“I think what started out looking like a great year has suddenly… chilled a little bit.”
Canadian farmers, alarmed by plunging commodity prices, are nervous that the global financial crisis could tighten up the credit they count on to tackle the rising cost of planting crops and feeding livestock.
There have been few signs of a credit crunch for agriculture in Canada to date, major lenders said. But farmers are watching how lenders respond to volatile markets and rising borrowing costs.
“Farmers have to borrow a lot more money than they used to,” said Ron Bonnett, an Ontario cattle producer and a vice-president of the Canadian Federation of Agriculture.
“If credit tightens up and interest rates go up, that could be devastating to the farm community.”
Bullish but cautious
For their part, lenders remain bullish on agriculture, but are cautious.
“It’s really too early to see an impact (from the financial crisis),” said Dan Bergen, chief operating officer of Farm Credit Canada, the country’s largest farm lender, which is backed by the federal government.
“It’s a real time of uncertainty, and it’s very difficult to look into the future,” Bergen said.
Grain farmers in Canada, one of the world’s largest exporters of farm products, were in a relatively strong position ahead of the crisis. Their prices skyrocketed as world grain stocks dwindled amid surging demand from markets such as China and India.
National farm income more than doubled in 2007, according to Statistics Canada. Cash receipts for the first half of 2008 were up more than 12 per cent from a year earlier.
Grain prices for this year’s large harvest have since dropped, although they remain at historically strong levels. But costs for fuel, fertilizer and other supplies have been slower to drop, pinching margins.
Meanwhile, livestock producers have grappled with high feed costs, and the Canadian dollar, which until recently was relatively strong, has made their exports less competitive in the key U. S. market.
Lenders said indicators point to a financially healthy sector. Land values remain high, loan defaults are low, payments are current, and many farmers have been conservative about drawing down operating lines of credit.
Recent volatility has also curbed farmers’ ambition to buy land and equipment, said Brian Little, head of agricultural lending for the Royal Bank of Canada.
“I think what started out looking like a great year has suddenly… chilled a little bit,” he said.
The value of farm assets continued to rise last year, outpacing growing liabilities, but StatsCan said farmers had a record-high debt-to-asset ratio of 20 per cent.
As the cost of capital rises, lenders have increased rates for some higher-risk farm loans, said Bill Condon, a commercial account manager at Bank of Montreal who works directly with farm clients in Manitoba.
“It’s a file-by-file basis, but our costs (for) funding loans have increased,” Condon said, adding credit was still widely available.
Canada’s farm sector has a strong equity base and can generate enough cash to service its debt, said Bob Funk, vice-president of agriculture at Bank of Nova Scotia.
“If interest rates were to rise within a narrow band, then we would say there would be no real impact on the viability of clients,” Funk said.
“I don’t believe that we feel that there’s anything really unusual coming up for banking for agricultural clients.”
In the bigger picture, world grain stocks remain tight and food demand will continue to increase even if global recession slows growth in emerging economies, said Rex McLennan, chief financial officer of Viterra, Canada’s largest grain company and a major provider of credit for supplies such as fertilizer and chemicals.
“The agribusiness sector is not going to be impacted (by the financial crisis) as much as many other sectors in the economy,” he said.