Farmers Under Pressure to Mitigate Interest Rate Impacts

No Rate Cuts Imminent

By Richard Kamchen

Farmers could use relief from high interest rates, but aren’t likely to get any soon, leaving them to mitigate the challenges themselves.

In a capital-intensive sector like farming, higher interest rates increase borrowing and production costs, and can influence buying decisions for machinery and equipment, inputs, and land.

In its fight against inflation, the Bank of Canada (BoC) has raised its overnight policy rate several times recently, from a mere 0.25 per cent in January 2022 to five per cent in July 2023, a level not seen since April 2001.

Farm Credit Canada’s chief economist J.P. Gervais predicts the BoC’s rate has likely peaked at five per cent.

“FCC Economics expects the overnight rate to remain unchanged through the rest of 2023 and into early 2024,” he says.

Given inflation remains above the BoC’s two per cent target, Gervais says “it’s way too early to even contemplate rate cuts.

“The likelihood of cuts will, however, increase as we get deeper into 2024, not only because inflation is expected to be closer to target by then, but also due to enhanced risks of a major economic slowdown as the lagged impacts of earlier rate hikes are fully felt,” he says.

Farmer looking out over field
    -Emily Croft photo

As much as farmers would like to see an interest rate cut sooner than later, Eric Olson, an MNP farm management consultant in Winnipeg, stresses they need to assume no such relief is imminent. Farmers should plan for where rates are today, and make whatever changes that are necessary for their businesses.

New territory

With interest rates having been relatively low the last 15 years or so, there are producers out there who’ve spent their entire farm careers having had no experience with rising interest rates, says Olson.

And they certainly never came across anything like the farm financial crisis of the 1980s when the BoC’s overnight rate at one point exceeded 20 per cent.

“While interest rates are rising now, they are still low compared to that time period, and did not take the sudden and dramatic jump up like they did then,” says Alfons Weersink, an agricultural economist at the University of Guelph.

Weersink adds the farming sector today is in a better overall financial position due to favourable prices over the last two decades and rising asset values compared to the ’80s. But that’s not to say farmers are out of the woods.

“A drop in commodity prices now could be the major driver to change the situation and narrow margins considerably,” Weersink warns.

Higher debt servicing costs

The reverberations of today’s relatively high interest rates have been felt throughout the farming sector.

Weersink says the effects will ultimately depend on how much debt an individual farmer has and how it’s structured.

Two young farmers sitting on a tractor wheel looking at laptop
    Some young farmers are experiencing rising interest rates for the first time. -Emily Croft photo

“Rising rates will increase expenses for everyone, but those who are highly leveraged, and those with high operating lines and/or long-term debt that will be refinanced soon will be most impacted,” Weersink says.

Gervais adds that rising rates translate to higher debt servicing costs, with the impact being felt more for those with capital expenditure requirements, which are often financed via loans.

“Those farms that are the most leveraged and capital-intensive – borrowing to add or replace equipment – would tend to be most exposed to rising rates,” Gervais explains. “In contrast, those that have healthy cash flows and have less of a need to borrow are least exposed to rising rates.”

However, rising rates add risks not only to farmers who borrow, but also to those who don’t.

“That’s because higher rates tend to act as a drag for the whole Canadian economy, reducing economic growth and impeding demand for commodities as a result,” Gervais says.

One sector that could be most affected by high interest rates is dairy, according to Olson.

Dairy farmers are typically able to borrow more than cyclical production sectors because of the guaranteed income flow that comes from supply management.

With higher debt levels than other farm sectors, dairy farmers may feel greater pressure to make decision-making changes, he says.

Less borrowing

Of course, they’re not the only ones re-evaluating their decisions, and Olson says farmers in general are thinking twice about borrowing money while looking harder at their purchasing options.

Gervais also sees softer demand for credit emerge as the sector adjusts.

But strength in farm cash receipts over the last several years has allowed farmers to increase the use of cash in investment decisions, including the purchase of farm inputs and assets, he says.

Farm cash receipts remained strong the first two quarters of 2023 – up $4.3 billion versus the same time a year ago to $48.3 billion, according to Statistics Canada. However, FCC reports year-end 2023 and first-half 2024 crop receipts will come under pressure from an estimated 13 per cent drought-related cut to grain, oilseed and pulse output.

Additionally, farm net income recorded a major boost in 2022 due to the increased value of inventories from 2021’s drought thanks to a production rebound in ’22.

“These stocks can and have been converted to cash, although this was done in 2023 at lower prices on average than the prices recorded in 2022,” Gervais notes.

He adds that sectors hit by adverse growing conditions and/or low commodity prices this year will find pressures on profit margins to be more significant and amplified by higher interest rates.


The price of farmland may also be impacted by higher interest rates, but there are two schools of thought there.

Higher interest rates should theoretically lower farmland prices because interest rates raise the costs of borrowing and production, making land less affordable.

However, inflationary pressure can also encourage people to move their money into hard assets that store their value and keep up with inflation, like land.

Olson works not only in Manitoba, but also southwestern Ontario and southern Saskatchewan, and he hasn’t observed downward pressure on farmland prices. In fact, quite the opposite.

“We see clients that are still in a fairly good financial position aggressively buying land, so we see land prices still moving up,” says Olson. “If you’re a high equity, low debt farm that’s had a few good years, you’re still going to be aggressively looking at purchasing land and replacing machinery.”

Gervais concurs, saying robust farm revenues supported continued increases in asset values, including farmland, where land values in 2022 rose at an average annual growth of 14.6 per cent.

“Investments on Canadian farms have been strong as the increase in farmland values and continued growth in farm cash receipts have supported capital expenditures,” Gervais says.

Holding inventory

Higher interest rates can also discourage farmers from holding onto inventory.

Holding inventory comes at a cost – either the interest paid if the business has debt, or the interest that would have been collected on savings if the inventory had been sold.

Olson hasn’t come across producers who’ve changed their marketing decisions over the cost of holding grain – yet.

“Our grain clients over the last few years have had some really good years, so most of them aren’t carrying high debt loads on their inventory,” Olson says. “The majority of clients I’m dealing with are doing their normal marketing as they would have, whether they usually held inventory or sold inventory.”

That’s not to say this can’t change. Farmers carrying higher debt loads may need to sell their grain sooner if they’ve borrowed significantly against their inventory.

“Then hoping for a small increase in the price of a commodity is offset by the carrying cost of the interest,” Olson says.

Mitigation actions

Gervais says farmers are adapting to a higher interest rate environment by strategically reviewing its impact to their bottom lines.

“Some farms may opt to accelerate repayment of loans, while others may want to stand pat and use cash flow to maintain operations.”

He recommends farmers review their own current loan terms, timing, and structure, as well as go back to some farm management basics.

“Knowing their cost of production, when loans are up for renewal, can allow them to take proactive measures, including around scenario planning and interest rate sensitivity,” Gervais says, adding that producers should also speak to their lenders about fixed versus variable rates.

Olson warns the full effects of high interest rates may yet to have been felt. He points out many farmers had locked in their rates prior to the BoC’s hikes, and that some of those loans haven’t come due yet. BF

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