The Hill: The worrying growth in farm debt

Sunday, January 4, 2009

Since 1993, farm debt has been growing inexorably across Canada, and nowhere more than in Ontario, making debt servicing one of the fastest growing farm costs

by BARRY WILSON

In the darkest days of the early 1980s, when double-digit interest rates were the norm and grain prices were low because of the export subsidy wars, Ontario farmers carried a debt load of $5 billion.

Interest rates of 20 per cent and above drove many to bankruptcy or foreclosure in the first half of the decade. Resistance groups grew up to surround farms on foreclosure day to protect assets.

Many farmers edging into middle age and beyond remember those days with a shudder as they recount early days in the business and lessons learned. The main lesson was that high debt levels can be an albatross if servicing costs rise and incomes fall.

For most of the next decade, they kept their debt level stable or even tried to pay it down.  

Farm income conditions and commodity prices got better as interest rates fell sharply. By 1992, farm debt in the province had fallen more than 10 per cent or $500 million, to $4.8 billion. With interest rates down to single digits, debt-servicing charges were hardly on the provincial farm radar.

As it turns out, those were the good old days. Across Canada, and in nowhere more than Ontario, 1993 became the turn-around year when borrowing intensified and debt levels began to grow.

Since then, national farm debt has been growing inexorably, adding several billion dollars each year to a country-wide debt which has climbed 132 per cent in the past 14 years to more than $54 billion.

Even with interest rates at 50-year lows, debt servicing charges are one of the fastest growing farm costs, taking $3 billion last year off the bottom line of an agriculture sector which produced $40 billion in farm gate sales and would have been $2 billion in the red if not for $4.1 billion in taxpayer-funded farm support programs.

In Ontario, the growth of farmer indebtedness has been the most dramatic of any province. From $4.95 billion in 1993, debt had soared to $13.24 billion by the end of 2007, a 167.5 per cent increase. Almost half is owed to chartered banks, but Farm Credit Canada (FCC) also holds $4.3 billion of the debt.

Ron Bonnett, who remembers the double-digit days, says that debt makes Ontario farmers extremely vulnerable.

"That's why it is important that we have farm programs which work for farmers," says the Canadian Federation of Agriculture vice-president. "That is also why it is important to have FCC in the market because it offers lower rates in many cases."

University of Saskatchewan agricultural economist Richard Gray says that the high debt load nationally is risky because debt-servicing charges are stable or rising while farm income is volatile. "In the economic turmoil we're in, it is really impossible to predict what will happen to interest rates over the next while, so I see this as a very scary situation."

Gray says that "cheap money," is one of the reasons for the debt increase, but he notes that farmers in the United States have cut or better controlled their debt load over the years.

"That is where this becomes a competitiveness issue as well," he says. "Canadian farmers are hugely exposed and this is a cost that is higher here than there."
Yet farm sector indebtedness seems to be below the radar screen for most farm and government politicians.
It rarely gets debated or noted.

If interest rates ever start to trend up, they may wish it had been otherwise. BF

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