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Borrowing our way to prosperity

Is it healthy for Canada’s farmers to have more debt than 130 of the world’s national governments?

Last year, Statistics Canada revealed Canadian farm debt exceeds a record $100 billion dollars.

Farmers and the ag industry love to set records. They drool over variety yields, bushels per acre, acres per hour, rates of gain, and any other metric that might portray them as more productive, efficient or simply better than their competitors.

Yet barely a word was mentioned last spring when Statistics Canada revealed Canadian farm debt now exceeds a record $100 billion dollars. To be specific, StatsCan said farm debt at the end of 2017 had reached $102.3 billion, or more than double what farmers owed in 2000.

To put this into perspective, the Canadian farm debt, in U.S. dollars, is higher than the government debt of about 135 sovereign nations.

Canadian farmers owe more than the governments of countries people consider basket cases like Afghanistan (US$1.6 billion), Haiti (US$2.8 billion), Cambodia (US$6.8 billion) and Syria (US$16.8 billion). Farmers owe about three times what the government of Kazakhstan (US$28 billion) owes, and Kazakhstan is a growing competitor of grains.

Canadian farmers even owe more than the governments of modern, advanced nations such as Chile (US$52 billion) and New Zealand (US$52 billion). (Note: All government debt amounts are from 2016 as reported by

The situation appears even graver if you compare debt to GDP. Joel Bokenfohr of Alberta Agriculture updated a debt/GDP comparison I made in 2014 and he presented the following graphic at the 2018 Agriculture Update for Professionals.

This is an annual update Alberta Agriculture offers to western Canadian professional farm advisors at seven locations throughout Alberta and one in Saskatchewan. This year about 700 accountants, lawyers, insurance agents, and banking professionals attended the one-day seminars.

Bokenfohr asked those in attendance at each seminar: “How many in the room are concerned about farm debt levels being taken on by farms?”

“60 to 65 per cent responded that they had some concern about current debt levels with some of their farm clients,” Bokenfohr reports, although he stresses this does not mean these advisors are worried about the debt levels for two-thirds of their farm clients. Rather, it’s that two-thirds of the advisors had concerns about some of their clients taking on more risk.

Darrin Qualman, an agricultural researcher in Saskatchewan, has even gone one step further. In a July 3, 2018 online posting entitled “$100 billion and rising: Canadian farm debt” Qualman used StatsCan data to calculate that between 2000 and 2017 farmers received an average $47 billion per year in gross farm receipts from the markets. During this time period they averaged a net farm income of $1.6 billion per year.

While this sounds impressive, if you divide that by Canada’s 193,492 farms, the average annual net income from farm operations over the past 18 years is only $8,300. As a result, off-farm income is a necessity for many farm families.

However, Qualman points out farmers received an additional average $3.1 billion per year from Canadian taxpayers through farm support program payments during the time period. And farm debt had also grown an average of $2.7 billion a year.

Most interesting, Qualman calculated the average interest costs that farmers pay to banks, suppliers and other lenders is about $3.0 billion a year, an amount almost equal to the average support payments from taxpayers. Qualman points out: “Thus, one could say that, in effect, taxpayers are paying farmer’s interest bills.”

Or it could be argued, according to Qualman, that farmers are taking on an equal amount of debt each year to what they have to pay in interest. “One could say that for two decades banks have been loaning farmers the money needed to pay interest of farmers tens-of-billions of dollars in farm debt.”

While the above illustrates the mountain of debt farmers have run up, many will argue farm debt, unlike so much government debt, is actually an investment in efficiency and productivity.

So what should farmers do?

Critics will also argue that StatsCan farm numbers include uneconomical hobby and retirement farms which distort debt and income averages.

These are valid arguments, provided all new debt that farmers incur actually results in better returns than would have been achieved without borrowing. But is this really true, given the increasing costs and borrowing required for equipment purchases?

The question farmers have to ask themselves before taking on debt is if the farm’s bottom line will actually improve as a result of the investment after meeting the debt obligations.

Farmers must also take into consideration the risk they are adding to their operation. We have had five interest rate increases in the last year and a half. What impact has that had on debt servicing? Interest rates are still low by historical standards, but can your business endure further rate increases?

Bokenfohr says all farmers should consider the following strategies to ensure they can continue to manage their debt:

“There are still opportunities for farms to take on debt and grow but it’s important to understand the impact and do some scenario planning (interest rates, changes in revenue, difficult harvests, etc.). Many farms have had a bit of a margin squeeze and the cost side of the business has been increasing — especially for capital costs of land and equipment.”

“Farm managers should consider building in business resiliency so they can take advantage of opportunities and cope with surprises.”

“Focus on good benchmarking and financial analysis to guide decision-making and analyze what factors may constrain decision-making over time such as input costs, land payments/rent, equipment payments, etc. This is especially important for those just coming back to the farm. We have seen the cost structure bid up and it’s important you’ve put the right metrics in place to guide your decision-making.”

Bokenfohr suggests farmers looking for benchmarking and financial analysis resources access online farm management information through Alberta Agriculture Ag-Info Centre at

On the other side of the ledger, J.P. Gervais, vice-president and chief agricultural economist for FCC, does not consider current debt levels to be a crisis. FCC holds about 30 per cent of Canadian farm debt.

FCC has an extremely healthy portfolio, Gervais says. Fewer than one per cent of its loans are impaired (i.e. late payment), which is close to a historical low. And while liquidity ratios are down, they are still higher than average.

However, Gervais says farmers face some challenges over the next few years. “Income is going to be challenged. Over the past eight months farm income is down about one per cent in Canada. U.S. farmers have seen a 30 per cent income decline. We are in a softer income environment.”

Gervais also points to the five per cent interest rate increases and warns farmers to expect more. He suggests farmers should be looking at the mix they have of fixed- and variable-rate loans.

Gervais warns global trade tensions, weather, and commodity price volatility may also have an impact on farm income and debt servicing.

“Farmers need to grow income and use debt to make investments that make the business more efficient,” he says. “Farms will be fine if they continue to grow income. This is a good time to review financials.”

Gervais says farmers also need a clear understanding of their financials. “How would your situation change if your assumptions about yields/weather/markets are wrong? You need to conduct stress testing of your business.”

Gervais adds it is okay if producers don’t do such analyses themselves, but he says they have to understand the results of stress testing conducted by a third party.

Farmers must also raise the bar in risk management. Producers need to consider government insurance programs and new revenue insurance offerings. “Farmers need to have a risk management plan in place,” he says.

Gervais described the current farm financial environment as VUCA. This is an acronym for “volatility, uncertainty, complexity, and ambiguity.” This is the environment, he feels, that could be what’s in store for the next three to five years.

While high debt levels and uncertainty make this a scary time for many producers, Gervais assured me it is business as usual at FCC. There have been no changes in lending policy, and FCC continues to use the same financial indicators and analysis in making loans.

Perhaps the best news for farmers from Gervais, as well as the professional farm advisors attending Bokenfohr’s seminars, is the consensus that land prices are unlikely to decline significantly, unlike what happened in the 1980s.

But farmers have to ask themselves if we merely borrowed our way out of the ’80’s farm income crisis. And if so, is the current debt bubble actually something we can grow our way out of given that higher production typically leads to lower prices?

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