If your farming career is less than 20 years old, you’ve likely not had the shock of seeing your debt payments balloon as interest rates rise. Why? Because interest rates have been historically low and very steady for a very long time.
That ‘cheap money’ environment is changing, however, as the Bank of Canada has increased the prime lending rate several times in the last two years. These incremental increases are set to continue — some analysts foresee the prime rate climbing past 5% within a few years.
Terry Betker, of Backswath Management, says that there are several ways for farmers to manage for increasing interest rates, though some are more obvious than others.
The first step, which seems obvious, but is much more difficult in practice than theory is reducing the need for debt. Certainly, a significant amount of recent farm growth has been financed, Betker says, and that makes sense given the low interest rate climate we’ve been in.
Betker says that, going forward, farms are likely going to need to figure out how to grow without borrowing to do so.
That said, for those starting to analyze their farm debt structure and set out new terms, Betker says remember that there’s always room to negotiate on rates and that you should ask about this. After all, if you don’t ask, the answer is no.
There’s also the option of locking in rates and stacking or laddering debt terms, so that loans don’t all require renewal at the same time. But what you chose to do really depends on the big picture plan for your farm. As Betker says, make sure you’ve done the homework on not just what your farm’s current needs are, but also what it will need two, three and five years from now.
If you’re looking at renewals or a full re-structure of the farm’s debt, where can you go for help? Betker says that an accountant or trusted business advisor is key to being that second or third set of eyes on not just your debt structure, but also on the overall strength of the farm and its ability to service that debt.