Debt on the farm

The current state of agricultural debt in Canada

canadian farm debt is a whopping $62.7 billion at present, and has been steadily increasing since 1995. “Before that, the outcome of the farming crisis in the early 1980’s with high interest rates and loss of markets kept the debt level flat from 1985 to 1995,” says Jean-Philippe Gervais, a senior agriculture economist at Farm Credit Canada. “Going further back, farm debt increased from the early 1970’s to
mid-1980’s.”

At the same time he acknowledges that increased farm debt is a concern, Gervais notes that if farmers are growing their profits at the same time they take on more debt, the concern is not as serious. “The ratio of farm debt to net income decreased five percent between 2001 and 2009,” he says. “Grains and oilseed prices have been increasing nicely.”

Dr. George Brinkman, professor emeritus of economics at the University of Guelph, agrees – to a point. “The relatively low increase in ratio of debt to income we’ve seen recently is because we’ve had steady record-low interest rates,” he says. “If interest rates increase even as much as three percent, farmers’ debts – including the cost of borrowing – will become impossible for many to handle. Farmers must be made aware that they are exceedingly vulnerable to rising interest rates.”

Brinkman also notes that the long term picture of debt to income ratio for Canadian farmers is much more serious. “In 2009, it was five times what it was almost 30 years ago in 1981,” he notes. “This means that at the same time Canadian farm debt has grown substantially, Canadian farmers in 2009 had one-fifth the ability to pay debt back than they did in 1981. Income has not kept pace with debt whatsoever during this time.”

examining farm income & debt
While US farm income has increased over the decades (and their debt to income ratio has held steady), Canadian farm income has basically held flat. “This is mainly because farmers are using up a lot of income to pay interest on debt,” Brinkman asserts.

The picture in Ontario is particularly serious. Farm income started decreasing somewhat in the 1990’s but in 2006, it dipped deeply into the red ($-24 million), and a year after, dropped to a shocking  $-195 million. In 2008, it was $266 due to record world grain prices, but it 2009, it again was in the negative ($-51 million). “Indeed, ‘market income’ (income that does not factor in government subsidies) has been negative in Ontario since 1999,” says Brinkman. “Also keep in mind that if times do get better for farmers in terms of making more money, government  subsidies also are likely to be
decreased accordingly.”

In terms of farm debt, US farmers have much less for several reasons, including the absence of supply management there, a more vertically-integrated farming system and a generally different structure of farm ownership. “There is more shared debt,” observes Gervais. “Also, much more land is rented.” Indeed, Brinkman says most of the Canadian farm debt consists of money borrowed to purchase land (and to a lesser extent, quota). High land prices are partly due to high demand for land near populated areas – but it’s also due to farmers outbidding each other. “Farmers themselves are very much to blame for farmland prices skyrocketing,” Brinkman asserts. “The US is catching up, but farmers here are willing to pay incredibly high amounts of money for land relative to the income earned from it.” 

Besides the high price of land – and the interest being paid on loans to buy it that are eating into farm profits – Brinkman is troubled because additional land isn’t bringing in an adequate net income increase. “Farmers say they’re buying land in order to make more money, but I see farmers buying land and quota also because of the capital appreciation they expect to get in the future when it is sold,” he says. “Part of the reason for increased land and quota prices is that farmers are buying these assets as good investments in themselves, not just for their value in increasing net income now, and that is very alarming.”

future outlook
Gervais sees positive fundamental trends in future farm income due to population growth, and expansion of both emerging markets and the worldwide middle-class. “There will be greater demand for better quality food and more meat,” he says. Brinkman agrees that the future income outlook is positive, but only provided interest rates don’t get too high and farmers don’t reduce their income through exorbitant land purchases.

“In my crystal ball, the single most critical factor for farmers is interest rates,” says Brinkman. “We’ve been blessed with record low levels for a long time, but it looks like they will increase slowly in Canada. As they continue to increase (due to the global economy coming out of recession and a strong Canadian dollar), many farmers could get into trouble.”

Brinkman therefore strongly advises running a calculation to see what will happen to your farm finances if interest rates go up by four percent. “You likely have three to four years to respond before this scenario will be your reality,” he says.

“Make your farm better, not necessarily bigger. If you’ll only be breaking even now, you may have to sell non-productive assets. Avoid interest-only loans at all costs.”

See page 18 for more debt management tips. •