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Farm debt at record highs — but top lender not worried

While FCC says most farmers can handle their debt load, 
financial expert Merle Good says some are ‘robbing Peter to pay Paul’

Farm debt has hit a record high, bringing back some unpleasant memories of the 1980s debt crisis.

But we’re not there yet, said farm business expert Merle Good.

“In 1980, we had huge inflation and huge interest rates,” said Good, a longtime tax specialist with the provincial government who now runs a private consulting business.

“In the ’80s, people were selling their entire farm base and leaving agriculture. The balance sheets today are much better than they were back then.”

As of Dec. 31, 2015, Canadian farmers had $86.8 billion in total debt, Statistics Canada figures show. In a report released earlier this month, Farm Credit Canada (FCC) projected that farm debt will increase by five per cent in 2016 and another three per cent 2017, hitting $93.2 billion this year and $95.4 billion next year.

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But farm income has been keeping pace with farm debt, making the increased level of debt affordable, said J.P. Gervais, FCC’s chief agricultural economist.

“We say with confidence that farmers are in a strong position to meet their financial obligations,” said Gervais. “We think that we are going to be able to ride the wave of strong income a number of additional years. We know agriculture is a cyclical business. The thing is though, we have been surfing this wave of really strong net income increases reaching a record again last year.

“I think we are going to be able to surf the top of the wave a little bit longer, but producers should be absolutely aware of the fact that there is a bit of downside risk because we are really at the top of the market.”

Last year was the first in many years when farm debt climbed faster than farm asset values, he said. As a result the 2015 farm debt-to-asset ratio rose slightly to 15.5 per cent. But that’s still lower than the five-year average (15.9 per cent) and 15-year average (16.7 per cent), Gervais said.

Good and bad debt

For Good, the debt-to-asset ratio “isn’t the scary thing.” What concerns him is how producers are using their operating loans.

“Capital debt is fine — we have to have debt in a capital (intensive) industry,” he said. “There’s not a farmer I meet who doesn’t have debt if they’re still actively farming. But a lot of people are making their capital payments on equipment and land with operating loans.”

Those producers could be in trouble, Good added.

“The farm is using operating capital to make payments, but the farm wasn’t making the earnings to make up those payments,” he said. “I can look at some people’s books and say, ‘You didn’t make the payment. Your operating loans made your payment.’”

Producers can head off problems by doing a quick “blood pressure test,” said Good. At the end of this year, add up your operating loan, accounts payable, and cash advances. Then divide that number by the total of any unsold inventory, accounts receivable, and pre-purchased inputs. If the result is greater than 50 per cent, “you have high blood pressure.”

“If you’re over that number, it starts to get concerning, because then your operating loan is not being used only for timing. It’s being used to make payments,” said Good.

farm debt reality check

“If someone says to me, ‘My debt payments are pretty high this year, and I don’t have the greatest crop because of the moisture,’ but their operating loan is lower than 50 per cent, I’m going to say, ‘Don’t panic.’ But if it’s higher than that, we have to look at other things.

“It’s like blood pressure. As long as your blood pressure is below what it’s supposed to be, you can eat hamburgers and not work out. Once you break that number, the doctor says you’ve got to make some changes.”

Do you need to refinance?

Once you break that 50 per cent mark, you should start thinking about approaching your lender to refinance your loans, said Good.

“Make sure you’re not robbing Peter to pay Paul. That’s really important with these operating loans,” said Good.

“If you’re looking at the cycle of commodity prices and thinking you’re going to be lower than you were the last four years — which we are — then you’ve got to say to yourself, ‘OK, if my operating loan is up too high when I’ve had four years of good revenue, I’d better refinance my operating loan if I’ve broken that 50 per cent level.’”

Producers also need to look at how much of their gross revenue goes to debt payments.

“Once you’re greater than 15 per cent, your warning signs have got to come on,” said Good. “If that’s more than 15 per cent of your gross revenue averaged over three years, I get nervous. If it breaks 20, we’ve got to restructure the balance sheet, which really means refinancing.”

If your books don’t pass those two tests, “wake up, but don’t panic,” said Good.

“Just look at what you could do with your balance sheet and look at what you can restructure,” he said.

“It’s kind of like the doc tells us. If you have high blood pressure, it doesn’t mean you’re dead. It means you’ve got something you’ve got to get under control. It’s not a death sentence.”

– With files from Allan Dawson

About the author

Reporter

Jennifer Blair is a Red Deer-based reporter with a post-secondary education in professional writing and nearly 10 years of experience in corporate communications, policy development, and journalism. She's spent half of her career telling stories about an industry she loves for an audience she admires--the farmers who work every day to build a better agriculture industry in Alberta.

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