With one more hike to the Bank of Canada‚Äôs policy rate widely anticipated on January 25, higher interest rates are reshaping how farmers and ranchers approach their business.
BMO senior economist Robert Kavcic described the dramatic shift of four percentage points in interest rates over the past year as a generational event that‚Äôs forcing a repricing of assets across the board. The change is so sharp that the chances of a mild recession are high.
‚ÄúThis is a pretty strong, pretty reliable signal that we have to brace for some economic weakness ahead,‚ÄĚ he says. ‚ÄúIt‚Äôs really hard to imagine an economy that can absorb a generationally abrupt tightening of monetary policy without some kind of economic damage.‚ÄĚ
Kavcic expects higher borrowing costs to last until 2024.
‚ÄúRate cuts are going to start to be a 2024 story, simply because I think policymakers want to err on the side of leaving rates higher for longer and making sure they crack that inflation nut rather than backing off too soon,‚ÄĚ he explains.
Kavcic expects interest rates to settle back into the 2% to 3% range once the current surge is over. The current Bank of Canada Policy rate is 4.25%, with commercial loans running about two percentage points higher.
Many farms have yet to feel the real pain from higher borrowing costs, however, as the rates primarily affect variable-rate financings as well as new debt.
‚ÄúThe high rates haven‚Äôt even funnelled through the system yet,‚ÄĚ says Karen Taylor, director of corporate finance, agriculture and agribusiness with BMO in Abbotsford. ‚ÄúThis is just starting, so it‚Äôll be interesting to see how long this lag period is.‚ÄĚ
Some older farmers are taking note, however, and changing up their succession plans. Rising capital costs are prompting some to consider selling rather than hand the farm onto a new generation, which would be saddled with higher costs in a low-margin environment.
‚ÄúThat is being discussed because now, if your facilities are old (and sometimes with succession planning that is the case, that facilities need to be rebuilt), now you‚Äôre talking about 6% money rather than 3% money,‚ÄĚ Taylor says. ‚ÄúIf someone takes over the farm, they‚Äôre also thinking about where can I grow, how do I buy the neighbour now that I have to pay 6% interest versus 3% interest? ‚Ä¶ The interest rate factor is definitely impacting succession planning conversations.‚ÄĚ