Farm Interest Rate Expenses Set to Rise: FCC

The growth in Canadian farm debt may have slowed in 2020, but higher interest rates ahead could still have a profound impact on the bottom line of many operations, according to Farm Credit Canada.

As noted in a website post Tuesday by FCC senior economist Leigh Anderson, overall Canadian farm debt this past year rose 5.9% to $121.9 billion – the smallest annual increase since 2014 and below the 10-year average of 6.5%. Indeed, amid strong demand for agriculture commodities, growth in farm revenues of 8.1% in 2020 outpaced the gain in farm debt for the first time in six years.

But Anderson warned producers still must ensure working capital and farm debt obligations remain a top priority.

Based on the nearly $122 billion in collective Canadian farm debt at the end of 2020, the current Bank of Canada effective business interest rate of 2.29% would result in $2.8 billion in interest payments by farmers this year. But even with a slight 0.5% increase in rates and assuming no increase in debt in 2021, farm interest payments would jump to $3.4 billion – a level similar to what was seen in 2019 when interest expenses galloped 16% higher from the previous year.

Meanwhile, actual farm interest expenses in 2021 are likely to be higher still, given FCC is projecting farm debt will not remain static and will instead grow by approximately 6%. That increase in debt, combined with a 0.5% hike in rates, would boost interest expenses even further.

Anderson said FCC is forecasting Canadian farm income will reach new record highs 2021, likely once again outpacing any increase in debt. However, he cautioned current drought conditions, high construction costs and other economic factors could still impact farm revenue and debt forecasts. As well, he pointed out the increase in 2020 farm income was not shared by all, with total livestock revenue decreasing by nearly 1%.

The Bank of Canada, which is scheduled to make its latest rate announcement on Wednesday, is not expected to hike its key overnight lending rate until 2022.

However, Anderson said the economic recovery looks to be gaining momentum as vaccination rates increase in Canada and around the globe. At the same time, upward pressure is already being seen for fixed interest rate products as long-term bond yields have increased through 2021, he said.