Wants vs needs: Think twice before incurring new farm debt

An independent financial advisor who keeps a particularly close eye on big banks and agriculture is urging farmers to consider delaying plans to borrow money, with so much uncertainty in world trade and bank rates destined to inch up.

Rob Hall, of Bankspeak Inc., an Ontario-based consultancy that helps farmers and other businesses negotiate with lenders, says he’s concerned enough about the state of domestic and world affairs that he’s suggesting producers avoid taking out loans to make big purchases, such as equipment.

“I’m advising farmers dealing with banks to build some liquidity into their balance sheets,” says Hall, a former bank executive who managed an extensive agricultural portfolio at the institution.

“A new tractor looks attractive, but if you can repair the old one rather than replace it with a new one that requires you to borrow money, you’ll save yourself thousands of dollars of debt. Try to make it last, hang onto it longer, preserve your cash, think about things you must have versus things that would be nice have. All business owners should be re-evaluating their needs versus their wants.”

Money has been relatively cheap to borrow for the past five or so years; farmers, like everyone else, have taken advantage of it. But low interests rates mean low returns for banks, who took a volume approach, and established aggressive loan targets. That opened the doors for liberal borrowing practices.

But Hall says cracks are emerging in the low-interest bubble. Rates are rising gently – although the Bank of Canada is holding steady for now he predicts an increase of one per cent or less per year for the next two to three years – but a variety of scenarios exist that could change that prediction for the worse.

Chief among them is world trade and foreign relations. Although a new trade deal that bodes well for Canadian agriculture was struck with countries in the Pacific corridor, the world’s two biggest economies, China and the U.S., are in flux. That leaves many commodity producers in an export-intensive country like Canada exposed.

“If rates go up and trade falters, there’ll be some stress out there,” says Hall.

The trade war between the U.S. and China left some American exports in tatters, eliminating a huge market for them, creating an oversupply and driving prices down. All this is adding up to a simmering anxiety among agricultural borrowers, says Hall.

As well, there’s more stress-testing today than in the recent past with home mortgages, creating angst among new borrowers inside and outside of agriculture, as well as some people who are renewing a mortgage.

“I’m getting a lot of calls from people wondering what they should do,” he says.

His advice is clear: lock in a five-year term now. Interest rates are still historically low, so they have nowhere to go but up, and when they rise you’ll be protected.

As well, focus on areas you can pay down to reduce your debt, before rates go up gradually or spike due to a trade shock or something else unforeseen.

“It’s good to have a cushion,” he says.

And, he adds, remember: banking is a business. Your banker, account manager or financial advisor may be your friend, but the bank as an institution is not.

On the flip side, the bank also wants you to succeed with your financial goals, because it’s good for them as well as you.

So make whatever banking friends you can, Hall advises. But if and when they move on, make sure you make new friends — quickly.

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