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Better Farming Ontario magazine is published 11 times per year. After each edition is published, we share featured articles online.


Record farm debt a 'ticking time bomb'

Tuesday, August 5, 2014

Canadian farm debt has more than tripled in a decade – even when farm cash flow and incomes are high. Why is no one talking about the debt hole farmers are digging for themselves?

by BARRY WILSON

Farm debt looms large as one of Canadian agriculture's largely unremarked competitive crises.

You would never know it, based on the lack of debate on the issue.

At the end of 2013, Statistics Canada reported in May, Canadian farmers were $78 billion in debt.

The total was 7.3 per cent higher than the previous year and continues the inexorable increase in debt that has gone on for more than two decades.

Since 1993, farm debt has more than tripled from the $23-billion range during the decade before – a decade of record-high, double-digit interest rates and erratic farm income. Since then, every year has brought a new record with farm debt growing even when cash flow and farm income are high. The debt in aggregate never gets paid down.

Debt servicing charges are now one of the top farm expenses and rising, even with record-low interest rates. Debt servicing charges come off the bottom line.

It is a competitive disadvantage since per capita United States farm debt levels are far less than in Canada and lower debt servicing charges give American farm competitors an expense leg-up.

Canadian Federation of Agriculture (CFA) president Ron Bonnett, a northern Ontario cattle producer who felt the sting of 20-per-cent-plus interest rates in the 1980s, has called the growing farm debt a "ticking time bomb."

CFA vice-president Humphrey Banack also lived through the record 1980s interest rates, rising input costs and falling grain prices on his Alberta operation. His farm operation paid the price and he had to rebuild.

But there is remarkably little political debate about the debt hole farmers are digging for themselves. Politicians see little problem. Lenders generally look at low default rates, rising farm asset values and borrowing to expand and see it as "good debt."

However, rising asset values and (probably temporary) high farm incomes (with input costs racing to catch up) should hardly be a comfort.

The business side of farmers understands that, while income has shown itself historically to be volatile, debt and debt servicing are a constant. Debt is not serviced from high asset values, but from volatile cash flow.

Meanwhile, the Bank of Canada continues to signal that this unprecedented period of record-low interest rates cannot last forever.

At some point, macro-economic developments in Canada or the globe will mean a rise in interest rates and debt servicing charges. Interest rates can only trend one way, and that is up.

In a rare moment of lender pessimism, bankers appeared on Parliament Hill last year to offer a warning to senators on the agriculture committee. When asked about their greatest worries, the responses were illuminating.

"I am concerned that we have been in the low interest rate environment for quite some time," Stacey Schrof, agriculture manager for TD Canada Trust said. Banks must educate farmer clients about the dangers. In her words: "Can the operation sustain the impact of a five per cent or seven per cent interest rate? What does that do to the bottom line?"

BMO agriculture director David Rinehart underlined the false economy of low interest rates. "I remind people when I can that it was just six years ago that interest rates were twice as high as they are today," he said. "If you ask anyone, regardless of the industry they are in, whether they can tolerate an interest rate twice as high as they are paying today, the response, more often than not, is 'no.'"

Yet farm debt continues to grow at a record pace and the issue is not on the political radar screen.
Why? BF

Barry Wilson is a member of the Parliamentary Press Gallery specializing in agriculture.

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