It feels like you need an MBA every time you turn on the radio. Stories of how lending institutions are moving enormous sums via complex trading schemes can (and maybe should) leave any of us a bit bewildered and not a little shaken.
There’s also the fear that the chaos on Wall Street and Bay Street will trickle down to Main Street, and inevitably to Canada’s gravel roads and rural routes.
Even worse, nothing seems as safe as it should, and it can seem far beyond your power to build a credit strategy that will keep your farm working, without spiking your risk exposure.
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How do you protect yourself in an era when laid-off factory workers in Ohio who can’t make their mortgage payments can crack the very foundations of our global financial system?
It will take months to restore confidence in the world banking industry. But one thing is sure — bankers have much sharper pencils now than they did even just a few weeks ago.
“I’m not sure how much will change,” says Alfons Weersink, ag economist at the University of Guelph. “It does send a sharp signal of the problems with equity lending.” If real estate and other equity values fall, the whole infrastructure can seem built on shifting sands.
Weersink says that one trigger of the agricultural financial crisis of the 1980s was too much focus on approving loans based on the farmer’s equity position.
“Because we had rising land values with no end in sight,” Weersink says, “there was no apparent risk in lending to anyone. You could get it back if people defaulted.”
The 1980s loom large in the collective memory of farmers and agricultural economists. It was the best of times — farmland values went up by a factor of seven from 1973 to 1981 — and it was the worst of times — who can forget the 18 per cent interest rates by the mid 80s?
“When Reagan got elected,” says Bill Brown, ag business professor at the University of Saskatchewan, “he thought the way to cut inflation was to raise interest rates. Many farmers gave land back to the lender.”
Economists don’t predict a return to double-digit interest rates, and the farm economy is relatively healthy heading into the upcoming winter. Yes, grain and oilseed prices have dropped, but the previous 18 months have been a time of rebuilding and paying down debt, says Brown. “Farmers have more equity as a basis for borrowing money.”
Brown says last year was like the 1970s. Prices went up, input costs went up, but if you got a decent crop you made some money. But if we enter a period where interest rates rise very rapidly, farmers who have variable rates on operating loans and mortgages could get stung.
“If interest rates rise, then land values will drop,” predicts Brown. “If margins disappear from agriculture, land values will drop too. Margins are still positive, however, and I expect land values to rise again in 2008 for Western Canada.”
The fundamentals — high demand and low supply for most agricultural commodities — suggest to Brown that prices won’t fall through the floor.
Another number that is looking good is agriculture’s ratio of debts to assets, especially in Saskatchewan. The amount of farm debt has gone up over the past 15 years, says Brown, but the debt:asset ratio has stayed relatively constant. That’s because although debt has gone up, land values have gone up too, and farmers’ borrowing capacity has increased.
Putting your own cap on credit
This is where the warning flags come out. The theoretical capacity for farmers to take on more debt because of increased land values is sparking warnings from at least some economists. After all, it’s not unheard of for bank managers to give out money irresponsibly.
