Borrowing costs begin to bite

Three increases this year to the Bank of Canada’s overnight lending rate are raising financing costs for farmers.

The central bank’s benchmark rate increased to 1.5% on June 1, six times what it was at the start of the year. Prior to the first increase in March, the benchmark rate had been 0.25% since March 27, 2020.

Higher interest rates typically aim to cool inflation, but they also boost borrowing costs.

Unfortunately, producers vulnerable to higher borrowing costs have limited options for mitigating the impacts at this point in the season, says Farm Credit Canada chief economist J.P. Gervais.

“There is not a whole lot that you can do beyond what you would already be expected to do,” says Gervias, encouraging farmers to “continuously evaluate the return on applying fertilizer, maximizing yields.”

While the impacts of rising interest rates depend on the sector, Gervais encourages producers to evaluate their financial risk and risk exposure.

This is particularly true for livestock producers, where margins are tight because feed prices have increased faster than livestock prices.

“If you are in a very tight situation to begin with, and you were exposed to some financial risk in the sense of higher interest rates, it’s not necessarily good news,” he says. “Those businesses will see their margins being tighter and that should lead them to scale back on maybe some inputs going forward.”

The story is a bit different for crop producers.

“For grains and oilseeds, if you look at profitability, I think they still have very good margins. Yes, inputs are higher but overall prices are really, really good,” Gervais says. “The expectation is that if we get some good yields, revenues will be okay.”

Producers who feel vulnerable to rapidly increasing interest rates can look at financing options that offer a fixed rate. While fixed rates have already started to move up, Gervais has noticed a “definite trend towards fixed rates.”

“More and more businesses that borrow money are locking in rates for the long term,” he says, a shift that began in the last quarter of 2021 and first quarter of 2022.

Many observers expect the Bank of Canada will continue raising interest rates past 2% and possibly even flirt with 3%.

“We expect another 50-basis point increase in July and another one in September,” Gervais says. “In the short term, it only affects those who are exposed to variable rates, but long-term, it sends a signal that more are coming, and businesses need to evaluate the exposure they have.”

The Bank of Canada’s next rate announcement is scheduled for July 13.

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