Producers urged to watch interest rates closely

Producers are generally rolling with last week’s modest and highly anticipated Bank of Canada interest rate increase. But they have clear concerns about the way future hikes will affect the industry.

The quarter per cent hike, to 0.75 per cent, was followed by chartered banks increasing their prime rate to 2.95 per cent. Another Bank of Canada rate increase is expected in October, with perhaps another in early 2018.

Looking ahead

Canadian Federation of Agriculture President Ron Bonnett says agriculture is generally in good shape to deal with the quarter per cent hike.

But, he warns, future interest rate increases must be managed predictably and gradually, to ensure they don’t disrupt growth opportunities for Canadian agriculture.

“Producers will need to consider what this increase, and potential future increases, could mean for cash flow and investments,” he says.

Cattle

On the livestock side, Canfax Manager Brian Perillat expects last week’s rate hike to have little impact on cattle operations.

Cattle feeders borrowing to buy cattle, or those who have purchased land, may see a slight cost adjustment, he says. But he expects the overall impact to be limited, unless rates continue to rise. Although the rate has climbed, Perillat says, Canadian interest rates overall remain historically low.

He’s more concerned about the Canadian dollar.

“The higher dollar has a negative impact on Canadian cattle prices,” Perillat says.

Thin operations

Tom Manley, president and chair of the Organic Council of Ontario, says an interest rate hike will consume a large portion of what he calls the “already thin operating profit” for Ontario farmers.

“Farmers rely heavily on debt,” Manley says. “They borrow money for planting and don’t get paid until months later. Some are also indebted millions of dollars for land, buildings, livestock, quota and machinery.”

He worries particularly about young farmers and new entrants, who are especially prevalent in the organic sector. They’ll have to make tough decisions, such as choosing between take home pay and servicing debt, with impacts on future modernization and expansion of their farms, he says.

As an example, he notes land values exceed $12,000 per acre in some places in eastern Ontario. Purchasing just 200 acres represents $2.4 million of debt for a new farmer.

“A rate hike of 0.5 per cent on debt this size means $12,000 of family income lost,” Manley says.

Land

For his part, Craig Manness, principal at The Impact Group, an integrated business marketing strategy company, says the interest rate hike could slow price-of-land and cash rent increases.

But, he says, it also makes the transfer of farm assets more difficult to the next generation, and can give an advantage to foreign investors over local buyers.

He agrees that higher rates can be tougher on the family farm. And while he thinks this initial hike will be manageable, he also suggests producers keep a close eye on the future.

Bottom line

“This rate increase isn’t that big a deal,” he says, “but if it’s only the first in a series of rate hikes in the next few years, that is a big deal.”

Article by: Owen Roberts