The sixth consecutive increase in the Bank of Canada benchmark lending rate underscores the need for farmers to be on their toes heading into 2023.
A 50-basis point increase October 26 puts the so-called policy rate at 3.75%, 15 times what it was March 1.
Many economists now expect a recession in the new year, as the series of aggressive interest rate increases are set to slow consumer spending and business investment.
The speed of the increases have some businesses waiting until the interest rate environment normalizes.
Farm Credit Canada vice-president and chief economist JP Gervais says farms most vulnerable to interest rate hikes are those seeking new debt to cover land purchases or other capital investments. Higher interest rates may delay those purchases, though high commodity prices have so far failed to dampen the appetite for land purchases. Strong cash flow has so far supported land values.
But farm businesses that need to renew terms on existing debt or have operating lines of credit don’t have the luxury of waiting. The additional financing costs will have an immediate impact, forcing them to pay close attention to expenses going into 2023.
FCC offered no fresh guidance to farmers in the wake of the latest rate increase, but Gervais told Country Life in BC following the last increase in September that farms need a business risk management plan in order to prioritize spending and debt management.
“It’s paramount that people have a good risk management plan and understand what the exposure is to elevated borrowing costs that last,” he said.
Unfortunately, research by the Farm Management Canada indicates that adoption of farm business management practices is on the decline.
In 2020, just a third of farmers calculated, reviewed and monitored costs of production to guide decision-making, even with 2015. But over the same five-year period, the proportion of farmers having “a structured approach to financial planning to ensure sufficient capital to withstand changes to the business environment” had dropped from 51% to 43%.