The Never-Never Plan: Farm Debt Psychology Has Changed

I attended a marketing seminar the other day.  It was part of a series put on by Farm Credit Canada and my friend Brian Voth from Manitoba.  It took place in Tilbury Ontario, which is just south of me so those in attendance were friends and acquaintances throughout the deep Southwest of Ontario.  During the presentation I got to ask lots of questions about futures, basis and Manitoba land prices.  There were also presentations from Farm Credit Canada on their financial products.

During the presentation I noticed an acquaintance of mine who used to be a junior hockey goalie in Dresden Ontario during my high school years.  We have talked a few times through the years and he has been a big supporter of my writing during a time.  He asked several marketing questions during Brian’s presentation.

On leaving the presentation, we exchanged pleasantries and he asked me, Phil, “What is the pulse of agriculture right now”?  We both looked at each other, about the same age and smiled.  I told him that in my opinion right now it’s about farming in a cheap money world.  It’s about farming when capital is not a limitation to almost anything that you want to do.  I went on to say that if we ever got to an era where capital became so cheap that we had negative interest rates, I’d hand in my farmer card and live in a box in Toronto.  We both laughed.

Picture the moment.  I turned 58 years old this year and the acquaintance I was talking to was about the same age.  We both looked at each other with agreement and a bit of nostalgia.  Simply put, for those of us who beat the 20% banker man back in the day, this new world of free and easy capital is bewildering.  Beating the man was never supposed to be this way.

Of course, the world of cheap capital is not the same for everybody as there are still barriers to entry to farming.  However, what I never envisioned was the world of super low interest rates effectively “changing the game” within agricultural economics of forcing capital into fixed assets looking for capital appreciation.  Land prices are one thing, but there is so much more to this. Many of those 1980s bankers who browbeat young 20 something farmers back in the day would be turning over in their graves now.

Fixed costs within agriculture seem to be growing rapidly, which is very understandable.  Farmland values have increased continually over the last several years and there is a report out this morning that Ontario farmland values rose 5.8% in 2016.  That would mean that my acquaintance and I standing in the Tilbury parking lot were 5.8% richer than a year before.  If you stretch that way out, it means that by beating the man with his 23% interest rates back in the day, we are getting it all back now minus the insults and intimidation.

It is, what it is.  Financial institutions are quite different than they used to be and I can understand that in this low interest rate era.  The whole focus is to get money out the door.  The whole focus is to get money out the door into a fixed asset hoping for capital appreciation.  In the world of agriculture it is no different even though our planning horizon can often be affected by weather and biology.  It is led to a farming and agricultural economic psychology where debt is looked at completely differently.  Price a new combine lately?  There is a never-never plan to pay for it.

I’m beginning to have no opinion about this because it is so difficult for me to get my head around.  In fact, I asked my acquaintance that day who are we to determine who is right or wrong?  Do we pay off debt like we used to, partly because it is required but also partly to control our lives?  Or do we simply forgot about that and borrow as much capital as we can on our farms with the specter of negative interest rates changing the whole planning horizon?  Or am I missing something?

The question is, who is the dummy?  I said that as I put my own hand up.  Of course, there are many variables to that, I’m sure many of you have thought that for quite some time, it’s nothing new.  Simply put, our farm debt psychology has changed.  If anybody has the answer, I’d like to hear it.