By Tim Kalinowski
While farmers are in a pretty good position at the moment when taking into account their land and asset appreciation versus their debt load, generally poor crop prices, high input costs, weather-related issues and steadily increasing interest rates are raising some red flags among financial lenders.
“When we look at the broad health of agriculture we have seen a bit of slippage,” confirms Farm Credit Canada principal ag economist Craig Klemmer, “but overall it looks to be about the same (as 2017) … When we think of liquidity and the ability to service debt, Canadian agriculture seems to be well-placed for the investments they have made.”
Klemmer does stress however, farmers must find think more carefully about their cash positions in places like southern Alberta and southern Saskatchewan if drought conditions linger into another year and crop prices remain low.
“Make sure you are protecting your cash position when it comes to opportunities in the marketplace, making sure you are able to make your payments,” he says. “If that means taking some short-term financing or looking how you structure your debt moving forward; that’s one option, and FCC is willing to work with you on that.”
Klemmer says the agriculture sector, while good overall, has some pockets and regions where deeper concerns exist.
“This year has been more of a challenging situation,” he admits. “Region by region it is different how precipitation impacted crops, and we did have a drier year. In our recent debt report we are looking at where we were at the end of 2017, and you are going to have regional characteristics that are going to impact some producers.”
Ed Knash, vice-president ATB’s Agricultural Centre of Expertise, admits there are likely certain producers lenders are requiring greater assurances from at the moment before providing financing; and those hard hit by several years in a row by drought, or other weather-related issues, would likely fall under that category.
“I have no doubt there may be some individuals who are impacted quite negatively, and we as financial institutions require some greater assurity,” he says. “We have to come up with something fairly unique in those circumstances to help carry them through to the next year. We are going to be looking at each one of these unique situations, and working with individuals to provide a customized solution.”
Knash says most farmers are aware of the cyclical nature of their industry, and have, in most cases, taken steps to protect their ability to finance their operations through challenging years— a fact which is reassuring to lenders.
“Most people in agriculture carry some sort of risk management, either crop insurance or revenue insurance,” he says. “There are some very good products on the marketplace right now that are quite cost-effective and basically keeps you going in the bad years. And you can survive until things get better.”
When it comes to purchases of farm real estate, particularly high value properties like irrigated lands, banks and other financial lenders do use a slightly different rubric before granting such loans, says Knash.
“Irrigated land has been going up to very high levels, and sometimes if you are looking at the individual parcel of land it might be a challenge to debt-service that piece of land on its own,” he admits. “But generally speaking farms are using assets they’ve built up, sometimes on a multi-generational basis within the family farm, and we sit back and look at debt-servicing for each incremental purchase: That’s debt-servicing by the farm unit. And generally speaking, that debt-servicing is good if people have half-decent years.”
But that doesn’t always mean a loan for land purchases is always an automatic for certain farm operations, says Knash.
“There may be individual circumstances at play where a farm has successive droughts, or maybe some other weather issues that maybe has impacted their production. Debt-servicing, in those circumstances, can drop off very dramatically.”
And that debt-servicing ability may eventually become even more challenging for farmers if interest rates continue to rise, says Knash
“So if you are sitting back, carrying a large debt load— and those interest rates are forecast in ATB’s opinion to go up again a couple of times in the next year or so— in the longer term, if we look back at the history of interest rates, the rates we have seen the last several years have been at an unprecedented low. Your debt-serviceability goes up (when interest rates rise). And even though you might be solvent, meaning you are not going to default on your loans, you simply can’t debt service.”
But farmers are a resilient bunch, says the FCC’s Klemmer, and think about the long game when it comes to their businesses. He has no doubt farmers can and will adjust as those interest rates continue to rise.
“The reality is we are seeing interest rates rising,” he states. “We have had five interest rate increases in the last 12 months, and those are going to increase borrowing costs.
“When producers are looking at those equations,” he adds, “and looking at their operations, they are going to be making decisions on their risk tolerance, whether to lock that in for a fixed rate mortgage or whether they going to be running on variable rates, and build that contingency in for themselves to adjust to those shifts in interest rates.”
Knash agrees farmers will make the necessary adjustments to control their risk, and that’s why he does not see any evidence at ATB, or other financial institutions, of any pulling back on their enthusiasm to lend to Canadian farmers.
“Agriculture has proven to be a good investment, and there is a lot of competition for financial institutions to be able to lend to agriculture,” he says. “And that has been the case for over a decade.”