Debt is something most Canadians now accept
as almost essential to getting by. Many
economists worry that record levels of household debt will be unsustainable as
interest rates rise, as expected. What about farmers? They’re clearly on the same path. A recent headline “Canadian Farmers Held Record Amount of Debt
in 2016” received virtually no attention. I think it matters.
I’m no puritan when it comes to debt. I’ve
never forgotten reading John Kenneth Galbraith at university on the Great
Depression. He wrote that there were excellent carpenters who needed work, lumber, hammers and nails, people who
desperately needed homes. What was missing was the capital required to finance
building, and governments and banks were just too stubborn to make it available. Galbraith says the misery and suffering
caused by this was unforgiveable. Galbraith’s professional career took him to a
number of top economic and diplomatic posts in the United States, but his roots
gave him, in my opinion, an extraordinary amount of common sense. He grew up on a farm in Iona Station, Ontario,
and often said the long days and hard work of farming made everything else seem
easy.
So let’s try to bring some common sense to
farm debt. The amount of money is one
thing, $90.8 Billion nationally in 2016 (not including household debt like home
mortgages and car loans), up 7.5% from the year before. What’s more troubling is that collectively debt levels continue to
rise year after year. Put differently,
debt has not been paid down since 1993, despite what Statistics Canada has
reported as some very good years for farmers.
On PEI some debt was paid down in
2012, but since then debt levels have gone up by $150 Million to more than it’s
ever been, $783 Million in 2016. Loans from provincial agencies are also at
record levels, up to almost $48 Million. What’s more worrying here was the
increase last year in what’s called “trade credit’, up 16%. Farmers use it when they can’t borrow any more
from traditional lenders like banks. It can sometimes come from friends or
family, but most often from suppliers or buyers. The down side for farmers is that they lose
control over where they’ll sell their crop,
and at what price. It’s virtually pledged to whoever supplied the
credit, and dealers and processors can take advantage of this. It keeps farmers in financial trouble in
business for one more year, one more
roll of the dice, but a price is paid by the loss of control.
Debt obviously isn’t always bad. Money can be borrowed to buy more land or
farm machinery, construct new buildings, all can make a farm more productive. What I’ve
seen over the years however is that farmers are continually chasing the market,
which is always demanding lower prices, even as costs go up. If the margins keep shrinking then more volume can look like a solution. Until
it isn’t, especially if other farmers are on the same track and markets become
over supplied. So yes borrowing can make
a farm more efficient but not necessarily more profitable. What we do know is
that the pressure on farmers to be more productive is relentless.
I’m certainly not saying that every farm is
losing money every year. The smartest thing I was ever told about farm finances
is that one third of farmers are making money, and another third are losing, all
because of good luck and market conditions elsewhere. It’s the middle third you
have to pay attention to. I’ve called them the solid family farmers, the ones
who don’t brag or complain. What I do hear
from those willing to share is that
they’re treading water at best, or slowly eating into their equity year by year
at worst, not enough to alarm their creditors,
but enough that the future looks uncertain.
Equity is the final piece of the debt puzzle
that looks worrying. Land and building values have been going up steadily, 10.9%
a year nationally for the last 4 years, but Farm Credit is predicting just 4% growth this year, and 1%
next. PEI farmers have benefited (or
been hurt if a farmer is looking to buy land) by farm purchases by Taiwanese
monks, and Amish families from Ontario.
Then there’s this. A Farm Credit economist
Craig Klemmer uses something he calls liquidity to measure the financial
health of farmers. It’s the ratio of current assets to liabilities, and it
determines the ability of farms to weather setbacks like poor harvests, or very
low prices. Grain, oilseed and poultry
operations have the best liquidity numbers. The worst? Potatoes and dairy, two
of the most important commodities on PEI.
Klemmer says the low number for dairy isn’t a problem because of
“continuous production and predictable cash flows.” He indicates about a third of potato
producers nationally are on very poor footing financially, and that’s clearly not
good for PEI. I do worry many potato
producers here feel boxed in by debt.
But perhaps John Kenneth Galbraith can
cheer us up a bit with one of his famous comments: “The only function of economic forecasting is
to make astrology look respectable.”
Maybe everything will work out. Maybe.
