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Higher interest rates risk for Canadian ag


June 10, 2010
By BMO

Topics

June 10, 2010, Toronto,
Ont – Some segments of the Canadian agriculture industry could face an
unsettling outlook in three to five years if they don’t take steps now to
manage their debt, increase their productivity and bring their debt-to-income
ratios back into balance, according to Dr. George Brinkman, professor emeritus
and former chair of the Department of Food, Agricultural and Resource Economics
at the University of Guelph.



June 10, 2010, Toronto,
Ont – Some segments of the Canadian agriculture industry could face an
unsettling outlook in three to five years if they don’t take steps now to
manage their debt, increase their productivity and bring their debt-to-income
ratios back into balance, according to Dr. George Brinkman, professor emeritus
and former chair of the Department of Food, Agricultural and Resource Economics
at the University of Guelph.

Dr. Brinkman, who
specializes in farm viability, urges Canadian farm businesses to shed
unproductive assets and to develop a business strategy to manage the impact of
interest rates that are expected to rise by as much as three per cent to five
per cent by 2015.

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“Rising interest rates
are the real vulnerability that Canadian farm businesses face today,” said Dr.
Brinkman. “Many Canadian farmers are carrying an inordinate level of debt
vis-a-vis comparable markets in the world. Consequently, the impending rise in
interest rates, expected over the balance of 2010 and throughout 2011, poses an
issue for Canadian farms.

“It’s important that
Canada’s agriculture industry takes steps now in planning for higher rate
scenarios in three to five years just when the rest of the global economy is
picking up and governments may not have an appetite for another bailout,” he
said.

Canada’s economy is
expected to strengthen this year on the back of monetary and fiscal stimulus,
according to the BMO Economics Department. One consequence of the improved
economic climate is that the Bank of Canada will likely continue raising
overnight lending rates, raising rates steadily but gradually from the recently
announced 0.5 to 3.25 per cent by the end of 2011 and to 4.25 per cent by the
end of 2012.

“Longer-term interest
rates are likely to increase less than short-term rates, with the 10-year
Government of Canada yield expected to climb from 3.40 per cent currently to
3.95 per cent by the end of this year and to 4.70 per cent by the end of 2011
and to 5.10 per cent by the end of 2012,” said Sal Guatieri, senior economist,
BMO Capital Markets. “Agri-businesses are advised to consider their financing
and interest rate options sooner rather than later in order to take advantage
of current historically low long-term borrowing costs.”

David Rinneard, national
manager, agriculture, BMO Bank of Montreal, says farmers need to adopt
strategies to cope with looming interest rate increases and improve their
competitive position in the global market.

BMO is encouraging
farmers to review their longer-term interest rate strategies to avoid risks and
leverage opportunities from interest rates,” he said.

He also suggested
farmers take advantage of government programs such as AgriInvest, which –
through matching contributions from the government – helps them build a nest
egg when they are generating revenue so that they will have a reserve account
to help weather volatility within their business cash flow.

Rinneard suggests
Canadian producers take the time to sit down with an advisor who understands
their business and the agriculture market to ensure their financial structure
is appropriate for their farm business.

“We’re at the beginning
of a long-awaited growth cycle in the economy so it’s imperative your business
is fit and tuned to leverage the opportunities that a healthy market presents,”
said Rinneard. “But there are risks as well, especially if your capital is
supported by high-cost debt. You have to get it right.”

 

What do farmers need to
do?

 

Rinneard offers the
following advice to farmers:

 

Develop a long-term
business plan

Review your capital
structure

If interest rates
increased three to five per cent, could your farm business meet its
debt-servicing requirements?

Consider ways to improve
your debt servicing capability by renting equipment and land or selling off
unproductive assets

Avoid overcapitalization
and extended interest-only loans and high debt – talk to an advisor and ensure
every significant purchase is well thought out

Consider government
programs like AgriInvest to improve your farm business’s ability to weather
revenue fluctuations

As part of your
planning, develop and review your estate and retirement plans

Seek advice from experts
such as your BMO advisor who can provide advice on these and other aspects of
your business


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