A Defining Week: Interest Rates Rise and Quebec Farm Country Loses Its Soul

Quebec Interest RatesToday marks a real watershed in Canadian agriculture.  In 1995 Canada came within 30,000 votes of dissolving into something most of us cannot imagine when Québec separatists almost attained their dream.  Québec farmers were a large part of Québec wanting to be a country.  So when former Premier Lucien Bouchard said today that the dream of separatism in Québec is no longer achievable it represented a real change.  You will never kill that separatist dragon in Québec but when you have the top spokesman of the 1995 Québec yes campaign saying it’s over, that means something.  At least for the moment, Québec and Canadian agriculture will never be the same.

At the same time south of our border the US Federal Reserve announced that it would raise its discount rate from 0.5% to 0.75%, effectively starting the path toward higher interest rates.  Last week at the Louisville Farm show, all the top American agricultural economists were saying there was only one way to go for interest rates and that was up.  You couldn’t remain on 0% forever.  So today we start on that path toward double-digit interest rates for North American agriculture.

Those two developments over the last day or so in my mind will have deep long-term effects on North American agriculture.  The interest rate effect I’ve been waiting for a long time.  With credit being the lubrication of our economy, sending interest rates down in response to recessionary times was the tonic to get the economy moving again.  In the case of agriculture, the farm economy did not hit the same type of recessionary wall and cheap interest rates were a super stimulus to production agriculture.  Case in point was John Deere announcing today that their first-quarter profit topped analyst estimates.   They also announced that their 2010 forecast for agricultural equipment sales in the United States and Canada has been adjusted up.

At the same time this week we had federal finance Minister Jim Flaherty tighten up mortgage rules for Canadians.  He reduced the number of years that Canadians could get a mortgage amortized and he also increased the down payment that Canadians would require when getting mortgage insurance.  The impetus behind these policy decisions was to restrict Canadians from getting over their heads into debt when the interest rate tsunami eventually comes.  It’s an interesting analogy, but there are no such restrictions on farmers buying farm equipment, land and in the Canadian case, quota.

The point being “times are changing “in the structural agricultural economic background that underpins our farms and our rural society.  For instance there is a generation farming now who have faced constantly decreasing interest rates.  Your loyal scribe is one of them having started my farming career a demand loan for 23.25%.  I paid for a lot of my land at 12 and 13%.  However, when interest rates hit a 50 year low last year I was at rock bottom.  I’m the poster child for a guy who has seen ever decreasing interest rates.  Others younger than me don’t even know what double-digit interest rates are.  The events of the last few days surrounding the Federal Reserve move, marks the beginning of us getting back there.

That Québec situation is a Canadian phenomenon.  Last week I got a call from a Manitoba farmer who had received an e-mail authored by myself but forwarded to him through a third-party.  This e-mail had to do with my opinion about Agristabilty, which just happened to be the topic of last week’s column.  This Manitoba farmer in some of his colleagues were the proponents of something called Agristabilty Plus which is similar to our present day Agristabilty but it takes into account the cost of production and quite a few other things.  Needless to say on reading the proposal I wrote another commentary about Agristabilty Plus, which was somewhat critical.  However, the main reason for my criticism was that this policy would never work in Ontario and certainly not in Québec.

It was completely obvious to me that my Manitoba friend was quite shocked with my opinion, especially my views from Ontario and Québec.  One thing Canadian farmers outside of Quebec need to understand is that to be a Québec farmer is something you don’t do.  Being a Québec farmer is something you feel and the nationalism they feel for the Québec nation is just as real as you might feel for Canada.  So trying to suggest that Agristabilty Plus would work nationally and in Québec in my mind was a nonstarter.  Seeing Lucien Bouchard standup today and say the Québec separatist dream is dead, I know resonated in every Québec farmstead.  How that will affect the greater Canadian agricultural policy, I dunno.  Needless to say, I know at the end of the day it probably won’t make it easier.

So as we look ahead, there will be many challenges especially when we consider our present bearish market structure.  But keep in mind that the week of February 14, 2010 may be looked back on as a watershed time for our Canadian agricultural economy.  Somebody will say, that’s the week interest rates started their long journey up and Québec farm country lost a little bit of its soul.  How this plays out will surely challenge us in the future.