Higher interest rates may be on the horizon as farm debt in Canada logs the smallest increase in six years
By Jackie Clark
Farm debt in Canada saw the smallest increase since 2014, so producers should be on the lookout for higher interest rates, Farm Credit Canada (FCC) reported recently.
The lower increase in farm debt is likely due to a mix of higher revenues and a cautious approach during the COVID-19 pandemic, Craig Klemmer, Regina-based senior economist at FCC, told Farms.com.
“We actually saw some pretty good receipts, I also think there was quite a bit of uncertainty,” he explained. “Some industries were disrupted more, especially when we think about pork and beef processing and the impact that has had on hog and cattle producers, but overall we saw that the industry managed fairly well through the pandemic.”
As a result, farm debt increased by 5.9 per cent, which was lower than the ten-year average of 6.5 percent. Cash receipts grew by 8.3 per cent.
“We did see major investments in a number of different sectors, but I would assume that we did see a little bit more of a cautious approach by sector, based on the challenges that they still saw on the horizon and how much debt that they were willing to take on,” Klemmer explained.
A potential result could include increased interest rates, though many factors could impact how that happens.
“The expectation is that we’re going to see interest rates increase,” Klemmer said.
“That being said, we’re still going to be at very low interest rates, but when you move from very, very low interest rates and see an increase of half a per cent to one per cent over a fairly short period of time, it’s going to mean quite a bit more in interest costs. And I think it’s just important that people are aware of that and realize that impact, especially when we have debt levels of about $122 billion dollars here in Canada in terms of farm debt.”
Raising interest rates is one way that the Bank of Canada can attempt to control inflation.
Financial experts have observed “stimulus spending post-pandemic in Canada and the United States, we see strong recovery, strong consumer demand, that could put upward pressure on inflation in Canada and as a result we could see interest rates moving higher a little bit quicker,” Klemmer said.
However, that inflation could peter out midyear, because it has largely been driven by increased energy costs, he explained.
“There’s a couple storylines that we’re going to have to monitor, and really the story is going to be what is the inflation here in Canada, do we see this continuing really strong which will put upward pressure on interest rates, or do we see it taper off and then maybe we see a little bit slower, more gradual increase in interest rates as well,” he added.
Farmers should have an idea of how those different scenarios will impact their farm and working capital.
“I don’t think there’s a right or wrong way of managing it,” Klemmer said.
“I think a person needs to look at the overall picture of their farm. How well are they able to adjust to higher interest rates? If we do see interest rates moving up, is that going to have a major impact on your business? If the answer is yes, you may want to consider locking in some of your rates, so that you just don’t have that fluctuation or added cost,” he explained.
“If you’re looking at the picture of your farm and it doesn’t seem to be a big impact for you in terms of negatively impacting your working capital, then you may choose to remain in variable rate products,” he added. “That’s something to be determined on each individual farm.”
It’s important to reach out and connect with your financial team and advisors to build a strategy that is best for your operation, Klemmer said.
Jevtic\iStock\Getty Images Plus photo