My advice is to lock in these low rates for as long as you can and build equity as quickly as you can.

George Brinkman is professor emeritus in the department of food, agricultural and resource economics at the University of Guelph. This first appeared in the April issue of Canadian Farm Business Manager, published by the Canadian Farm Business Management Council.

In the global business community, last spring seems like a lifetime ago. In almost every sector, competitors were bidding up the price of already overpriced assets and virtually anyone wanting to get in the game could find banks eager to lend. When the correction came, it came with a boom. Overleveraged businesses immediately fell into crisis.

There’s a real danger the same thing could happen to Canadian agriculture.

Here are a few of the facts:

Canadian farmers had debts in 2007 of $49.8 billion – three times the level of 1981. Their debt-to-income ratio went from 2-to-1 in 1970 to 23-to-1 in the period from 2004 to 2007. When you look at equity-to-income ratios – which really represents how much capital you’ve invested in order to earn a dollar of income – over the same period, the average in Canada is 110.6-to-1. In Ontario, it’s 293-to-1.

This is not normal or financially justifiable. American debt levels are only up 19 per cent in the last 26 years even though their farm incomes tripled while ours fell. Their debt-to-income ratio in 2004-07 was only 2.9-to-1 – roughly what ours was in

the ’70s and just one-eighth of what ours is today. The equity-to-income ratio in the U. S. is about 26-to-1. Ours is over four times higher.

CLIFF EDGE

In other words, Canadian agriculture is in the same overleveraged position as the global business community was a year ago. Most Canadian farmers are walking along a cliff edge. If they fall, it’s a long way down.

What could push them off that cliff? The most important factor is higher interest rates.

We’re at record-low rates. This will not last. They will go up one day.

Take a look over the edge of that cliff. What would your financial picture be like if your interest rate was five percentage points higher? What would you do if your lender cut back your operating loan by 25 per cent?

We’ve probably got another four or five years of low interest rates, so there’s still time to prepare. My advice is to lock in these low rates for as long as you can and build equity as quickly as you can. That might mean forgoing expansion, selling some land and renting more, and buying used equipment instead of new.

I can’t tell you if Canadian agriculture is going to crash. But given how highly leveraged we are, if we do, it could be a big one.

Prof. Brinkman did an in-depth presentation on the viability of Canadian in a CFMBC “webinar”

in Dec. 08. Go to www.agriwebinar.comand use the search feature to find Brinkman.

The post Sky-High Debt Imperils Canadian Agriculture appeared first on Alberta Farmer Express.