Cost of borrowed money continues to rise on farms

After the hustle of the 2023 harvest season settles, a lot of Ontario farmers will examine their business’s financial numbers and be surprised at the impact of rising interest rates, says Shawn Brenn, chair of the Ontario Fruit and Vegetable Growers Association.

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Despite early 2023 predictions that the Bank of Canada would curtail its two-year-long strategy of inflation-fighting policy rate increases, those rates have continued to rise. On July 12, its overnight rate – the driver for the prime rate by which lending institutions approve loans – rose to five per cent. Many economists predict an additional 25 basis points with the next announcement on Sept. 6.

The Bank of Canada has increased interest rates 10 times since March 2022.

Why it matters: Farmers need to be mindful of how increased interest rates will affect cash flow.

For farmers with variable-rate loans or who want to secure new financing for equipment, land, inputs or expansions, this means more available cash will go toward interest expenses.

“People’s thought process with interest rates are going to be sharpened,” said Brenn, who grows potatoes, onions and leafy greens near Waterdown. “I think a lot of people are going to be surprised” once they have a good look at their numbers.

Farm Credit Canada acknowledged the looming financing squeeze with a pair of interest rate-themed announcements in May. The arms-length government lender cited “financial difficulties, including cash flow challenges, due to higher-than-average input costs and elevated interest rates,” in a May 24 news release announcing “an unsecured credit line up to $500,000 with loan processing fees waived” for farms and agribusinesses.

“While the current experiences of individual operations within the different agriculture and food sectors are varied, we hope those who identify with these challenges will use this credit line as an opportunity to work through their current position and build back stronger than before,” said FCC chief operating officer Sophie Perreault in the news release.

Specific to the hog sector, which is facing rapid declines in demand and Canadian processing capacity, FCC also announced in May that its relationship managers “will consider additional short-term credit options, deferral of principal payments and/or other loan payment schedule amendments to reduce financial pressures.”

“Hog producers may face a cash shortfall in addition to personal hardship and stress,” said Manon Duguay, FCC’s vice-president of operations for Quebec and the Atlantic, in the news release. “We’re monitoring the situation closely and have been in touch with our hog customers over the past several months.”

Brenn knows the financial and potential mental health strain caused by rising interest rates isn’t confined to hog producers.

“It really depends on how leveraged each farm operation is,” he said. Cash crop growers may have a lot of expensive equipment. If it’s financed or leased on a variable rate, “that rate can have a huge impact on your cost of production.”

In fruit and vegetable and other sectors like dairy, specialized infrastructure is often required when the farm undergoes technology upgrades, expansions or generational transfers. His own Brenn-B Farms is in the midst of an expansion first planned about four years ago. The interest rate is now 4.5 per cent higher than when they started planning.

Things have gone slower than hoped, as is often the case, due to delays in acquiring permits and securing contractors. This 4.5 per cent increase has added hundreds of thousands of dollars to the budget for financing the expansion. And Brenn knows his family is not alone in this experience.

“Every time there’s a delay, you know that by the time you need to go and get funding, it’s going to cost that much more in interest.”

Asked about the potential effects of rising interest rates on farms, FCC’s Montreal-based manager of economics Krishen Rangasamy said “rising rates translate to higher debt servicing costs, with the impact felt more acutely for those that have capex (capital expenditures) requirements, often financed via loans.

“Some farms may opt to accelerate repayment of loans, while others may want to stand pat and use cash flow to maintain operations,” said Rangasamy. “Either way, rising rates add to ongoing cost pressures for farms, which is not positive with regards to profitability and investment spending.”

The federal government has a list of strategies for anyone challenged by rising interest rates. These include:

• Reducing expenses so there is more money to pay down debt;
• Paying down debt with the highest interest rates first;
• Finding ways to increase income to help pay down debt;
• Ensuring there is an emergency fund to deal with unexpected expenses, including managing higher loan payments to avoid penalties.

Specific to the agriculture and agri-food sector, Rangasamy encouraged business owners to “talk to your lender for advice and products that can be tailored to your specific needs.”

And, as with the general advice from the feds, “find ways to keep other costs under control to support profitability.”

Brenn-B Farms hasn’t expanded its land base over the past two years. But Brenn agrees it’s impossible to ignore the trend across Ontario of rapidly increasing farmland prices. This has happened in an environment of continued interest rate hikes and he’s sure it will end soon.

Even now, he believes the trend has eased and he’s hearing of tightened criteria used by lending institutions to approve loans.

“A lot of people probably took out loans on one or two-year terms and planned to go back in and renegotiate, hoping the rates would settle or go back down,” he said.

That hasn’t happened and now they must renew loans at higher rates than the original.

In the countryside, Brenn still sees farmers breaking ground on expansions and farmland being sold at record or near-record levels. But he believes those activities have slowed and expects they’ll slow even more in coming months.

He added the half per cent or 1.5 per cent rates from more than a decade ago were “a luxury” that some people took for granted.

After raising the policy rate to 4.5 per cent in January, the Bank of Canada said it expected to stall hikes at that level due to a downward trend in inflation parameters. That expectation didn’t last long because inflation didn’t fall as far as expected – due in part, the Bank of Canada suggested, to a continued tight labour market and persistent consumer spending in both Canada and the US.

Rangasamy says those parameters, particularly in Canada, have since slowed.

The next scheduled policy interest rate announcement is Sept. 6 and, again, economists across the country predict one last hike to 5.25 per cent.

“They might still go with a (25 basis point) hike,” said Rangasamy. “The question mark is, will the Bank of Canada take that slower growth into account” and opt to stay at five per cent or “will they continue to look at the inflation parameters” that have not yet reached the two per cent target and institute another rate hike.

Either way, “the consensus among the big banks is that we’re very close to peaking.”

Earlier this month, Agriculture and Agri-food Canada sent a news release explaining programs that could assist producers who face interest rate challenges. Among those is the farm debt mediation service, a “free financial counselling and mediation services to farmers who are having difficulties meeting their financial obligations.”

Information on how to manage debt is available at: agriculture.canada.ca/en/programs/farm-debt-mediation-service.