You say you would never ever dream of jumping off a bridge with only an elastic bungee cord between you and the great hereafter? Nor can you figure out why anyone would ever jump out of a perfectly good airplane. And as for hang gliding, kite surfing and ice-climbing, well, there’s a lot to be said for two feet on the ground.
You aren’t alone. Few of us engage in so-called extreme sports, for a very good reason. We’re addicted to breathing.
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But if you’re farming in Canada, you already have a lot more in common with these adrenaline junkies than you might like to admit. And now, the spectre of uncertain interest rates is rising like a tsunami to a surfer, or an avalanche to an extreme skier.
The parallels with extreme sports are strong enough already. After all, what in the world would possess someone to take a big pile of money, invest it in land and equipment, and then turn around and risk it all by planting crops, despite having no real control over either production conditions or the price you’ll get for the end products?
When you look at it that way it becomes readily apparent — farming is the economic equivalent of an extreme sport.
So, how do you play to win?
Business conditions are getting more challenging by the day, says Terry Betker, head of the agriculture division at the accounting and consulting firm Meyers Norris Penny.
Now, says Betker, those conditions are going to get even more precarious, and there’s not much doubt in his mind that farmers will need to adopt quickly but carefully to this new reality.
“Farmers are going to have to get used to more risk and more volatility in everything — from prices to inputs to interest rates,” Betker says. “There are no one-size-fits-all solutions. Every farmer will have to carefully and honestly assess their own operation.”
THE ONLY SAFE PREDICTION
Right now, in economic terms, the surf is weirdly choppy. There’s the lingering worldwide financial crisis that’s still churning up the waters, combined with the deadly rip tide of a global economic slowdown. But there are gusts of good news too, with stronger stock market averages and hints of recovering employment, at least in some sectors.
We’re in that jittery, anxious lull of uncertainty. Is that rogue wave on the horizon the big one, or does it mean the storm is passing, and it’s time to move on?
If big waves do start rolling in, surfers quickly get divided into three categories.
There are the beginners who need to head to shore right away, before they drown. Next, there are the novices who might have enough experience to be out there, but they can quickly get into trouble with just one misstep. And then there are the Big Kahunas, able to paddle out without fear, hoping to ride the raging surf to glory.
It’s like that for interest rates too, according to a growing list of economic thinkers. If significant hikes start rolling in, the first job of everyone out there is to know their risks, assess their skills, and stick to plan.
The cost of credit has always been an important issue for farmers. Any farmer who lived through the grain boom of the 1970s and the ensuing price crash and interest-rate spike of the 1980s will tell you that such a perfect storm can knock you right off your board and leave you gasping for breath, or dead in the water.
Not only that, but getting a straight answer out of an economist or business advisor on interest rates continues to be a lot like looking at a weather forecast. That’s because the weather and interest rates share two things in common. There’s no such thing as “typical” weather or interest rates, and like the weather, changes in interest rates can have an enormous impact on the bottom line for farmers.
In fact, interest rates are like a poker game where the ante is a half-billion dollars. That’s because, according to the latest StatsCan figures, Canadian farmers are carrying a record $580 billion in debt.
With a debt load that size, a single percentage point change will instantly raise or lower Canadian agriculture’s bottom line by $500 million. Clearly, getting interest rates right is going to help a farm succeed, regardless of whether times are tough or flush.
According to one expert on agricultural finance, interest rates don’t really have anywhere to go but up.
Michael Hoffort is vice-president of operation for the Prairie region with Farm Credit Canada. He says that by any reasonable measure, today’s interest rates are low.
“Over the past 20 years, the cost of money has been eight per cent,” Hoffort explains. “Today a five-year loan is somewhere between five and six per cent.”
While Hoffort doesn’t come right out and say it, the message between the lines is pretty clear. If you know you have capital needs, and you have the opportunity to lock in money at today’s rates, you should probably consider it very carefully because history would say that rates aren’t going to get any better, and may get a lot worse.
There’s a second part to that question, though. If rates are likely to climb, how quickly is that likely to happen?
According to one interest rate analyst, the speed of the climb depends on when the Bank of Canada moves, and he says the Canadian situation is among the best among the world’s advanced economies.
Grant Bishop is an economist with the Toronto Dominion Bank and he says the relatively good fiscal position the Canadian government finds itself in means it also has more latitude than many other jurisdictions. For example, while the government has engaged in some deficit spending and fiscal stimulus, it’s never been forced to outright print money to pay the bills, and isn’t likely to.
“Our view is that the Bank of Canada has the ability to move a bit more slowly to raise rates,” Bishop told Country Guide during a recent interview. “We expect them to hold rates down, likely until after the second quarter of 2010.”
That matches neatly with the public statements of Bank of Canada governor Mark Carney, who moved rates down to just 0.25 per cent last fall, with a dramatic 0.50 per cent cut in response to the severe economic crisis kicked off by the subprime housing bubble and subsequent bank failures in the U. S.
Carney has always said he’ll keep rates down until mid-2010 to ensure stability for Canadian businesses and to keep the wheels of the economy turning.
But today the Bank of Canada is grappling with a number of new realities that are causing some market watchers to wonder if the bank will be forced to move more quickly. For example, houst
ing prices continue to climb in major urban centres, causing some to fret that low interest rates are sparking a made-in-Canada housing bubble.
One of the most recent forecasts comes from the Conference Board of Canada. It is predicting the central bank rate will rise from 0.25 per cent to four per cent over the next two years, on the strength of the ongoing economic recovery.
Then there’s also the issue of the loonie. In case you haven’t noticed, it’s on a tear, causing speculation that it’s bound back to trading at par or better with the U.S. greenback. That’s threatening to take the legs out from under the still-vulnerable economic recovery, but it’s also likely to strengthen the resolve of the Bank of Canada to hold rates down.
It will be like reading tea leaves this winter, and reading the newspaper may not help. If anything, say our analysts, they expect a higher level of rhetoric about keeping rates down as the fall and winter progress.
In the long term, however, they do expect rates to rise, and they’re telling their clients to get ready. Partly that’s because rates are so low right now, and partly it’s because economists suspect there’s inflation on the horizon, which usually means higher interest rates.
Economists compare the enormous stimulus spending of recent months to a fire that’s smouldering, but has yet to burst into flames. Sooner or later, the thinking goes, it will explode, and when it does, the role of the central bank will return to inflation fighting, where their first line of defence will be to hike interest rates and tighten monetary supply.
Farmers need to be aware that they’re headed into uncertain waters they have no control over, our experts tell us. Critical factors range from housing prices in Toronto and Vancouver to the strength and weakness of the U. S. and Canadian dollars.
Even more importantly, farmers need the self-awareness to critically look at their businesses, and also to assess their own management abilities. To go back to the language we used at the start of this story, they need to recognize what category of extreme sports enthusiast they are, and then figure out whether they should be heading to shore, or out to ride the big one.
Betker broke farms down into three main categories for us. First, there is the young farmer at the start of their career. Then there’s the mid-career veteran, and then finally there’s the seasoned veteran who has seen — and survived — it all.
ing prices continue to climb in major urban centres, causing some to fret that low interest rates are sparking a made-in-Canada housing bubble.
One of the most recent forecasts comes from the Conference Board of Canada. It is predicting the central bank rate will rise from 0.25 per cent to four per cent over the next two years, on the strength of the ongoing economic recovery.
Then there’s also the issue of the loonie. In case you haven’t noticed, it’s on a tear, causing speculation that it’s bound back to trading at par or better with the U.S. greenback. That’s threatening to take the legs out from under the still-vulnerable economic recovery, but it’s also likely to strengthen the resolve of the Bank of Canada to hold rates down.
It will be like reading tea leaves this winter, and reading the newspaper may not help. If anything, say our analysts, they expect a higher level of rhetoric about keeping rates down as the fall and winter progress.
In the long term, however, they do expect rates to rise, and they’re telling their clients to get ready. Partly that’s because rates are so low right now, and partly it’s because economists suspect there’s inflation on the horizon, which usually means higher interest rates.
Economists compare the enormous stimulus spending of recent months to a fire that’s smouldering, but has yet to burst into flames. Sooner or later, the thinking goes, it will explode, and when it does, the role of the central bank will return to inflation fighting, where their first line of defence will be to hike interest rates and tighten monetary supply.
Farmers need to be aware that they’re headed into uncertain waters they have no control over, our experts tell us. Critical factors range from housing prices in Toronto and Vancouver to the strength and weakness of the U. S. and Canadian dollars.
Even more importantly, farmers need the self-awareness to critically look at their businesses, and also to assess their own management abilities. To go back to the language we used at the start of this story, they need to recognize what category of extreme sports enthusiast they are, and then figure out whether they should be heading to shore, or out to ride the big one.
Betker broke farms down into three main categories for us. First, there is the young farmer at the start of their career. Then there’s the mid-career veteran, and then finally there’s the seasoned veteran who has seen — and survived — it all.
TAKE STOCK, THEN TALK
If rising interest rates threaten your viability, solve the problem before it gets out of hand
You’ve run your numbers six ways from Sunday, varying everything from income projections to interest rates. Still, the conclusion is inescapable.
Your farm is vulnerable, but not in trouble yet.
In some ways you probably wish you hadn’t run the numbers, because now the luxury of telling yourself “everything’s fine” is long gone.
But if you take the right approach, there’s a fairly high likelihood that arming yourself with this knowledge earlier rather than later will be a very good thing in the long run, says Meyers Norris Penny’s Terry Betker.
You now have time to address this situation before it becomes a crisis.
So, what should be your first step? You could do a lot worse than packing up the books and heading in to your banker’s office to lay the whole thing out, Betker says. Contrary to popular belief, your lender really can be your best friend during tough times, especially if you give them a reason to believe in you by showing solid management skills and by flagging problems early.
“It’s always easier to fix a small problem than a large one,” Betker explains.
“For a lender, there’s also the issue of management skill,” Betker adds. “If you come in now, show you’ve done your homework and you understand the problem, you’ll get a check on the good side of the ledger. But if you’re running into trouble, cheques are bouncing and bills aren’t being paid so he has to call you in — you’ve got a problem.”
Building that good relationship with your lender is always good policy. During tough times, it’s even more vital. It is one of the keys to success. While all lenders know that at the end of the day, the numbers have to stand on their own, there’s still a healthy dose of interpersonal issues in any business deal.
“It’s never all a black and white situation,” says Betker. “How could it be? There’s always some subjectivity.”
TIGHTENING UP?
Other industries are handcuffed by a lack of credit. Now, it may happen to farming too
Credit may soon be harder to get. You might not have seen much evidence of it on your farm yet, but there is growing anecdotal evidence that credit for agriculture is going to get tighter.
Terry Betker of Meyers Norris Penny talks to a lot of bankers on both sides of the border, and says he’s beginning to get the sense from the people he talks to that the taps are slowly turning down.
“It’s a head office thing,” Betker explains. “It’s got more to do with banks and their comfort level lending to agriculture than it does with actual conditions in the sector.”
In part it’s the effect of the financial crisis that took billions and billions of dollars off bank balance sheets. Simply put, there is less money to lend. The pie just got smaller, and your piece of the pie may be shrinking too.
The clamp-down will only slowly manifest itself as the full effects of the credit crisis move throughout the economy. And this may be one of those situations where you’re glad that you’re on this side of the Canada-U. S. border.
“Canadian banks are in far better shape than the banks in the U. S.,” Betker says. But Canadian agriculture may still suffer. Many farmers have become accustomed to dealing with banks that are based in far-flung locales like the Netherlands or Hong Kong. It remains to be seen what their staying power will be. The industry could also suffer because agriculture is a pretty small portion of the portfolio of the major banks, and smaller sectors don’t always get the attention or capital that their financial performance might justify.
“If a bank had $10 million to lend, and now it’s only got $5 million,” Betker says, “it stands to reason credit will be tighter.
IF YOU’RE A BEGINNER
The young farmer has just paddled out past the calm waters of the lagoon. They tend to carry large debt loads because they’ve had to make investments to get up and running. They also don’t tend to have much equity built up in their operations, making them more vulnerable to downturns.
They also bring with them the managment assets and liabilities of their youth. Younger farmers tend to be both more aggressive and more flexible. Their operations aren’t locked into a long-term pattern and they’re more readily adaptable to changing conditions. But they also don’t have the experience of a longer career and they have started their businesses in a climate of low interest rates and readily available credit — which any farmer who’s been in it for the long haul can tell you isn’t always the way things are.
“They don’t know what they don’t know,” is the way Betker sums it up. “They need to develop a plan with their business that provides some balance between staying comfortable and how aggressive they want to be.”
IF YOU’RE A MID-CAREER PRO
The mid-career farmer has a bit more experience. They’ve been in the pro leagues a decade or more and they’ve seen a thing or two. But their debt-to-equity status can be a mixed bag. Some of them carry a lot of debt, while others have already acquired a fair bit of equity.
Some of these farmers likely have enough experience, and are well enough situated so they could find opportunities in the uncertain conditions.
But this is also the group that can put itself in harm’s way by misjudging their position or their own skills. In the world of extreme sports, there’s even a term for this — intermediate syndrome — referring to participants who have just overcome the white-knuckle terror that accompanies their first outings, when it seems death lurks around every corner. That terror can be healthy and encourage them to take extra precautions and avoid the highest risks.
As they build up a bit of experience, a potentially deadly dynamic begins to arise. The easy and safe stuff becomes a bit boring, while the higher-risk, higher-return ventures begin to look interesting and enticing.
TAKE STOCK, THEN TALK
If rising interest rates threaten your viability, solve the problem before it gets out of hand
You’ve run your numbers six ways from Sunday, varying everything from income projections to interest rates. Still, the conclusion is inescapable.
Your farm is vulnerable, but not in trouble yet.
In some ways you probably wish you hadn’t run the numbers, because now the luxury of telling yourself “everything’s fine” is long gone.
But if you take the right approach, there’s a fairly high likelihood that arming yourself with this knowledge earlier rather than later will be a very good thing in the long run, says Meyers Norris Penny’s Terry Betker.
You now have time to address this situation before it becomes a crisis.
So, what should be your first step? You could do a lot worse than packing up the books and heading in to your banker’s office to lay the whole thing out, Betker says. Contrary to popular belief, your lender really can be your best friend during tough times, especially if you give them a reason to believe in you by showing solid management skills and by flagging problems early.
“It’s always easier to fix a small problem than a large one,” Betker explains.
“For a lender, there’s also the issue of management skill,” Betker adds. “If you come in now, show you’ve done your homework and you understand the problem, you’ll get a check on the good side of the ledger. But if you’re running into trouble, cheques are bouncing and bills aren’t being paid so he has to call you in — you’ve got a problem.”
Building that good relationship with your lender is always good policy. During tough times, it’s even more vital. It is one of the keys to success. While all lenders know that at the end of the day, the numbers have to stand on their own, there’s still a healthy dose of interpersonal issues in any business deal.
“It’s never all a black and white situation,” says Betker. “How could it be? There’s always some subjectivity.”
TIGHTENING UP?
Other industries are handcuffed by a lack of credit. Now, it may happen to farming too
Credit may soon be harder to get. You might not have seen much evidence of it on your farm yet, but there is growing anecdotal evidence that credit for agriculture is going to get tighter.
Terry Betker of Meyers Norris Penny talks to a lot of bankers on both sides of the border, and says he’s beginning to get the sense from the people he talks to that the taps are slowly turning down.
“It’s a head office thing,” Betker explains. “It’s got more to do with banks and their comfort level lending to agriculture than it does with actual conditions in the sector.”
In part it’s the effect of the financial crisis that took billions and billions of dollars off bank balance sheets. Simply put, there is less money to lend. The pie just got smaller, and your piece of the pie may be shrinking too.
The clamp-down will only slowly manifest itself as the full effects of the credit crisis move throughout the economy. And this may be one of those situations where you’re glad that you’re on this side of the Canada-U. S. border.
“Canadian banks are in far better shape than the banks in the U. S.,” Betker says. But Canadian agriculture may still suffer. Many farmers have become accustomed to dealing with banks that are based in far-flung locales like the Netherlands or Hong Kong. It remains to be seen what their staying power will be. The industry could also suffer because agriculture is a pretty small portion of the portfolio of the major banks, and smaller sectors don’t always get the attention or capital that their financial performance might justify.
“If a bank had $10 million to lend, and now it’s only got $5 million,” Betker says, “it stands to reason credit will be tighter.
IF YOU’RE A BEGINNER
The young farmer has just paddled out past the calm waters of the lagoon. They tend to carry large debt loads because they’ve had to make investments to get up and running. They also don’t tend to have much equity built up in their operations, making them more vulnerable to downturns.
They also bring with them the managment assets and liabilities of their youth. Younger farmers tend to be both more aggressive and more flexible. Their operations aren’t locked into a long-term pattern and they’re more readily adaptable to changing conditions. But they also don’t have the experience of a longer career and they have started their businesses in a climate of low interest rates and readily available credit — which any farmer who’s been in it for the long haul can tell you isn’t always the way things are.
“They don’t know what they don’t know,” is the way Betker sums it up. “They need to develop a plan with their business that provides some balance between staying comfortable and how aggressive they want to be.”
IF YOU’RE A MID-CAREER PRO
The mid-career farmer has a bit more experience. They’ve been in the pro leagues a decade or more and they’ve seen a thing or two. But their debt-to-equity status can be a mixed bag. Some of them carry a lot of debt, while others have already acquired a fair bit of equity.
Some of these farmers likely have enough experience, and are well enough situated so they could find opportunities in the uncertain conditions.
But this is also the group that can put itself in harm’s way by misjudging their position or their own skills. In the world of extreme sports, there’s even a term for this — intermediate syndrome — referring to participants who have just overcome the white-knuckle terror that accompanies their first outings, when it seems death lurks around every corner. That terror can be healthy and encourage them to take extra precautions and avoid the highest risks.
As they build up a bit of experience, a potentially deadly dynamic begins to arise. The easy and safe stuff becomes a bit boring, while the higher-risk, higher-return ventures begin to look interesting and enticing.
“Intermediate farmers need a plan that allows them to take advantage of opportunities that may arise, but they also need to protect their equity,” Betker says. “They’ve been working hard for 15 or 20 years to build it, they don’t want to have to work another 15 or 20 years to rebuild it.”
IF YOU’RE A VETERAN
The most experienced farmers, on the other hand, tend to be like the old masters of the extreme sports world. They’ve pretty much seen it all, and if they’ve survived this long they’re among the best business men and women in the world. They tend to have more equity and less debt. They’re prepared to take necessary risks, but they’re also very, very good at managing that risk.
These farmers also tend to have different considerations in mind than many of their younger colleagues. They’re thinking of protecting their retirements, or creating winning conditions for a generational transfer. They can afford the higher levels of risk — but as they age they follow a familiar pattern.
Their appetite for risk begins to drop, just when they’re best able to handle it. In a lot of cases these farmers actually spend a lot of time worrying about issues that won’t have a huge impact on their operation — like an increase in interest rates on a modest amount of debt, Betker says.
“Don’t be too worried,” Betker says. “They still need to maintain balance in their operations, but these are the farmers that have quite a bit of equity in their operations. Nobody likes to pay, say, an extra $3,000 in interest — but $3,000 isn’t going to sink them.” CG
“Intermediate farmers need a plan that allows them to take advantage of opportunities that may arise, but they also need to protect their equity,” Betker says. “They’ve been working hard for 15 or 20 years to build it, they don’t want to have to work another 15 or 20 years to rebuild it.”
IF YOU’RE A VETERAN
The most experienced farmers, on the other hand, tend to be like the old masters of the extreme sports world. They’ve pretty much seen it all, and if they’ve survived this long they’re among the best business men and women in the world. They tend to have more equity and less debt. They’re prepared to take necessary risks, but they’re also very, very good at managing that risk.
These farmers also tend to have different considerations in mind than many of their younger colleagues. They’re thinking of protecting their retirements, or creating winning conditions for a generational transfer. They can afford the higher levels of risk — but as they age they follow a familiar pattern.
Their appetite for risk begins to drop, just when they’re best able to handle it. In a lot of cases these farmers actually spend a lot of time worrying about issues that won’t have a huge impact on their operation — like an increase in interest rates on a modest amount of debt, Betker says.
“Don’t be too worried,” Betker says. “They still need to maintain balance in their operations, but these are the farmers that have quite a bit of equity in their operations. Nobody likes to pay, say, an extra $3,000 in interest — but $3,000 isn’t going to sink them.” CG
