High Interest Rates a Risk For Ag Industry
Some segments of the Canadian agriculture
industry could face an unsettling outlook in three to five years if they
don’t take steps now to manage their debt, increase their productivity
and bring their debt-to-income ratios back into balance.
June 10, 2010, Toronto – Some segments of the Canadian agriculture industry could face an unsettling outlook in three to five years if they don’t take steps now to manage their debt, increase their productivity and bring their debt-to-income ratios back into balance, according to Dr. George Brinkman, professor emeritus and former Chair of the Department of Food, Agricultural and Resource Economics at the University of Guelph.
Dr. Brinkman, who specializes in farm viability, urges Canadian farm businesses to shed unproductive assets and to develop a business strategy to manage the impact of interest rates that are expected to rise by as much as 3 per cent to 5 per cent by 2015.
“Rising interest rates are the real vulnerability that Canadian farm businesses face today,” said Dr. Brinkman. “Many Canadian farmers are carrying an inordinate level of debt vis-à-vis comparable markets in the world. Consequently, the impending rise in interest rates, expected over the balance of 2010 and throughout 2011, poses an issue for Canadian farms.
“It’s important that Canada’s agriculture industry takes steps now in planning for higher rate scenarios in three to five years just when the rest of the global economy is picking up and governments may not have an appetite for another bailout,” he said.
Canada’s economy is expected to strengthen this year on the back of monetary and fiscal stimulus, according to the BMO Economics Department. One consequence of the improved economic climate is that the Bank of Canada will likely continue raising overnight lending rates, raising rates steadily but gradually from the recently announced 0.5 to 3.25 per cent by the end of 2011 and to 4.25 per cent by the end of 2012.
“Longer-term interest rates are likely to increase less than short-term rates, with the 10-year Government of Canada yield expected to climb from 3.40 per cent currently to 3.95 per cent by the end of this year and to 4.70 per cent by the end of 2011 and to 5.10 per cent by the end of 2012,” said Sal Guatieri, senior economist, BMO Capital Markets. “Agri-businesses are advised to consider their financing and interest rate options sooner rather than later in order to take advantage of current historically low long-term borrowing costs.”
David Rinneard, National Manager, Agriculture, BMO Bank of Montreal, said farmers need to adopt strategies to cope with looming interest rate increases and improve their competitive position in the global market. “BMO is encouraging farmers to review their longer-term interest rate strategies to avoid risks and leverage opportunities from interest rates,” he said.
He also suggested farmers take advantage of government programs such as AgriInvest which, through matching contributions from the government, helps them build a nest egg when they are generating revenue so that they will have a reserve account to help weather volatility within their business cash flow.
Mr. Rinneard suggests Canadian producers take the time to sit down with a trusted BMO advisor who understands their business and the agriculture market to ensure their financial structure is appropriate for their farm business.
“We’re at the beginning of a long-awaited growth cycle in the economy so it’s imperative your business is fit and tuned to leverage the opportunities that a healthy market presents,” said Mr. Rinneard. “But there are risks as well, especially if your capital is supported by high-cost debt. You have to get it right. BMO can lean on a team of experts who understand your business and the environment you’re operating in to help you make sense of it all and make smart decisions about how to manage your business for success,” he explained. “BMO is open for business with farmers, has a long history of working with farmers through all cycles and developing appropriate debt structures for them”.
What do farmers need to do?
Mr. Rinneard offers the following advice to farmers:
- Develop a long term business plan
- Review your capital structure
- If interest rates increased three to five per cent, could your farm business meet its debt-servicing requirements?
- Consider ways to improve your debt servicing capability by renting equipment and land or selling off unproductive assets
- Avoid overcapitalization and extended interest-only loans and high debt – talk to a BMO advisor and ensure every significant purchase is well thought out
- Consider government programs like AgriInvest to improve your farm business’s ability to weather revenue fluctuations
- As part of your planning, develop and review your estate and retirement plans
- Seek advice from experts who can provide advice on these and other aspects of your business
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