When Gwen Paddock began her finance career some three decades ago, farmers were looking for a chequing account, an operating loan and maybe some short-term financing for equipment and land.
Not so today.
“Farms are getting bigger with more moving parts,” says RBC’s national director of agriculture. “Now, farmers and farm operators are looking for bank products and services that are in a lot of ways similar to what our other mid-market commercial clients are looking for… foreign exchange, trade financing, employee banking packages in order to retain employees, all kinds of risk management tools.”
Those same farmers are also taking on record high levels of debt.
Excluding household debt — such as student loans, car payments and non-farm mortgages — Farm Credit Canada pegged 2016 Canadian Farm Debt at $90.8 billion, an increase of 7.5 per cent over the previous year. Farm assets were valued at $591 billion.
But what those numbers mean depends on where you live.
In Saskatchewan, the average debt load per farmer is $420,575, whereas the government of British Columbia estimates average farm debt load in that province at $327,801. Total farm debt in Ontario exceeded $24 billion in 2015, and total liabilities in Manitoba in 2016 reached approximately $9.6 billion, or roughly $580,168 per farm — a 38 per cent increase since 2011.
Paddock says the increasing “debt pie” is the result of multiple drivers.
“It’s a combination of a number of factors, I think it is farm expansion as farms consolidate, I think it’s farms investing in technology and they are financing that technology in order to improve efficiency, effectiveness and productivity,” Paddock says, adding farm succession can play as role as well, as younger generations buy out older generations.
Kelly Keeler, vice-president of agriculture risk management and credit risk management at CIBC, agrees that innovation and the adaptation of new technologies is a big part of the reason that farmers have taken on increasing levels of debt.
“There has been an awful lot of productivity growth in agriculture in Canada. It’s been a great story. We are a country that has been working on a productivity mandate as a nation,” says Keeler. “Some of that has been financed by equity and some has been financed by debt, so from our perspective debt is a useful tool.”
“That being said, it can be a dangerous tool as well.”
Whether or not the current level of debt being carried by Canadian farmers is a problem depends on who gets asked.
“I would start by saying it’s relatively large, but so are asset values,” responds Alan Ker, a professor at the University of Guelph who recently testified on the issue before the House of Commons standing committee on agriculture. “Debt-to-asset ratios are in line with what they have been historically, so it doesn’t seem like it’s going to be a problem any time too soon — unless there is a major change in interest rates.”
The Bank of Canada has raised interest rates twice in recent months and is expected to do so again in the near future. So far the increases have been minimal and incremental, with the key rate now sitting at one per cent — a far cry from the record high interest rates Canada saw in the 1980s when the key lending rate neared 22 per cent.
But Ker, who also heads the Canadian Agricultural Economics Society and is the director of the Institute for the Advanced Study of Food and Agricultural Policy, says this doesn’t mean farmers shouldn’t prepare for the possibility of higher interest rates to come.
“If interest rates were to change markedly more, I mean they have only changed pretty marginally, but if they were to keep changing in that direction, then yeah, I think servicing that farm debt could become an issue for sure,” he says. A decline in asset value could also be problematic for heavily leveraged farm operations, Ker adds.
“I think the risk now would be, given it is so large in absolute terms, that if something were to happen to asset values it would be very disconcerting,” notes the professor.
According to a recently released report by Farm Credit Canada, the collective debt-to-asset ratio of Canadian farmers has increased for the first time since 2009 and Statistics Canada numbers indicate that the last time Canadian producers paid down their overall debt was in 1993.
According to Agriculture and Agri-Food Canada, debt-to-asset ratio of the sector increased slightly in 2016 to 15.4 per cent, but remained below the 10-year average of 16.2 per cent. A lower debt-to-asset ratio generally gives a business more flexibility to withstand unexpected changes and challenges, as well as the financial strength to pursue unexpected opportunities.
Agricultural economist Amy Carduner doubts this small shift will be an issue for Canadian farmers.
“Canadian producers have recently taken on more debt,” writes the Farm Credit Canada economist. “This is, in part, due to the farmland values and the overall intensive capitalization of agriculture. Both increased recently. Historically low interest rates have also pushed up debt levels. That may sound worrying but, at least for the moment, there’s no cause for alarm.”
Carduner adds that the industry has been financially stable for years, and is well positioned to handle increased interest rates and higher debt levels.
Not everyone agrees.
Jan Slomp says that with land values accounting for an average of 70 per cent of farm assets, any dip in land prices could spell disaster for producers with heavy debt loads.
“That throws a tremendous monkey wrench into the whole thing,” says the president of the National Farmers Union, who began farming in 1979. The other thing that makes this whole thing very vulnerable, he says, is that many farmers may rent five times as much as they own. So if all of a sudden they face a financial challenge, they have limited equity to respond to it with.
Farm Credit Canada’s chief agricultural economist, J.P. Gervais, says that while debt-to-asset ratio is an important indicator, it’s farm income that holds the key to debt management.
“The income statement is what matters, so on that basis what we’re looking at first is income,” he says. “And then when you start thinking about interest rates going up… as long as it’s gradual, I think our customers, our producers are going to be just fine. Obviously they’d like to pay less interest, but a lot of them have actually taken steps to manage their risks and sort of moved part of their loans towards fixed rate products.”
More than with many other industries, farm income is susceptible to factors far beyond producer control, ranging from climate change and weather events to fluctuations in international currencies and geopolitical issues.
Ker believes the biggest risks to producer income are “exchange rate risk, interest rate risk, and policy risk.”
“Policy risk in the sense of what’s going on south of the border, not only in terms of their domestic foreign policy but in terms of trade and everything else,” he says. “So there is some risk in that direction, as well as the change in climate we are seeing. It seems like things are more volatile than a couple of decades ago and managing those things… makes farming risky for sure.”
Canadian producers have been shielded from the declining farm receipts seen in the United States largely by a low Canadian dollar, Gervais notes. But with the Canadian dollar on the upswing, farm incomes could be negatively affected, as could farmers’ ability to service debt.
“That Canadian dollar is the one thing I would point out as being something that we need to monitor,” says Gervais. “Look at the downturn in the United States over the last three years; we’ve been shielded from that. Almost year after year, depending on what province you’re in and depending on crops or livestock, but almost year after year we’re breaking records in terms of farm cash receipts.”
Farmers in the United States have seen the opposite, he adds, noting U.S. producers have seen declines as big as 30 per cent some years.
“What has shielded us from this downturn has been the Canadian dollar and now to see it up at 82 cents, to me, this is going to have an impact on cash receipts long-term,” says the chief economist. “That’s maybe one thing I would monitor if I were to identify one source of risk.”
While averages can make it hard to see what is happening on a farm-by-farm basis, experts say there will always be some operations that aren’t equipped to withstand changing economic forces.
“There will be some operations where the leverage is more than the operation can handle, especially in a rising interest rate environment, so that’s where you would have concerns, if increases in interest rates then make it so payments can’t be made,” says Paddock, adding that assets can only pay down a debt if they’re sold. “If you’re looking at winding down the operation that’s okay, that’s a valid strategy, but if you’re looking at having a sustainable business model, then you absolutely have to be able to pay for that debt, to service that debt from cash flow and from running a profitable business.”
Gervais says that farm operators should be examining their business plans for resilience long before interest rates rise, before weather hits, and before taking on new debt, seeing what shocks they can absorb and what risk management tools are available.
“As an industry we need to take our risk management skills to another level and that includes, obviously, production risk due to weather. There are tools that we have that I don’t think we’re maximizing,” he says, adding there are established government programs in place, but also private sector options producers can utilize. “I think we need to up our game in terms of risk management, looking at hedging, the futures markets, even those crop insurance programs. There’s also some revenue insurance programs in recent years.”
This year’s federal, provincial and territorial agricultural ministers’ meeting resulted in a commitment to undertake a comprehensive review of business risk management programs available to farmers and a partnership with the newly formed AgGrowth Coalition, which brings together several agricultural organizations in an effort to to provide non-governmental policy research.
“Modern farming is a smart global business supporting strong communities across the country with sustainable practices. It’s time to modernize our agriculture programs, reflect the risks that are part of this reality and support the opportunities in front of us,” says Mark Brock, who heads both AgGrowth and Grain Farmers of Ontario. “This is a rare opportunity to improve agriculture policy and programs to enhance the economic, environmental, and social contributions of farming in Canada.”
AgGrowth’s vice-chair Jeff Nielsen adds that he hopes the new coalition is able to work in partnership with government on the review of business risk management programs.
“The AgGrowth coalition has created an industry business risk management committee to conduct research and analysis, develop policy positions and ultimately present options for improvement from a farmer perspective,” he says.
One complaint Gervais hears from producers is that government risk management programs are too short-lived or unpredictable. It’s a sentiment that Manitoba’s agriculture minister agrees with.
“I’m not a big fan, as I’ve said over and over again… of ad hoc programs,” says Minister Ralph Eichler. “What we heard from our consultation process is that (farmers) want to make sure that those programs are predictable and sustainable.”
Agriculture ministers from across the country agreed to extend existing risk management programs, but Eichler says he is optimistic that a long-term solution for better programming is on the table at the 2018 federal, provincial and territorial meetings.
But back at Jan Slomp’s Victoria Island dairy, the leader of the National Farmers Union says that what farmers really need is government policy that doesn’t encourage producers to acquire massive debt in the name of unending growth.
“The last 15, 20 years you see a lot of young or younger farmers — and I call everybody below 50 young — that are so easy going into enormous amounts of debt, and the bank is helping them do that,” says Slomp. “They have not lived through the ’80s where there was depreciation of land values instead of appreciation.”
Rather than focusing on expansion, he says producers should be encouraged to become more profitable through efficiencies and reduced reliance on inputs.
“The industry or the trade has a benefit from endlessly more supply, which means lower prices, but that means farms have to get bigger and more intensified and use more fertilizer and get higher yields per acre,” Slomp says. “When I look at the total debt load, I think it is a consequence of farmers being misled into thinking that if they become more productive, higher yields per acre and more acres, they will remain farming and benefit themselves. And that’s a fallacy.”
Higher land prices have given financial institutions greater incentives to provide producers with capital they might not be able to afford if they have a couple of bad years or interest rates increase, he adds, while giving some farmers a false sense of security.
For their part, lenders agree that higher land prices have made agricultural clients lower risk, and foreclosures have been extremely rare in recent years.
“By getting to know the farmer, we get to know what they should be able to generate and we focus more on repayment than assets. We still need those assets, our regular leader wants us to have those assets underneath us,” Keeler says. “But when things evolve or change, talk to your banker or your lender or your financial service provider… and we can talk about it and we can manage it better.”
Paddock says what doesn’t get enough attention when discussing farm debt is the level of financial literacy producers now bring to the table. As farms have become more complex, so too has farmers’ knowledge of what options are available to them and their farm businesses.
“I don’t think a lot about how big the debt pie is going to grow,” she says. “It’s not something that keeps me awake at night, because I think each business, if they have a sustainable business model, will manage their way through.”
“I would say from a bank perspective, though,” says Paddock, “we absolutely still need to be able to provide the credit products, but what’s going to really add value to our customers is what else we can provide to them to help them manage their risk.”