One of the key drivers of our Canadian agricultural economic growth are low interest rates. This past winter I completed a speaking tour for Farm Credit Canada specifically to do with farmland values. The two main reasons I gave for high farmland values were higher commodity prices and very low interest rates. These put together have sent farmland values to all-time highs.
As farmers we spend much of our time trying to figure out one part of that equation, crop prices. It just so happens over the last two weeks our friends at the USDA have put us through hoops trying to decipher what is going to happen to our crop prices next. The latest iteration from the USDA on April 10th actually showed less US corn stocks than the market expected. This was after the March 28th report showed so many more corn stocks than we ever thought we had. The question is where did the corn go? I put the question out on twitter and one Michigan grain merchandiser actually got back to me and said it was with Jimmy Hoffa!
I laughed out loud when she told me that. It is a mystery and the USDA has certainly challenged our logic over the last two weeks. However, how about that other factor, interest rates which affect our agricultural economy? What is their future and just how are they affecting things now?
In many ways interest rates have become ubiquitous. For the young, they are a necessary constant in the acquisition of farm assets. It just so happens that the overnight lending rate from the Bank of Canada has been stuck at 1% over the last several months and that continues to act as a great stimulus to agricultural growth. When the cost of money is so low, there are a myriad of places to spend it.
When I speak on this issue, I often tell audiences that my first farm demand loan from a bank was at 23.25%. When I say that, you can see groans in the audience and you can see some people of my vintage, nodding their head in agreement. The analogy I draw is that credit in those days was so mind numbingly difficult to get versus today. Buying a farm was much more difficult and with today’s moral capital so much cheaper, in many ways it is resulted in a lot higher land values to play the game of agriculture.
Of course, the question some of us older people are asking ourselves is when will the shoe drop and interest rates go much higher? With the Bank of Canada overnight lending rate at 1%, many of us laugh at the specter of a couple point rises in interest rates. When you have built your business on double-digit interest rates, this is like child’s play. Needless to say, when you look out on the horizon the specter of interest rates rising significantly just aren’t there. I always quote my friend US Federal Reserve chairman, Ben Bernanke who is said interest rates in the United States will not rise until 2015.
If you have heard me speak on that issue, it’s almost hard to argue with it. In Canada, the loonie reached a 7- week high of .9892 US. 10 year Canadian bond rates are at 1.78%. Our Bank of Canada wants to hold inflation between 1 and 3% and they are doing that very effectively. Any precipitous rise in interest rates would boost the Canadian dollar, which isn’t good for much of the Canadian export economy. Needless to say, with the American economy on a slight rebound, the Canadian economy is well placed and interest rates will not move up very soon. In my mind, they will mirror what the US Federal Reserve does into late 2014 or 2015.
Of course, one stray nuke coming out of North Korea can spoil everything. Let’s just leave it at that. That is the unexpected Tuesday nobody wants, so let’s hope it stays that way.
So apparently, the coast is clear on the interest rate front. So that means we can buy just about anything. In many ways credit is like it was in the late 1970s, easy to get with a little bit of equity and we should let the good times roll. The only problem is I read a news report tonight that says the average cost of production to an Iowa farm to grow an acre of corn is US $777/acre. With normal yields this year, there may be a possibility where prices might reach a point below the cost of production. Oh, how we hate to go back to that. So we had better concentrate on our marketing.
Some will argue that a one, two or five percent rise in interest rates on the farm would give us less carnage than in the nonfarm economy. Yes, the condominium market in Toronto might implode under such conditions. Who knows? The bottom line is the cost of money has hardly ever been cheaper and at least for the next 2 years, it’s not going to change significantly. We’ve got quite a bit of breathing room on that side of the equation. Where we have a few problems is in these new crop price projections. Mixing the two together may surely lead to a challenging time ahead.