I’m just old enough to remember the farm bust of the 1980s.
I was a teenager at the time, and like all good parents would, my folks tried to shield me from the worst of their worries and woes. But I grew up on a grain farm, and in that era, troubles were unavoidable all around us. At home, among the neighbours, at school — times were clearly tough, and there’s little confusion as to why.
In the 1970s, a lot of sharp financial advisors told farmers repeatedly that now was the time to expand. Then U.S. agriculture secretary Earl Butz famously urged American farmers to plant “fencerow-to-fencerow” in an effort to maximize production and capture higher prices.
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Fortunately for the world at large, and unfortunately for farmers around the world, producers were up to the job. In just a few years, the world was creaking under the weight of a grain glut that drove prices below the new cost of production.
To heap more misery on an already difficult situation, inflation flared and began to get seriously out of control. In the U.S., where the macroeconomic policies that affect the world are set, it was well into the double digits by the late 1970s and early 1980s.
By 1980, then-U.S. Federal Reserve chair Paul Volker had jacked interest rates to a record 20 per cent in an effort to tame inflation. It was a move that hurt anyone who owed money, but it hit few sectors harder than the heavily indebted farm economy.
It was a prolonged pain. While rates eventually came down from nosebleed levels, they stayed high for a long time as inflation remained muted but stubbornly entrenched.
This history lesson isn’t intended to frighten anyone, but it is a polite reminder that, as the author Mark Twain once famously observed, “History may not repeat, but it often rhymes.”
The first signs that the fates could be aligning to sing us a familiar chorus can be seen all around.
Farmers are heavily indebted once again, to the tune of more than $138 billion in Canada alone. Inflation has returned and remains stubbornly higher than policy makers might want. It hit eight per cent a year ago and had fallen to 4.4 per cent as of April, still more than double the target inflation rate of two per cent.
And Canadians are, again, dealing with higher interest. On June 7, the Bank of Canada suddenly hiked its overnight rate to 4.75 per cent. It had paused rate jumps in January following a string of them last year.
Into this not-entirely-bright economic outlook, Farm Credit Canada has tried to inject some sunshine.
As Jonah Grignon reported in last week’s Co-operator, the lender announced it will offer unsecured credit lines up to $500,000 to agricultural producers and will waive loan processing fees. A similar offer was extended specifically to the hog sector.
The intention is to bolster farm cash flow and offset at least some of the short-term economic pain to get these operations over the hump.
It remains to be seen whether farmers are facing a modest bump or a massive mountain.
As Grignon’s story noted, there are hopeful signs.
Interest rates are higher than they’ve been in a while – sitting at 6.95 per cent for the prime rate. That’s still manageable relative to the rates seen in the 1980s, but are bound to be a bit stressful for younger producers used to lower rates.
Farmers have had a good run of profitability, allowing most of them to develop resources to draw on during tighter times. While grain prices have softened a bit, there’s still a chance to find profit. It’s going to make cost containment and efficiency an important part of the equation, but things don’t yet have that hopeless air.
However, the latest figures show the Canadian economy beat growth expectations handily in its most recent month. Ordinarily, that would be seen as a good thing, but in an inflationary era, it has sparked speculation that the Bank of Canada could resume rate hikes in June. Once that process starts, it’s anyone’s guess where it ends.
Farmers can still prepare. How does your farm measure up to financial ‘stress tests?’ Run the numbers at today’s interest rates, and then for a couple of scenarios with higher rates. Figure out where things start going off the rails. Then, consult lenders and farm management specialists about options.
