Risk of Higher Rates Overshadows Smaller Increase in Farm Debt

Good news on farm debt is being overshadowed by the potential for higher interest rates, according to Farm Credit Canada’s chief economist.

A sharp and sudden rise in interest rates could have a ‘significant impact’ on the ability of farm operations to service debt, J.P. Gervais said in a release Tuesday. Driving factors of net farm income, such as trade, weather conditions and high farm input costs, could also impact farm revenue and debt forecasts, he added.

“With the level of debt in the farm economy, producers must be aware of the potential for higher interest rates and factor that into their risk management plans,” Gervais said. “Higher interest rates affect your working capital and your ability to service debt obligations. While current low short-term rates are attractive, it may be appealing to lock in long-term rates at the current low levels.”

According to Statistics Canada, Canadian farm debt increased by 5.9% to $121.9 billion as producers invested in land, buildings and equipment. However, this was the smallest increase since 2014 and below the 10-year average of 6.5%. On the other side of the ledger, farm cash receipts climbed 8.3%.

Looking ahead to 2021, Gervais said FCC is forecasting that farm debt will rise around 6% again, while farm revenues reach a new record high. These are both positive signs for farmers, but he also noted revenue growth hasn’t been consistent across all sectors and regions of Canadian agriculture. Total livestock revenue, for example, decreased nearly 1% in 2020, largely due to COVID-19 disruptions induced by temporary shutdowns of processing plants and closure of the food service sector.

Meanwhile, Gervais said there is still much uncertainty around the permanent nature of current inflationary pressures.

“On the one hand, current supply chain bottlenecks and strong consumer spending causing inflation could subside in the second half of 2021,” he said. “On the other hand, accumulated savings in the economy could further increase consumer spending and unleash permanent price increases that warrant higher interest rates.”