC get so big, so fast? They used taxpayer's money to buy the market. Canada's chartered banks have been complaining about this for decades.
Unfortunately, every Canadian citizen is at risk with FCC's gamble, for taxpayers guarantee the loans and decisions of FCC.
In the 1970's, FCC's predecessor made a similar gamble as both farm land prices and ag commodity prices soared. Every time their farm assets went up in value, the bank started calling all the farmers, offering even more loans. When interest rates climbed in the 1980's, and commodity prices dropped, and farm valuations also dropped, thousands of farmers could no longer afford their loans.
FCC's predecessor went bankrupt, and Canadian taxpayers got stuck with the bill.
Here, we have FCC saying that FCC is very smart and has everything under control.
The warning signs are clearly visible to all. Interest rates will soon start to climb. Bond rates will climb even faster than Bank of Canada rates. FCC will (or should) be basing their loans on bond rates. Please fasten your seat belts, turbulence is expected soon.
A "stress test" of 200 basis points (ie. 2%/yr interest rate increase) is not much of a stress test. Canadian bank Prime Lending Rate (ie. the rate charged their very best customers) averaged 7.58 percent from 1960 until 2015, reaching an all time high of 22.75 percent in August of 1981 and a record low of 2.25 percent in April of 2009. Currently it's 2.85%, so a 200 basis point "stress test" is calculated at 4.85%, a fraction of the average interest paid from 1960 - 2015.
FCC is just as confident now as what their bankrupt predecessor was in the early 1980's.
We'll soon see who is right.
Glenn Black
Small Flock Poultry Farmers of Canada
Do you actually realize or understand that Canada is a vast country with land that is used to grow and produce agricultural products ? You sound like an Liberal who thinks the food comes from a local garden and just appears on the store shelf every day .
Where were you when Thompson was towing his "Equity Trailer" around the province ?
Don't forget that FCC lends to all types of agriculture .
In response to "Do You Actually" http://betterfarming.com/comment/16278#comment-16278
Yes, I somewhat understand Canada. I have been as far East at Botwood Newfoundland, to Victoria BC, and the Klondike Highway, Alaska to Dawson City.
I understand that FCC is important to Canada. That's why it's important that FCC does an excellent job. Not too tight on credit, not too loose, just right.
My comments were based on the article above, as well as other research I had previously done on FCC as it related to the Supply Management sector for chicken.
If you are interested in learning from that research, you are cordially invited to review it:
I hope to learn something from you. I am not aware what you meant by "Thompson was towing his 'Equity Trailer' around the province" refers. Can you please explain in full?
Glenn Black
Small Flock Poultry Farmers of Canada
Mr. Black(and other readers) here is a link to a very interesting article if you have not previously come across it, if respectfully, BF will leave the link up. http://business.financialpost.com/fp-comment/overgrown-farm-credit-giant
Raube Beuerman
FCC is in the business of lending money but unlike the banks FCC should not be squandering money and making huge profits .
Banks are in the business of making money and they are accountable to their shareholders, as they should be.
As for the rest of your statement, please, read the article from the link I provided again if you have not already.
Raube Beuerman
Today, one would have to spend $31 for $1 in dividend income on average for top quality Canadian or US companies with a track record of increasing their dividends ahead of inflation.
In contrast, you would have to spend $60 for land per $1 of income.
A couple other things to consider 1) the tax implications on dividend income are superior.
2) Dividend income is obtained while sitting on one's a$$, while the other method requires work.
Now some may love driving up and down the field (I don't mind it either to a certain extent), but I can think of plenty of other things I would rather do.
Raube Beuerman
6 billion in increased debt across Canadian agriculture is substantial. I am not part of that statistic, I would fit into the category of reduced debt from the previous year.
The difference between now and the environment of interest rate increases of the early 80's is that the price discovery mechanism has been remove from the bond market. When central banks/government simply buy their own bonds(debt), it changes everything.
Aside from a black swan event, I don't see rates going up for quite a while.
One other comparison to note in this environment of low rates, compared to the late seventies, is the tax implications in that interest is paid before tax, while principle is paid after tax.
Are farmers really making any more money per acre inflation-adjusted than they did in the late seventies?
Realistically, is it mathematically possible that these loans will ever be paid off?
Raube Beuerman
When it comes to the purchase of farmland, and pretty-much anything else, farmers are notorious for believing the following:
(1) this time it's different
(2) price/earnings ratios don't exist and would mean nothing even if they did
(3) I'm such a good manager I'll be able to handle it
(4) my bank will lend me the money - how can it go bad?
On the last point, I "cut-my-teeth" in the early 1970s working for FCC lending money based on the income approach to value of farmland. If that approach was to still be used, and I'm one of many who believe it should, FCC would be lending somewhere around $3,000 to $4,000 per acre which would then give farmland a price/earnings ratio equivalent to that which might be earned on publicly-traded equities.
Further to that matter, one of the most-successful farmers I know was in business before he became a farmer and became a successful farmer by applying what he learned in business which was to never investing in anything, including land, which couldn't be paid for in seven years - quite understandably, he has been selling, rather than buying, land recently.
Finally, I'm going to venture a guess that none of the esteemed analysts at the recent seminar even thought about looking at the overpriced farmland issue from the income approach to value aspect.
Stephen Thompson, Clinton ON
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