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.

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The expansion of Canada’s farm debt continued, but at its lowest pace in six years. Meanwhile Farm Credit Canada’s chief economist says that the potential for higher interest rates is the “darkest cloud” in that otherwise optimistic picture.

Statistics Canada data showed outstanding Canadian farm debt increased by 5.9 per cent to $121.9 billion as producers invested in land, buildings and equipment. However, this was the smallest increase since 2014 and below the 10-year average of 6.5 per cent. Farm cash receipts climbed 8.3 per cent.

“These are positive signs the overall financial picture of Canadian agriculture improved in 2020,” said J.P. Gervais, FCC’s chief economist. “We are now projecting record-high farm revenue in 2021, outpacing expected growth in farm debt outstanding of around six per cent.”

Gervais said it’s important to recognize revenue growth hasn’t been consistent across all sectors and regions of Canadian agriculture. Total livestock revenue, for example, decreased nearly one per cent in 2020, largely due to COVID-19 disruptions induced by temporary shutdowns of processing plants and closure of the food-service sector.

He also noted a sharp and sudden rise in interest rates could have a significant impact on the ability of farm operations to service debt. Driving factors of net farm income, such as trade, weather conditions and high farm input costs, could also impact farm revenue and debt forecasts.

“With the level of debt in the farm economy, producers must be aware of the potential for higher interest rates and factor that into their risk management plans,” Gervais said. “Higher interest rates affect your working capital and your ability to service debt obligations. While current low short-term rates are attractive, it may be appealing to lock in long-term rates at the current low levels.”

There’s still much uncertainty around the permanent nature of current inflationary pressures, according to Gervais.

“On the one hand, current supply chain bottlenecks and strong consumer spending causing inflation could subside in the second half of 2021,” he said. “On the other hand, accumulated savings in the economy could further increase consumer spending and unleash permanent price increases that warrant higher interest rates.”

Demand for agriculture commodities and food is strong and inventories are generally lower than their long-term average. This generates a positive outlook for the industry coming out of the pandemic. But there are no guarantees the high prices recorded in many sectors won’t return to normal levels, he cautions.

“The overall balance sheet for Canadian agriculture remains healthy, despite the current uncertain times,” Gervais said. “But producers need to understand their financial situation and build resilience into their business plans so they can thrive in this dynamic operating environment.”

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Ministry officials met with farm groups during the day to discuss the new policy, which is part of President Alberto Fernandez’s plan for making the country solvent after announcing it will have to revamp about US$100 billion in what it calls unsustainable debt.

A government decree providing details of the new tax policy was expected to be published on Wednesday.

The ministry suspended on Feb. 26 the registration of agricultural exports until further notice in a move that traders said likely foreshadowed an increase in grains export taxes.

The suspension of the register prohibits grains exporters from making new deals. The suspension has slowed export operations since last week but was expected to be lifted in the days ahead, said Gustavo Idigoras, head of grain exporters and processors chamber CIARA-CEC.

Cash-strapped Argentina is a major corn and soybean supplier as well as the world’s top exporter of soymeal livestock feed.

— Reporting for Reuters by Nicolas Misculin; writing by Cassandra Garrison and Hugh Bronstein.

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Townsend is the chief market analyst for FarmLink Marketing Solutions, while Newton is the chief economist and head of marketing research for Nutrien. They discussed consolidation on Thursday during the Big Picture Outlook at the Grain World conference in Saskatoon.

“The reason why yields have grown and people focus on yields, it’s what you can control, depending on the weather,” Newton said.

“Get big or go home is definitely an attitude in a lot of industries. I think farmers are investing lots of money and prices haven’t co-operated,” Townsend said.

He cited one news report from Des Moines stating “44 per cent of Iowa farmers have significant debt concerns.”

Newton attributed that situation, which has burdened farmers across the U.S., to increasing land prices that have driven up debt levels.

Also, both speakers believe the U.S.-China trade war forced lower commodity prices on U.S. farmers. Another factor has been U.S. corn exports, which have dropped because major importers have turned to other sources, according to Townsend.

Townsend took note of improved yields in Ukraine and Russia. He said Ukraine’s corn yields are increasing four to five per cent per year and Russia’s wheat yield has climbed to 80 per cent of Canada’s.

Part of that, he said, was due to previous drought in the Black Sea region that resulted in the loss of numerous small to medium farms, which were consolidated into larger operations.

Also, Newton gave credit to the higher yields in both countries to efficient use of fertilizers, especially nitrogen.

China as well has seen a huge turnaround, Townsend commented. The country used to import 10 million to 25 million tonnes of wheat annually to feed its burgeoning population. Today, China still imports three million to six million tonnes, but to blend with other wheat to provide a taste that is otherwise absent in food production.

As for India, Newton said about 80 per cent of the farms there are less than five acres, with most passed down from generation to generation. That, together with farming and prices being highly regulated in India, consolidation will be a very long time coming.

“There’s reduced economic incentive to increase productivity,” Newton said of India, but stressed that consolidation in other countries has proven to be inevitable.

— Glen Hallick reports for MarketsFarm, a Glacier FarmMedia division specializing in grain and commodity market analysis and reporting.

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Kruger had initially asked for a $2 million loan to build a grain elevator. But the Chicago-based bank, one of the largest U.S. farm lenders, ended up selling him a $5 million loan for the elevator and another $7 million to finance crops, machinery and debt consolidation, according to documents in the Ohio foreclosure case the bank filed to seize Kruger’s farm (all figures US$).

When Kruger offered to supply receipts of sold grain and other standard documentation, his loan officer told him not to bother. “‘Don’t worry. We’ll make the numbers work’,” Kruger, 67, recalled the officer saying.

Five years later, after aggressively expanding its U.S. farm loan portfolio, the bank called in Kruger’s loans as corn and soy prices collapsed and the United States was starting a trade war with China. As the U.S. agricultural economy sours and farmers’ financial woes pile up, BMO Harris is leaving behind a trail of farmers such as Kruger who have lost nearly everything.

The bank, a subsidiary of Canada’s Bank of Montreal (BMO), has struggled to recoup some of its investments through a slew of bitter legal fights, according to a Reuters review of court documents and bank regulator data, as well as interviews with dozens of U.S. farmers, bankers, and former and current BMO Harris employees.

“BMO Harris did push for growth, and they’ve had some of those deals blow up spectacularly in their faces,” said John Blanchfield, founder of Agricultural Banking Advisory Services, a consulting firm.

The plight of BMO Harris and its customers reflects broader distress in the U.S. farm sector. Farmers are struggling to pay back their loans or obtain new ones. Shrinking cash flow is pushing some to retire early and a growing number of producers to declare bankruptcy, according to farm economists and legal experts.

BMO Harris may yet face more defaults, judging by its high level of delinquent loans. At the end of June, nearly 13.1 per cent of its farm loan portfolio was at least 90 days late or had stopped accruing interest because the lender doubts the money will be paid back — compared to 1.53 per cent for all U.S. farm loans at banks insured by the Federal Deposit Insurance Corporation (FDIC). BMO Harris had the highest rate among the 30 largest FDIC banks, according to a Reuters analysis of loan data the banks reported to the regulator.

Ray Whitacre, head of BMO Harris Bank’s U.S. diversified industries unit, said in a statement that the bank’s distressed loans do not represent “the overwhelming majority” of its borrowers’ experiences. The Bank of Montreal and its U.S. businesses have been in farm lending for more than a century, he said. The bank takes a long-term view of helping farmers through “all stages of the economic cycle,” Whitacre said.

BMO Harris spokesman Patrick O’Herlihy attributed the high delinquency rates to the bank’s lending in the upper Midwest, where dairy and grain operators have faced serious financial challenges. Sam Miller, BMO Harris’ managing director of agriculture banking, said the bank is keeping a closer eye on its customers with cash-flow shortages and lending to fewer mid-sized operators. “We have to be more vigilant in underwriting the risk,” Miller said in an interview.

The bank declined to comment on any individual loans or borrowers, or on the prospect that it could face additional defaults based on its delinquency rates.

Missing collateral

The bank’s exposure to the farm sector reached a peak of $1.59 billion in 2018. Most other major banks have been scaling back their farm-loan portfolios since about 2015, as prices fell due to a global grains glut, according to the Reuters analysis of FDIC data.

Among the BMO Harris deals that went belly-up was $43 million in farm operating loans to McM Inc, run by Ronald G. McMartin Jr. in North Dakota. The farm filed for Chapter 7 bankruptcy in 2017.

BMO Harris secured a $25 million loan with McM’s grain, cattle and other farm crops, along with other assets. McM agreed to use the sale of these crops to pay the bank back, according to a copy of the loan.

During the bankruptcy proceedings, BMO Harris’ attorneys told the court it was unable to locate all the crops backing its loans, alleging that McM had sold some of the crops to pay other creditors first. Court documents also show the bank had not audited some of the farm’s financial statements. An outside consultant later found McM’s accounts receivable and inventory was overstated by at least $11 million, according to court filings. Neither McMartin nor his attorney responded to requests for comment.

Some experts and bankruptcy attorneys representing former BMO Harris customers say the bank issued too many loans for too long that farmers simply could not pay back. The problems, they said, stem from the aggressive practices of some loan officers and a lack of oversight by bank auditors.

Michael and Byron Robinson borrowed $2.5 million in an agricultural loan and another $2.5 million on a line of credit in 2013 through their Indiana businesses, court records show. The bank sued the Robinsons in federal court as part of its foreclosure process in 2016 and later sold the farmland at auction. The property brought far less than the value the bank had estimated the properties were worth to justify the original loans, said their bankruptcy attorney, Maurice Doll.

Michael and Byron Robinson did not respond to requests for comment. Doll said BMO Harris had loaded his clients up with far more debt than they could reasonably pay.

‘Don’t worry. it’ll be fine’

The Indiana-based BMO Harris banker working with the Robinsons and Kruger, Thomas “T.J.” Mattick, found his customers through farm magazine advertisements, word of mouth, at church gatherings and from rural loan brokers who were paid a finder’s fee, according to interviews with 10 farmers and one loan broker.

“I thought I could trust him,” Kruger said. “We would talk about church and faith all the time.”

When the Robinsons were looking to expand their corn and soybean operations, Mattick convinced them to buy two new farms instead of one — with BMO Harris financing 100 per cent of the deal, said Michael Morrison, the Robinsons’ farm bookkeeper and a former agricultural banker.

Morrison told Reuters he was concerned by how the bank’s underwriters valued the family’s grain in storage, on the premise that its value would continue to rise — even as grain prices were starting to soften at the time.

“We used to say that T.J. never saw a loan he didn’t like,” Morrison said. “I kept telling them, ‘Don’t do this. Don’t take on the debt.’ But T.J. kept telling them, ‘Don’t worry, it’ll be fine’.”

Mattick, who no longer works for the bank, denied that he encouraged borrowers to take on more debt they could pay back. In written answers to questions from Reuters, Mattick said “extensive underwriting and analysis” were conducted on the loans for Kruger and the Robinsons, as with any other file.

Mattick denied telling Kruger that he would “make the numbers work” without standard documentation such as sold-grain receipts. And he said BMO Harris would not have given the Robinson’s 100 per cent financing on their farms unless they pledged additional collateral. BMO Harris declined to comment on Mattick’s statements regarding individual loans and bank policy, and Reuters could not independently verify them.

“I worked with clients to help them determine what they could afford and never would have counseled them to incur debt beyond what they could afford,” Mattick said.

— P.J. Huffstutter reports on agriculture and agribusiness for Reuters from Chicago; additional reporting by Jason Lange and Pete Schroeder in Washington.

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JBS’ net income for the first quarter, 506 million reais (C$179.45 million), was 48 per cent above analysts’ estimates, with higher revenue and costs reduction.

Earnings before interest, tax, depreciation and amortization (EBITDA), a gauge of operating profitability, stood at 2.8 billion reais, also higher than a 2.7 billion reais consensus estimate.

Revenue rose mainly in JBS’ units in the U.S., especially in its chicken processor Pilgrims Pride Corp. In Brazil, revenue was slightly lower in the first quarter than a year earlier.

JBS also announced in a securities filing on Monday that the company reached an agreement with banks to refinance its debt, extending maturities of 12.2 billion reais in debt for three years.

JBS will pay principal between January next year and July 2021, the filing said.

As Brazilian benchmark interest rates fall to their lowest level ever, highly indebted companies are sharply reducing financial expenses.

JBS has reduced its leverage over the last 12 months, the company said. Net debt was equivalent to 3.4 times its annual EBITDA on the first quarter, below the 4.2 ratio a year earlier.

— Reporting for Reuters by Tatiana Bautzer.

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To help make your farm more profitable (and your life more enjoyable), this ongoing series from Glacier FarmMedia combines expert advice with insights from farmers who have gone down this road.

For borrowers in Canada over the last decade, low interest has been par for the course.

In May 2007, the Bank of Canada’s overnight rate was 4.25 per cent, a number that plummeted to one per cent by February 2009 and has yet to rise above one per cent since. In 2015, the rate fell twice, finally reaching its current 0.5 per cent.

For farmers looking to expand, the lower interest and cheaper loans that came with it are good news and Canadian producers have taken advantage.

By 2015, farm debt had risen to $91.8 billion, up from $84.6 billion the year before, according to Statistics Canada.

J.P. Gervais, chief agriculture economist for Farm Credit Canada (FCC), has said low interest is at least partially responsible for the jump in farm debt, although farm income is a larger contributing factor, in his view.

“Almost year after year, we’re breaking records, growing income, growing farm income and at the same time we’re making investments, being more productive. That has been growing farm debts, which is obviously encouraged as well by low interest rates,” he said.

Realized farm income jumped 7.6 per cent in 2016, the third consecutive year of net increase, Statistics Canada says. At the same time, asset appreciation has outstripped both debt and income increases, according to the 2016-17 farm debt and asset outlook from FCC. The organization reported that asset values increased 155.1 per cent from 2001 to 2015, above the 125.8 per cent increase in debt and 85.2 per cent increase in farm cash income.

The same report linked soaring costs of farmland and buildings with increases in farm debt. While debt increased 125.8 per cent from 2001 to 2015, farmland and building values appreciated 211.1 per cent. Farmland appreciation has also outpaced farm revenue nationwide over the last five years, the report said.

Managing the risk

As with any loan, borrowing money for the farm comes with a risk that interest rates could rise.

Borrowers perform a delicate balancing act, trading between the risk of floating rates — lower, but open to upwards pressure — with more secure, but expensive, fixed rates.

The Bank of Canada’s interest rate is expected to remain low, although at least one economist from the Bank of Montreal has told the CBC that rates may increase by April of next year. It’s important to remember the central rate is not the only thing that determines the rates you pay.

In particular, Gervais said, interest rates may be impacted by financial policy in the United States. In March 2017, the U.S. Federal Reserve increased key interest by 25 basis points.

“What customers need to understand is the rate that they pay is a function of the rate that the financial institution itself borrows some money (at) to lend it back to producers,” Gervais said. “If interest rates in the financial market — and I’m talking about government bonds, corporate bonds — and if all of these interest rates in the U.S. are moving up, it is likely that at one point it will be moving up as well in Canada.”

Terry Betker, CEO and president of consulting firm Backswath Management Inc., says conversations with his customers often start with the reason behind their loan before moving into what terms and conditions the operator can afford.

“The advice that I give farmers is to look at their debt servicing ability, the term — how long they’re committed to the payments — the impact on their ability to generate cash flow and then, in a worst-case scenario, if they have to restructure, do they have the ability to do it?” Betker said.

Perhaps most importantly, Betker said, a well-managed loan should be flexible and producers should leave room for possible interest shocks or unexpected drops in income.

For those who are risk averse, a two-to-one ratio of earning ability for every dollar of payments is ideal, but often unattainable on the farm, Betker said. Most producers instead set a tolerance between $1.25 and $1.50 to $1.

“This depends a little bit on a function of cash flow,” Betker said. “A farm that’s in supply management, that has more stable cash flow, then they can, I think, afford to be a little tighter on their debt servicing. Farms that have more variability in income, like a grain farmer for example or a livestock cow-calf operation, perhaps they would like to get closer to 1-1/2 to one to be really more comfortable with the risk associated with borrowing the money.”

Borrowers through FCC, meanwhile, might be asked if they could afford products one rung higher than their preferred option.

“If the answer is yes, then we’re a lot more comfortable making that deal,” Gervais said, adding that a one per cent interest rate variance is generally considered “comfortable.”

Risk tolerance will be unique to each operation, Gervais said.

“If you’re a mature business that’s been established — you’re not looking to expand too much and you’ve got lots of equity — maybe you can put a little more risk on the table and say, hey, I’m OK to let my rates float and if they go up, I can live with that,” he said. “If I’m a young entrepreneur and just got into the industry and made a lot of investment decisions, maybe I like to have the security of knowing that ‘this’ is going to be my payment for the next five years, next seven years.”

Betker also pointed to farm size relative to the size of the loan. A large farm will have the ability to build more flexibility than a smaller farm taking out a similar-size loan, he said, as the loan to the bigger farm would be a smaller proportion of overall farm value. A large loan, meanwhile, will often open doors to multiple maturation dates and prepay options, allowing producers to further customize rates and terms.

Mixing and matching

Should a farmer opt for a variable rate, they may save substantially, but may also face a financial hit if those interest rates rise. A farmer opting for the fixed rate, meanwhile, may end up losing out if the lower variable rate does not rise.

In most cases, producers with a floating rate may later lock it in, should interest forecasts turn stormy, Betker said, but pointed out that the process of locking in a rate comes with its own perils.

“Understand that the spread between floating rates or variable rates and fixed rates widens before the floating rate goes up,” Betker said. “Lenders’ risk is not in the short-term money to interest rate, it’s in the long-term money. They don’t want to get on the wrong side of long-term interest rates, so if a lending institution thinks that there might be some risk to interest rates increasing, they’ll increase their long-term rates before they increase their variable rates.”

With this in mind, a farmer looking to lock in an interest rate might suddenly find long-term rates, which were only slightly higher at the time of taking out the loan, have outpaced the short-term rate in the interim.

For farmers who are risk averse but hope to take advantage of lower, but riskier, floating rates, Betker suggested a regimen of self-disciplined saving. Rather than spending the money saved by risking a floating rate, funds could be set aside as contingency in case of interest increases or used to pay back principal.

The “ultimate mitigation to interest rate increase” however, according to Betker, is the ability to term out an agreement should the worst occur and the loan becomes unaffordable.

“Do you have the ability to restructure the debt in your balance street?” Betker said. “Principal is principal, but if interest rates go up and you can’t generate the cash flow in the business to make the payments as they are currently structured on a farm, what do you do? Well, you could sell assets; you could try and be more efficient, but generally the action taken would be to term out the debt, to extend the payments.”

Such an option would require assets to put against the new deal, Betker said. For some highly leveraged farms, that ability to manage a worst-case scenario may be out of reach.

What not to do

Borrowing money may foster a desire to pay it back as quickly as possible, but overaggressive repayment is among the top mistakes that Betker has seen producers make, along with financing large purchases through operating loans or automatically using extra funds to pay off only high-interest loans. Instead, he suggested, producers should prioritize loans with the highest combined interest and principal.

“I think they could do a better job of putting some flexibility into how the loans are termed out and align their repayment with their ability to generate cash flow,” he said.

Gervais, meanwhile, has linked success with a firm grasp of the link between a dollar of debt and expected monetary return from an investment.

Overall, he said, farm financial conditions have “evolved the right way.”

FCC’s 2016-17 outlook identified possible challenges as projected farm income and land appreciation flattens, and acknowledged that farmland values were outstripping crop receipts. “Financial risks remain manageable as the outlook for interest rates and net cash income are supportive of the balance sheet,” the report read. “It remains prudent for agricultural operations to be flexible enough to amend business plans if the outlook for borrowing costs and/or profitability moves in a different direction.”

Should interest rates rise, Gervais expects both asset values and debt to slow down, although overall impact on farm debt would be hard to gauge.

The post Looking for a loan? Add in interest rate risk when deciding to borrow appeared first on Manitoba Co-operator.

“With hedging, you need to have cash for the calls and so on, security money,” explained council chairman and Manitoba producer Rick Bergmann. “With the hedging program you need to have extra funding. To date that’s been a bit of a sore point or a challenge for producers.”

Last week the federal government announced it would provide the CPC with up to $169,530 to explore the feasibility of developing a hedging program that would offer price stability and address the cash flow needs of Canadian hog producers.

“Our government is proud to support the hog industry’s efforts to analyze the potential of new instruments, like a hedging program, that would help protect producers against fluctuations in market prices,” said Bev Shipley, an Ontario MP and chair of the Standing Committee on Agriculture and Agri-Food. “Investing in programs to reduce risk adds stability to the hog sector and will help boost competitiveness and profitability.”

Bergmann said factors like disease, currency fluctuations and international instability all affect Canadian pork producers, putting them at risk.

American pig farmers use hedging on the futures markets to a far greater extent than Canadian producers, he added, noting one goal of the study is to determine why, while also gauging interest at home.

Last year the Western Livestock Price Insurance Program — a three-year pilot project many believe will become permanent — was launched, offering cattle and pork producers the opportunity to guard against price fluctuations.

But the provincial and national pork councils have been critical of the program.

“I guess the premiums on that livestock insurance are an issue where you’ve got to pay too much to get too little,” said Bergmann. “That’s why the hedging concept has really kind of taken hold in a lot of different provinces as far as a good option, not saying that producers can’t use… the insurance, but again, it’s creating options for producers to pursue.”

The study won’t begin to yield results officially until at least September, but the chairman doesn’t expect any big surprises.

“I think what we want to do is confirm what we think we know already, but we want to do our due diligence,” he said, adding he expects to find that a lack of cash will be the barrier most producers face when it comes to using hedging as a risk management tool.

The next step will be to look at how producers can access additional funding, something Bergmann hopes the federal government will assist with.

“The federal government has been a very significant part of our industry till now,” he said. “And we anticipate that it would want to continue to be part of that in the future.”

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But with the drop in commodity prices and changing markets, it seems that prices may have peaked.

“I think we’re at the top of the cycle,” said Merle Good, a former tax specialist from Alberta Agriculture, and a speaker at Ag Days in Brandon last week.

“The increase in farming profitability, that’s been the big driver,” he said. “We’ve also had a successful run of good prices… it’s very rare in agriculture that you get six years in a row of substantial revenue increases, that in my view has been capitalized into the land value and I believe we are at the top.”

What happens next remains up for debate, but farmers who bought land over the last few years shouldn’t waste time wringing their hands if prices fall.

“The real question is, based on what you just paid, can you afford to maintain your payments?” said Good.

Interest rates

Producers with heavy debt loads could be seriously impacted when interest rates rise, but that’s not likely to happen in the near future. Just last week the Bank of Canada once again lowered its overnight lending rate to .75 per cent from an already low rate of one per cent.

“Yes, always a word of caution on interest rates,” said Roy Arnott, a business management specialist with Manitoba Agriculture, Food and Rural Development. “But I think you’ve got time before some level of increase, interest rates have been fairly stable, I don’t think they’re going to go up.”

But he said now is the time to plan for when interest rates do eventually increase.

Variable or locked in?

Good advised those with variable-rate loans to begin thinking about when might be the best time to lock in a rate, and ensure they are going to be paying what their business can afford in the long run.

“Because right now a lot of young guys are saying, oh, wow, I’m going to stay on the variable rate ’cause it’s four per cent and I can’t afford to pay more than that,” Good explained. “Which is fine, but you should, in my view, perhaps look at the flexibility with some lenders where you do have it, to actually say, I want to lock in 30 per cent of that mortgage, and let 70 per cent float.”

Those who rent land are also facing tough decisions and changing prospects.

“So have prices peaked? Are they on the decline? Are they going to go down? I don’t know, but I think they almost have to. We’re in a situation where land rental rates are quite significantly high, and when you look at the commodities that we can grow… we’re not going to make as much as we did over the last two years,” said Lance Stockbrugger, a farmer and chartered accountant from Saskatchewan.

“From September 2012 to September 2014, corn has gone down 51 per cent gross value, canola has gone down 41 per cent, wheat 31 per cent, and soybeans to a lesser extent have gone down by 22 per cent,” he said. “That’s straight out of the profit, that’s the money that you get to take home, that’s the money you get to use to pay your bills and your principal/interest payments, that’s gone.”

That means producers with rental agreements are going to have to look at renegotiating those agreements. Something that underlines the importance of having a good working relationship with the landowner you’re renting from, Stockbrugger said.

That sentiment was shared by Good, who said, “you have to get creative, if you’re going to rent the majority of your land, you’ve got to really make sure you’ve got a good relationship with the landowner.”

In the past, renters had to choose between a share crop model or paying straight cash rent, he noted. But today it’s better to have something in between, such as “flexible cash rent with a guaranteed floor,” said Good.

Buy or rent?

All this still leaves producers who want to expand with their biggest decision — whether to buy or rent.

“Land purchase is a long-term investment decision specific to you farm’s current cash and equity position, long-term enterprise cash flow, profitability and your view of land values in the future,” said Arnott. “Land value planning is not easy, simple or straightforward, this is challenging stuff, definitely makes my head hurt for sure, but I definitely think it’s worth the work if you’re going to move your farm forward in a positive direction.”

The first step is knowing exactly what your farm is making and what it’s costing, making sure margins are known and gross revenue is understood.

Good suggested producers look at their operations as two separate businesses.

“The real reason I like the idea of two separate businesses is primarily for succession, because the transferring of the farm is not transferring one bundle of assets, the farm to me is the operating business, the cattle, machinery, inventory and that structure, the land is a separate issue, because I can be a successful farmer with not inheriting every acre,” Good said. “So when we have that separation of land versus the operations, we can then understand what our business is making, versus what our real estate investment is making or costing us.”

But perhaps before producers even think about acquiring more land they need to be asking if they can increase their profit margins using the land base they already have at their disposal.

First step

Before buying more land, Good suggested farmers look at ways of increasing their returns from existing land through improvements such as tile drainage, or increasing productivity through strategies such as variable-rate seeding, or improving their bottom line through better marketing.

He also noted that new challenges are on the way that will impact what farmland becomes available. As existing landholders, many of them retired farmers, pass on, more farmland is being inherited by children who don’t farm.

“When they get that land, what are they going to do with it? And I think our role as educators of agriculture is trying to convince a girl in Calgary or in Brandon that if she inherits farmland from her parents, maybe she should hang on to it, and not flip it the next day,” Good said, noting that over the long haul, land still proves to be profitable regardless of ups and downs along the way.

“Over the 30-year cycle, land from 1983 has increased approximately twice as much as the TSX,” Good said. “In addition the bull run has continued from 1992 which is the last year in Canada that farmland year over year had a negative change in value.”

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BMO cites George Brinkman, an authority on farm viability, as warning about “an unsettling outlook” from high levels of farm debt made worse by rising interest rates over the next three to five years.

BMO and Brinkman have teamed up to alert Canadian producers about the danger higher interest rates pose to already-burdensome farm debt levels.

Interest rates, which have been at historic lows for several years, could rise three to five per cent by 2015 and put farm lenders in a bind, BMO officials warned last week.

“It is conceivable that if a producer continued to use a variable rate and the principle outstanding remained the

Canadian farmers “are walking along a cliff edge.”

– GEORGE BRINKMAN

same, interest payments could in fact double,” said David Rinneard, BMO’s nat ional manager for agriculture, in an interview.

“Now is the time to come in, have a discussion and see what options are available.”

Rinneard said BMO decided to join forces with Brinkman af ter hear ing the ret i red University of Guelph agricultural economist speak recently about farm debt in Canada.

Brinkman has been sounding the alarm for years that Canadian agriculture faces a potential crisis because farmers are so highly leveraged with debt.

Canada’s farmers owed $63 billion in both mortgage and non-mortgage debt in 2009, up 4.7 per cent from the previous year, according to Statistics Canada.

The nation’s farm debt today is nearly 3.5 times what it was in 1981. That year, farm debt in the United States stood at US$177 billion. Since then, the U. S. debt has increased 20 per cent while Canada’s has more than tripled.

Brinkman has expressed grave concern about Canadian farmers’ ability to carry increasing debt loads. The average debt-to-income ratio among producers in the 1980s was about seven to one. In 2007 it was 40 to one.

In a recent talk, Brinkman said most Canadian farmers “are walking along a cliff edge” and higher interest rates could push them over.

The results could be catastrophic, he warned.

“What would your financial picture be like if your interest rate was five percentage points higher? What would you do if your lender cut back your operating loan by 25 per cent?” he asked.

Sal Guatieri, a BMO senior economist, said runaway interest rates and inflation are not in the cards. But he said it’s inevitable that short-term interest rates will soon rise because they have been kept artificially low to deal with the global recession.

“We don’t think inflation will be a driver of rising interest rates. What will be the driver is the renormalization of interest rates,” Guatieri said.

Rinneard said Brinkman’s statistics are aggregates and not every Canadian farmer is drowning in debt.

But BMO agrees impending interest rate hikes are serious and farmers should do things to prepare for them, Rinneard said.

Strategies include: locking in loans at fixed rates instead of following variable rates; making lump sum payments to lower loan principles; using available money to build nest eggs in programs such as Agr i Invest , which receives matching government contributions.

Rinneard said borrowers can also “stratify” loans – taking out several loans for varying periods of time to average out the increased cost of borrowing.

Rinneard said BMO, the second-largest agricultural lender among Canada’s chartered banks, does not have a problem with delinquent farm loans. But it wants to warn farm clients about higher interest rates.

“Interest rates are going to move and now is the time to do something about it, if in fact you need to.” ron@fbcpublishing.com

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