Managing your farm in an era of rising interest rates

As the Bank of Canada aggressively raises interest rates to curb inflation, news coverage is dedicated to the impacts on businesses, consumers, and homeowners. Relatively little coverage has gone to the agricultural sector, investigating how Canadian farmers are managing higher interest.

How do Canadian farmers cope with higher interest costs? How should they?

How do interest rates affect agriculture?

Having advised hundreds of farmers throughout my career with varying levels of debt, I know even the most frugal ones can’t avoid carrying some debt if they want to operate profitably and expand.

Buying seed and fertilizer, investing in or repairing equipment, and expanding through the purchase of more acres — all these endeavours usually require some debt. While operating debt is important, longer-term debt can cause financial strain without proper management, and a large portion of the long-term debt in Canadian agriculture is at a floating rate.

You need to factor in interest as you look at your cost of production. Unless you have locked in your rates on all loans, higher interest rates mean higher payments to service your debt and operating line, which immediately hits your bottom line. What happens at the Bank of Canada is largely beyond your control, but as I’ve observed in my career, farmers who engage in thoughtful financial planning are much better equipped to weather the storm.

Farm succession, the process of transitioning to the next generation, also normally requires some form of debt, as well as a financial valuation of your farm. If your exit plan involves the sale of your farmland, elevated interest rates can feel especially burdensome; some potential buyers of your farm, whether it’s the next generation of your family or an external buyer, will be less inclined to go into debt to make that purchase. I have worked with farmers who have delayed their succession plans during tough economic times, just to ensure their financial goals are met.

Some good news

When faced with such challenges, it’s important to look for opportunities and reasons for optimism.

The first potential silver lining is that while interest rates rise, commodity prices have also risen in the past year Ironically, those rising commodity prices are one of the reasons the Bank of Canada has been hiking interest rates so quickly, making them both a blessing and a curse for farmers. But in the end, your farm may be able to benefit from higher commodity prices, bringing more revenue to help offset higher costs to service your debt. Even in an era of uncertainty, the key is to maintain a high enough margin to stay profitable, service your debt, and finance a good lifestyle for you and your loved ones.

Another important thing I tell my clients to keep in mind is that while interest rates are rising rapidly, they are coming off historic lows. The 1980s featured double-digit interest rates in Canada. Your situation right now is unique, but not unprecedented; you may be able to gain knowledge or peace of mind by studying past eras of economic uncertainty or seeking the wisdom of previous generations of farmers to understand how they navigated that period.

Lastly, in my experience, farmers who are highly profitable, and have strong cashflow and working capital, are more likely to capture investment opportunities amongst the economic uncertainty that accompanies high interest rates. If you have the necessary cash available, elevated interest rates may present new opportunities to acquire assets, because you’ll be competing against fewer market participants.

What are your options?

The best option for coping with unexpected events is to prepare for them in advance through financial forecasting and contingency planning. I’ve used this process to help my clients know what’s the optimum amount of debt for their farm to carry.

While it’s never too late to start the planning process, higher interest rates are already here. In the absence of that option, there may be some steps you can take now to improve the financial outlook of your farm despite rising interest.

When looking at the books of a farmer whose goal is to manage costs, I assess the following:

• Undergo a review of your revenue sources: If you can discover which of your revenue sources is generating the least profit, you can consider investing less in it or cutting it out completely. For example, you could choose to plant certain crop types based on profitability.
• Re-structure your financing: See if there are opportunities to create a strategy for your debt, re-negotiate more favourable interest rates, and potentially lock them in, by speaking with your lenders or financial advisors. Often a simple conversation or reviewing the terms in your debt contracts can manage the burden of debt.
• Tax planning: Look at your tax situation and find opportunities for lower taxation or deferrals that can help you in the short term.
• Government funding: As government funding programs, grants, and subsidies become more complex, some farmers are not fully aware of the aid available to them, or that they’re eligible for. Make sure you’re not in the dark — there may be opportunities just waiting to be seized, all you have to do is apply.

Every farm’s approach to dealing with higher interest payments will be unique. But in my observation, there’s one consistent trait of farmers who are best equipped to handle higher interest: they understand and monitor their financials. They know their numbers, their costs, and their margins, and they invest time to understand what story the numbers are telling.

No matter what level of financial expertise you have, maintaining visibility on the business side of your farm always pays off.

MNP can help

You don’t need to weather the storm of rising interest on your own. Have a conversation with our business advisors for guidance — we can help conduct a review of your revenue and costs and provide insights on where you should focus your resources to operate as efficiently as you can.