The government’s boost to Farm Credit Canada’s lending capacity and delaying repayment of cash advances is aimed at addressing immediate agriculture sector cash flow concerns — but there’s more to come.
That was the word this week from federal Agriculture and Agri-Food Canada Minister Marie-Claude Bibeau.
FCC is getting a $5-billion boost to its lending capacity and farmers are being offered a six-month delay in repaying their 2018 cash advances, to Sept. 30.
Why it matters: COVID-19 may undermine future farm income, but many producers are suffering now from a steady decline in margins, compounded by harvest troubles last fall. Many farmers want cash not more debt.
It’s intended to help farmers still recovering from setbacks during 2019, and in anticipation of future problems related to COVID-19, a federal government official said in a March 25 interview.
Bibeau delivered that same message during a telephone news conference March 23.
“For the farmers and food processors who are facing tight margins and a cash crunch, together these two measures announced today will help keep money in their pockets when they need it most,” she said, adding it’s support farm groups suggested.
But Bibeau also said farmers can expect more assistance.
“As we respond to issues step by step there will be more things to come,” she said. “It was important to have this in place as soon as we did to help with immediate cash flow concerns. There will be other measures of support for the food system. It’s really extraordinary times. Nothing is really off the table at the moment. Work will continue looking at options around financial support and looking at what’s available through BRMs (business risk management programs) — all of these things.”
But some farmers are panning this message. Keystone Agricultural Producers president Bill Campbell is among the critics, worried Ottawa’s programs fall short.
If farmers can’t repay cash advances — loans against inventory repaid when farmer sells — they aren’t making enough money — something better addressed through improved BRM programs, Campbell said in an interview March 24.
“All we’re doing is piling more debt on more debt,” he said.
A better option might have been to give farmers up to $400,000 in interest-free cash advances instead of the current $100,000.
However, Campbell did say the programs will help some farmers with cash flow.
Campbell said he doesn’t want the public to think farmers are getting a $5-billion handout through FCC.
The Agricultural Producers of Saskatchewan said the programs were a good first step.
FCC’s president and CEO Michael Hoffort and Dave Gallant, director of finance and operations with the Canadian Canola Growers Association, which is a cash advance administrator, say the programs will help many farmers.
Bibeau’s office said the government isn’t giving FCC $5 billion, but reducing the dividend FCC pays the government annually.
That additional money strengthens FCC’s balance sheet, Hoffort said in an interview March 24.
“And with a stronger balance sheet you can lend more money because you can leverage that,” he said.
“It also allows us to withstand changes to the risk profile of our book, but also take a bit more risk in how we serve the Canadian agriculture and food sector in this time.
“We’ve got 100,000 customers across the country. If they are experiencing some challenges with their term loans primarily we could look at full deferrals — principal and interest for six months — or interest only for a year. Those will be case by case — what does the farm or business need we will structure it up to best meet those needs.”
The $5 billion will also allow FCC to provide clients and non-clients with up to $500,000 in credit.
“It’s specific security and a very straightforward way of kind of freeing up cash flow for the industry,” Hoffort said.
If farmers have credit then they can buy their crop inputs in an orderly way this spring without delays, he added.
Off the farm
Meanwhile, some food processors that have lost restaurant markets need cash to help them find new markets.
In other cases processors’ suppliers are demanding cash because of increased risk and uncertainty.
“Having a little more access to an operating facility could be of value to some of those operations,” Hoffort said. “If people don’t need it they shouldn’t apply for it. We’ll be happy to talk to them tomorrow or next week or a month or two down the road depending on what happens here.”
The six-month stay of default on loans under the Advance Payment Program applies to cash advances issued in 2018 worth a total of $173 million, including $143 million for grains, oilseeds and pulses. They were supposed to be repaid April 30.
“If you still have money outstanding that’s interest free it remains interest free until September or until you pay it off,” Gallant explained in an interview March 25. “You are still required to pay as you deliver the product and if you have an interest-bearing portion of your advance the interest clock continues to keep on ticking and they will pay that as they pay off the rest of their advance.”
Under the cash advance program farmers can get up to $100,000 interest free. If they have repaid that loan they can get up to $100,000 interest-free loan through the 2020 program.
“If you have a 2018 outstanding advance, and you may have one from 2019, you can still get more money if you’re under the limit for 2020,” Gallant said.
Paying makes sense
Although farmers with 2018 advances can defer payment until Sept. 30, there’s significant incentive to repay sooner to get a 2020 loan at a much lower interest rate, he said.
The interest charged on 2018 loans is CIBC prime versus prime minus three-quarters of a per cent on 2020 loans.
“The prime rate at CIBC is 2.95 per cent today,” Gallant said. “Come April 1 when we issue these (2020) advances to farmers any interest-bearing portion will be 2.2 per cent.”
Farmers can borrow up to $1 million if they have enough inventory to cover it. The first $100,000 is interest free.
“When you get $100,000 at zero interest and $900,000 at 2.2 per cent your blended (interest) rate on a million dollars… is two per cent,” he said. “If you were borrowing the same amount of money at prime today that would save you just shy of $10,000 a year. We certainly don’t see this as a panacea solving all the problems of the world, but it makes low-cost cash available to farmers if they are borrowing anyway and who is not borrowing today?
“At the rates right now, it’s getting pretty close to free when you’re at two per cent.”