Low Interest Rates Are Like Ether to a Massey Tractor

I got started with soybean harvest earlier this month.  We were inundated with rain last week putting harvest at a standstill.  It’s always nice to get started, because there is always something that goes wrong.  It was a glorious day today in southwestern Ontario with temperatures in the 80s.  The only problem is my combine air-conditioner decided not to work today.  I hate when that happens.  Doesn’t happen often, but when it does it makes the day a little longer in the combine.

Of course many of you might say that I should buy that $700,000 combine I was writing about last week.  Yes, the air conditioner would probably work, but I will leave that for another day.  In these times of super-low interest rate it certainly create opportunity.  I think I’ll get that air conditioner fixed.  In fact, I dropped the combine head tonight to put it in the shop in the morning.
My combine mechanic says a new compressor is the cheapest way to fix it.  I’ll be combining again by noon in the cool comfort of my cab.  Here’s hoping!

My combine is one thing but the super-low interest rates are another.  Low interest rates are like ether to a Massey tractor.  They make it start in any type of weather.  As you know I have written many times in this column about the low interest rate era and the possibility of negative interest rates in our future.  How this will affect agriculture in the next five years is anybody’s guess.  However, last week I got a few clues from another sector of our economy, which is overheated because of these super low interest rates.  That would be the Canadian housing economy, specifically in Canada’s major cities like Toronto and Vancouver.

Last week the Minister of Finance Bill Morneau announced several measures to further restrict access to mortgage insurance for your house.  He also cracked down on foreign speculators who have been active in the Vancouver and Toronto housing market by buying and selling homes and avoiding capital gains tax as if it was their principal residence.

I thought that they were good moves by Bill Morneau.  However, they certainly weren’t unprecedented among Canadian finance ministers of the recent past.  The late conservative Finance Minister Jim Flaherty cautioned Canadians many times about the rising debt levels.  Our present minister is just doing the same.  Simply put, they see danger in one sector of the economy being super inflated partly because of super low interest rates.  In many ways it is making it unaffordable for many families.

Of course there are some similarities to the Canadian farm economy.  Land prices especially in some areas of Ontario remain very high compared to other areas of Ontario and the rest of Canada.  Land prices are influenced by the cash flow that they generate but in the low interest era they have taken on a life of their own.  In areas of Ontario where the supply management sector dominates, excess capital has been invested in land giving some of the highest land prices in Ontario.  There is nothing necessarily wrong with that, but you could argue its very similar to the housing bubble in Vancouver and Toronto.

That being said, we’ve have successive finance ministers who continue to voice their concern about these inflated assets, notably housing in our big cities.  At the same time the Canadian economy lately has been a bit uneven.  $50 oil still doesn’t replace the good times of the past in Western Canada.  Ontario has its problems too and of course everybody’s wondering what the future of our economy will be.  It just so happens that the Bank of Canada holds the levers to that to a large extent and on October 19th will once again decide whether they cut interest rates once more.  I’ve listened more than one Canadian economist the has said the rate could be cut again.

You would think that would be adding fuel on the fire to push even more capital into farmland and big city housing.  We are at half of 1% now, would a quarter of 1% be even better?  In some ways, it almost seems laughable.  Of course, I’m not even mentioning the prospect of negative interest rates, which would seem to be the next step if this economy doesn’t get moving pretty soon.

Of course, there is that event south of the border called the US presidential election that may change everything.  Both candidates are promising better times ahead.  One candidate is pledging to make America great again.  Needless to say, here in Canada we know what all this means.  Our American friends set the economic agenda in these parts and we just hope the choice they make comes up roses.

At the end of the day, the US election is the biggest economic variable out there.  It won’t change these low interest rates overnight, but it will set the economic agenda for the next five years.  It might also be start of a US dollar rally. Canadians will just have to wait per usual.