Our .25 of 1% Agricultural World: It’s Unsustainable Looking Ahead

25 WorldAs many of you know I write all of farm machinery reviews for Country Guide magazine in Canada.  So each month I usually feature five different pieces of equipment and compare their different features.  So I was taken aback this morning when I saw Canada’s national newspaper, the Globe and Mail was featuring the new CR 9090 Elevation combine from New Holland.  With its 600 hp in $600,000 price tag, it seems our national newspaper thought it such an anomaly they would put it on the front page.

I was a bit taken aback because as far as I am concerned I thought that would be a Class X, something that really doesn’t exist yet.  In fact the new Holland people called me about a year ago telling me that they had just come out with the biggest class IX combine in the world at 522 hp.  Can you imagine?  Think of the damage I could do and the roar I could make if I got behind one of those big yellow monsters!  Southwestern Ontario would never be the same.

Of course you probably will never see one of those in southwestern Ontario.  The Globe and Mail was featuring this, because it was unveiled at a farm show in Red Deer Alberta.  I’m never talk about price tags when I review equipment because you know what prices are like, they’re different for everybody.  However I kept thinking how would I ever pay for that combine and what would happen if interest rates went up?

I say that because we are living in the .25% world. If you have read this column over the last 24 years you will know that I’ve talked about those worlds quite a bit, like the $.62 Canadian dollar world we had way back in about 2001.  Of course it was only back in 2007 I was talking about our new world with the Canadian dollar at $1.10 US.  Needless to say I have not talked about our .25% world in Canadian agriculture.  If you are still confused I am talking about the Bank of Canada overnight lending rate which has been at .25 of 1 percent since May of this year.  Essentially money is the cheapest its ever been. It’s made farming in Canada much easier, whether you ever realized that or not.

It means if I go out and borrow the zillion dollars I would need for that 600 hp combine I might be able to scrape up a few nickels to handle the carrying costs.  However if interest rates spike to 23.25%, which I paid for my first operating loan on the farm, sayonara!

That combination of events with our USDA report today made be pause.  How financially healthy are we doing?  We all know our Canadian livestock sector is on the brink, in fact they’ve been there for a while.  Commodity prices have decreased from their heady levels of a year ago.  In Ontario there are terrible issues with quality in our corn crop and many producers after discounts are netting less than three dollars a bushel.  So I’m thinking at least in this .25% world we can pretend to keep going.

I say this in a week where I ordered a bag of seed corn with a list price of over $300 a bag.  At the same time the Bank of Canada warned Thursday that in their estimation growing household debt is now the biggest risk to our country’s financial system.  So when I read that, it wasn’t like a big revelation, but I thought how about the farm?  With the problems we have in Canadian agriculture what type of fall out would there be if anybody yelled fire in the crowded interest rate theater.

Of course we are all tempted.  In fact I’ve got the phone number almost dialed to buy that combine. Clearly though it is not a case of it not happening but more a case of when it will happen.  No I don’t mean me buying that combine.  I mean when interest rates go back into the double digits and somebody like me who buys that combine can no longer service that debt.  The next big cost price interest rate squeeze in agriculture is on the horizon and I think we all should be planning for it.  I’m not a skeptic regarding this.  However, I just believe that we will not be able to sustain interest rates this low into perpetuity.  If you add the inflation gods to the mix to pay for all this American spending, interest rates could get very expensive.

It’s not just debt servicing that will be the problem.  Credit is the lubrication of our agricultural economy and interest rates are the viscosity.  With high interest rates, grain gets harder to move, in fact everything in our economy does, especially those $600,000 combines.

The answer?  If it makes agricultural economic sense we do it. However it might be prudent to start doing our planning with higher discount rates and a few storm clouds on the horizon.  The .25% agricultural world we like.  Needless to say, it’s unsustainable.  The faster we realize that and prepare for future, the better.