Farm debt under control, but watch out for higher interest rates: FCC chief economist
According to the chief economist of Farm Credit Canada (FCC), the possibility of an interest rate hike is the grimest of recent news that farm debt in Canada has recorded the smallest increase in six years.
Statistics Canada data showed that Canada’s outstanding farm debt rose 5.9% to $ 121.9 billion as producers invested in land, buildings and equipment. However, this is the smallest increase since 2014 and below the 10-year average of 6.5%. Farm cash receipts climbed 8.3 percent.
“These are positive signs that the overall financial situation for Canadian agriculture has improved in 2020,” said JP Gervais, chief economist, FCC. “We now expect record farm incomes in 2021, exceeding expected growth in outstanding farm debt by around 6%. “
Gervais said it is important to recognize that income growth has not been consistent across all sectors and regions of Canadian agriculture. Total ranching revenues, for example, declined by nearly one percent in 2020, largely due to COVID-19-related disruptions brought about by temporary closures of processing plants and the shutdown of the sector. catering.
Gervais also noted that a sharp and sudden rise in interest rates could have a significant impact on the ability of farms to service debt. Determinants of net farm income, such as trade, weather conditions, and high farm input costs, could also affect forecasts of farm income and debt.
“With the level of debt in the agricultural economy, producers need to be aware of the potential for higher interest rates and factor this into their risk management plans,” Gervais said. “Higher interest rates affect your working capital and your ability to honor your debts. While the current low short-term rates are attractive, it may be worthwhile to lock in long-term rates at the current low levels. “
There is still a lot of uncertainty around the permanence of current inflationary pressures, according to Gervais.
“On the one hand, the current supply chain bottlenecks and high consumer spending driving inflation could ease in the second half of 2021,” he said. “On the other hand, the savings accumulated in the economy could further increase consumer spending and trigger permanent price increases that justify higher interest rates.”
Demand for agricultural and food products is high and stocks are generally below their long-term average. This generates a positive outlook for the industry as it emerges from the pandemic. But there is no guarantee that the high prices recorded in many sectors will not return to normal levels, he warns.
“The overall balance sheet for Canadian agriculture remains healthy, despite the current uncertain times,” said Gervais. “But producers need to understand their financial situation and build resilience into their business plans in order to be able to thrive in this dynamic operating environment.”