Despite super-sized rate increase from the Bank of Canada Wednesday, Canada’s agriculture industry is in a good position to weather inflationary pressures and higher interest rates, according to Farm Credit Canada’s chief economist.
“We are in a unique position where record farm revenues are helping to offset the impact of a sharp increase in input costs and rising interest rates,” J.P. Gervais said in a release. “The key for producers is to pay close attention to projected income and expenses to avoid any cash flow challenges that could put pressure on operations.”
“The ability to service debt is arguably the most critical financial risk indicator for a farm operation,” he added.
The Bank of Canada raised its key overnight lending by a 1% earlier today, the largest single increase since 1998 as it attempts to cool the highest inflation rate in 40 years. The hike is the Bank’s fourth since March, bringing its rate to 2.5%.
FCC’s most recent projections suggest farm cash receipts could climb almost 16% to $96 billion in 2022, driven by robust commodity prices and prospects of much stronger crop yields than last year. This would surpass the 2021 record high, which was itself an increase of 14.9% over 2020.
“Even if our projections were more modest, the Canadian agriculture industry certainly seems financially healthy and in a good position to weather inflationary pressure and higher interest rates,” Gervais said.
Yet, operations will need to adjust to farming under higher interest rates - a situation unlike the one experienced for the last 15 years, Gervais warned.
Inflationary pressures on farm inputs are widespread. Fertilizer prices saw a year-over-year increase of at least 50%, and even more than doubled in some cases. Feed prices climbed more than 40% year-over-year and farm fuel has increased by more than 35%. Inflationary pressures on farm inputs have dampened the outlook and contributed to an overall increase in farm debt, which rose by 7.1% to $129 billion at the end of 2021.
Gervais said producers should test various scenarios regarding commodity and farm input prices, yields and interest rates to better understand their financial risk exposure. They can then identify different strategies to mitigate those risks if they find themselves in situations that exceed their risk tolerance.
“If a producer is already carrying significant financial risk, then reducing the risk of rising interest rates may be a prudent strategy,” Gervais said. “I’m not saying that everyone should lock in, but every producer needs to understand how different scenarios could play out and to do what’s right for their business.”
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