The other reason why farm debt has not been a problem for many years is that average farm incomes were high and rising. That meant the percentage of overall farm income going to pay interest expenses has been very comfortable, by historic standards.
Things have been more challenging the past couple of years. Farm cash receipts are down from the highs, especially after stripping out cannabis and government payments. At the same time, total expenses (including interest costs) surged almost 10% in 2018 and 2019, which has dampened profitability.
The big recovery in prices for most of the major grain and oilseed markets in recent months, ranging from corn to canola and wheat, should boost returns for cash crop operations, providing at least temporary relief from the cost:price squeeze seen in 2018 and 2019.
Implication: With debt continuing to rise, the vulnerability of the farm sector to higher interest rates and/or a sustained period of low commodity prices is increasing. Farmers should use the current lull in interest rates and rebound by crop prices to position for tougher times ahead.
Reminder: Agriculture is highly cyclical. Regular readers of other DePutter reports will realize that they have espoused the following ideas:
1) For cash croppers, the rich profits seen in the great bull markets of 2008 and 2012 are over and won’t return soon. A sub 80-cent Cdn $ has been helping to extend the period of good times, but it can’t be counted on to act as a “bonus program” forever. Most livestock producers are facing challenging times today, due to a combination of low livestock prices and high feed costs. If an increase in interest rates were to accompany a pause or even a dip in land and commodity values, debt servicing and access to credit could become more difficult. Plan accordingly.
2) Other segments of agriculture, such as dairy, poultry and orchards/horticulture, have their own nuances. These will influence how much debt an operation can carry.
Summing up, we want subscribers to be well informed about the mountain of debt which has built up on the balance sheets of farmers from coast to coast. That debt could become a problem if farms face a sustained cost:price squeeze or an end to the current lull in interest rates.
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BONUS NON-AG COMMENT & CHART
Five-year bond yields stable, but not rising.
We like to keep an eye on five-year government bond yields in Canada and the US.
Yields on these bonds serve as a benchmark for various lending rates of a similar duration, including five-year residential and farm mortgages.
The chart below shows that yields on both sides of the border have been trending generally lower since the start of 2019. The latest major leg down was in early 2020, in response to the first wave of COVID-19.
In recent months, government bond yields have been stable, but have not turned higher.
Implication: Interest rates are no longer falling, but we also do not see clear indications they are turning higher. Our reports will let you know if this changes. Keep in touch!
