WESTERN PRODUCER — It was nice while it lasted, but farmers are facing the financial hangover of an era of cheap credit. With thousands needing to roll over large amounts of debt, critical decisions will be forced on farmers.
“As those loans (from the low interest rate years) are maturing, more and more and more operations face the decisions of what to do,” said J.P. Gervais, Farm Credit Canada’s chief economist.
For years, the price of land and equipment has steadily increased but with historically low interest rates available for more than a decade, farmers could finance major purchases with manageable interest costs.
Those low rates have evaporated, yet much of the debt remains and needs to be rolled over. That means the same debt is going to be much more expensive to carry at today’s rates.
Longer terms are priced lower than short-term rates today because the markets expect interest rates to fall in the next few years, but that’s just a guess. Nobody knows how soon interest rates will fall, or even if they’re done rising for this tightening cycle.
Gervais thinks rates have probably peaked, but nobody should assume they’ll tip over and begin a quick decline. Mixed economic signals and noisy data are likely to make the Bank of Canada conservative when it comes to any declaration of victory over inflation. That means the BoC might keep rates at current rates for longer than many expected.
“If we are at peak and we stay where we’re at, I think it’s still very much relevant for operations to consider moving off short-term and looking at some long-term options,” said Gervais.
Some economists think Canada might be on the edge of a recession, while others think the economy is cooling but not going cold. For central banks, failing to snuff out inflation when it soared two years ago has given their credibility a bruising and few are likely to blithely slash rates until it is clear that the inflation beast has been slain.
For people who need to renew debt or take on new debt, short-term rates are unappealing but many are hoping longer-term rates will fall back to pre-2022 levels. Some may choose to take short-term rates, hoping when they need to renew in a year or two that the longer-term rates will be substantially lower.
However, the lags involved in the interest rate hikes that are designed to force down inflation to the two percent level can be very long. Gervais says it is impossible right now to tell how long today’s possible plateau could last.
Debt markets have not dropped longer-term rates as much as debtors would have hoped, which Gervais sees as evidence that the markets don’t yet accept that the BoC is likely to soon start reducing rates.
“I think they’re waiting for more data or more statements from the Bank of Canada, so that might just get us to the next statement (with little change,)” said Gervais.
Farmers might be reluctant to look at current five-year rates, but they need to realize that those might last longer than expected, and the bank could even choose to raise rates again.
Risk management becomes key.
“Really be on top of ‘what if?’ How would that affect my balance sheet?” said Gervais.
The interest rate hiking cycle might be over. Or it might not be. Rates could begin falling. But they could even go up again.
“It’s a fragile state right now,” said Gervais.
Farmers with maturing debt have important decisions to make and nobody’s going to know for a long time who made the right or lucky choices.
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