Editor’s Take: What comes down must (eventually) go up

It was the fall of 1981.

Pierre Elliot Trudeau was once again in Sussex Drive after the brief prime ministership of Joe Clark.

Ronald Reagan was just settling into the White House.

And down the road, at the U.S. Federal Reserve, legendary central banker Paul Volcker was targeting inflation with high interest rates.

From the start of 1980 to the end of 1982 five-year fixed mortgages in Canada, were always more than 15 per cent. Rates hit just over 21 per cent in the last half of 1981.

The fallout was devastating. Media reports from the time include couples worrying over their $2,200 monthly mortgage payments after their rates reset. Canada plunged into a deep recession, and it wasn’t until the late 1980s (or early 1990s in some parts of the country) that it truly clawed its way out of the economic wreckage.

In the agriculture sector, it was as if an economic bomb had gone off, as farmers were caught up in a perfect storm of events that left them highly leveraged, with falling incomes and rising interest rates.

They had seen a boom in the 1970s that might seem similar to today. Commodity prices — including agricultural commodities — had jumped up on both scarcity and rising demand.

That led to a wave of investment in everything from oil and potash production to farmland and equipment, as businesses rushed to try to capitalize on these higher prices.

But then, of course, the bottom fell out. High prices, as always, fixed high prices, and forlorn former oilfield workers were seen driving around Calgary sporting “Please God, give me one more oil boom. I promise not to piss it all away next time,” bumper stickers.

Likewise, a lot of farms found themselves in dire straits as higher cost structures and reduced income flooded their balance sheets with red ink.

By September of 1985, a moratorium on foreclosures by the then Farm Credit Corporation was in place, and the next year the Farm Debt Review Act passed Parliament and received royal assent.

The act established Farm Debt Review Boards for each province (or region of a province) and gave farmers in financial difficulty new protections and recourse.

Even so, a StatsCan report on business bankruptcy trends through the decades, notes that well into the early 1990s, agriculture remained “among the three industries with the most bankruptcies” in the Prairies.

In this issue contributing writer Matt McIntosh delves into today’s scenario.

He notes in the section’s cover story that Canadian farmers “… could be open to significant financial hardship… “ should things take a turn for the worse. Today Communist China is the major driver of demand, just as the Soviet Union was decades earlier, and that policy shifts by that “red state” drove the 1970s boom. Farmers have responded in a similar fashion today, driving up their cost structure.

Back then, the first harbinger of doom was inflation beginning to creep upwards, something mainstream economists have again begun to fret about.

It’s likely that very few farmers or mortgage holders in 1972, when rates sat at 4.75 per cent in Canada, according to StatsCan, could have foreseen rates nearly tripling to close to over 12 per cent by 1979.

With interest rates hovering near two per cent right now, Canadian farmers are enjoying historically low rates. And that’s a good thing too. As FCC notes in a related story in our FarmIt section, Canada’s farm debt accumulation rate has slowed to ‘only’ 5.9 per cent, the lowest rate in six years. But that brings the total figure to $121.9 billion, representing a whole lot of interest rate risk in farm country.

At two per cent rates, which is the average cost of fixed mortgages, according to Ratehub.ca, the sector is paying about $2.4 billion a year in interest charges. Some are paying less for variable-rate loans, with those rates being as low as just over one per cent, according to the website.

Any way you slice it, they’re big numbers with a lot of risk baked in, considering the debt has been accumulated at a time of historically low rates.

Should those rates rise, as prices fall, the ingredients are there for another disaster.

FCC’s chief economist J.P. Gervais noted this risk, and suggested farmers might want to hedge some of that risk by locking in higher fixed rates now, in exchange for the peace of mind of knowing they’ll be gaining protection if central bankers are forced to again fight inflation.

Nobody knows for sure if inflation is coming, but as Benjamin Tal, BMO’s chief economist, noted in a recent conversation with the Financial Post, inflation is like a brown spot on a banana — by the time you’ve noticed, it’s too late.

About the author

Editor

Gord Gilmour

Gord Gilmour is Editor of the Manitoba Co-operator.

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