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Low interest rates a risk too

Pay attention to the financial obligations you’re assuming, says FCC’s head economist

Make good use of low interest rates, but don’t get carried away.

That’s the message from Farm Credit Canada’s chief economist, J.P. Gervais, in the wake of announcement from the Bank of Canada that the key overnight interest rate would be left at 0.5 per cent.

Bank of Canada Governor Stephen Poloz also said Canada is likely into a prolonged period of low interest rates, but warned Canadians to be cautious.

Farmers also need to heed that warning, Gervais says. In particular he says anyone contemplating expansion should proceed with caution, paying particular attention to the financial obligations the operation is taking on.

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“Make sure you can meet the financial obligation,” Gervais said. “Expansion might make sense for producers if they can meet the financial obligation. Pay attention to what’s going on.”

Poloz says low interest rates are likely to linger for now, and present a concern for people in or nearing retirement, businesses pondering expansion plans and governments looking to stimulate growth in the domestic economy, Poloz says.

At first glance, low interest rates should be welcome with a national farm debt in the $90-billion range, Gervais said in an interview.

“Low interest rates are better than high ones,” he said.

Still, farmers should be watching their expenses, he says. “It’s a good time to tighten your belt and find efficiencies in your operation. Raise your productivity.” Producers contemplating expansion or major equipment purchases need to be prudent.

Rising land prices are frustrating for farmers looking to expand, and buying the land outright may represent assuming a lot of risk for a farm, he says.

“There are more options for renting land and one of them might provide the operational size needed to be efficient and make the best use of existing equipment. Watch for opportunities.”

In recent years, farm incomes have risen faster than debt, he notes. Last year was the first time in a while that debt climbed faster.

Farmers should consider applying a shock test to their expansion plans, just as the federal government has instituted for new home buyers to make sure they can withstand a sudden rise in interest rates or drop in income.

“Producers have a duty to protect themselves,” Gervais notes. FCC applies that kind of analysis to any farm loans it makes.

For now farm income prospects still appear healthy, even if crop and livestock prices are soft, he adds. There is sufficient growth prospects that agriculture should be able to ride out the slow economy that has created the low interest rates.

Poloz says low interest rates are the result of several factors, particularly aging workforces. Lower-for-longer interest rates have made it more difficult for Canadians to finance their retirement through savings. People are “rightly worried about their ability to live off their savings,” he said. “I certainly can sympathize and understand these concerns.” Longer life expectancy is compounding the challenge because people need to finance a longer retirement period.

Businesses need to reduce expectations about future investment returns, he added. Some businesses aren’t taking into account the low-interest-rate environment when deciding if an investment will be worthwhile.

If companies are waiting for returns near the levels that prevailed before the crisis, “they are unlikely to invest any time soon, and we will not see the kind of growth, productivity and job creation we are looking for. And neither will the companies.”

There is much governments can do to help offset the impact of an aging population on interest rates, Poloz noted. That includes ensuring that policies in areas such as tax and immigration aren’t obstacles to business growth, and that young companies can access financing.

Authorities must also explore every avenue that would boost the economy’s potential growth rate, he says, pointing to investments in productivity-enhancing infrastructure and agreements to liberalize trade, both inside and outside Canada, as steps that could make an important difference over the medium term.

“We need to take every decimal point of potential growth more seriously than we have in the past,” he states. “In a lower-for-longer world, these are opportunities we simply cannot afford to miss.”

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