Q: What are some strategies I can use to manage risk on my farm?
A: Grain growers are concerned about how their profits will be affected by speculation around rising interest rates. Navigating these uncertainties takes a proactive approach to minimize risk, protect yourself against uncertainties and control variables that affect your financial position. Consider these steps to get started building a more proactive financial plan.
Know your interest rate
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Higher interest rates mean increased costs to borrow. We’ve seen a steady increase in interest rates over the last two years. In addition to rising interest rates, commodity prices and the cost of production and land are all tied to the market as well and can affect profitability.
The Bank of Canada (BoC) adjusts its overnight target rate based on its mandate to manage inflation. In July 2023, the BoC’s overnight target rate reached five per cent, which hasn’t been seen since 2001. In the last 12 months, the target rate has doubled, which can eat into growers’ profits if there aren’t mechanisms in your financial plan to control rising costs.
For example, let’s assume a grower is managing a 5,000-acre grain farm with a budget of $300 per acre to purchase seed, fertilizer and crop protection products. The grower’s borrowing rate of prime plus one per cent in February of 2021 means his or her interest rate would have been 3.45 per cent. Assuming the purchases are financed from May until crop proceeds are received in late fall, the monthly compounded interest expense on crop input spending of $1.5 million comes in around $35,000 to finance that purchase. In the same scenario this year, the grower’s interest rate would be 8.2 per cent, with interest costs totalling $82,000, which is more than double what the grower would have paid just two years ago.
Explore your options for a clearer financial picture
Researching opportunities for a fixed or blended rate financing program can help control one more variable and enhance profitability. Other things growers can do to create more flexibility in their financial plans include:
- Look for ways to complement your operating line of credit with input financing offers.
- Know break-even costs and cash flow cycles.
- Regularly monitor changing variables throughout the year.
Stay positive, despite the market
There’s reason for optimism even though the market remains unpredictable. We’re seeing signs that some of the severe market turbulence in this cycle is behind us. Taking some simple steps to be proactive and manage risk will make you feel more confident in your decision-making. And when you need help to respond to interest rate volatility and enhance profitability, don’t shy away from involving trusted partners who have your best interests at heart.
– Carrie Cholak is a territory sales manager for Nutrien Financial. With 20 years of experience, she provides financing expertise to growers across Alberta to increase their buying power and maximize every opportunity for success.
