Global economic turmoil to challenge Prairie farmers

(Resource News International) — Western Canadian farmers who have been trying to keep their heads above water over the past couple of years are going to find it even more challenging to do so, given the ongoing turmoil of the global economy.

“The total effect of the world economic collapse is only now starting to be felt in the cash markets in Western Canada, but the worse is still yet to come,” according to Mike Jubinville, an analyst with ProFarmer Canada in Winnipeg.

Not only are prices for grains and oilseeds in Western Canada likely to see additional declines, but producers are going to have a difficult time securing financing for next season’s crop, he said.

“Producers are not going to have any problems in paying down this year’s operating costs, but when they try to secure financing for next year, they are going to be dealing with a wholly different scenario,” said Ken Ball, a broker with Union Securities in Winnipeg.

The world economic turmoil has led North American commercial banks, financial institutions, inter-government businesses and companies in general to put a freeze on lending, Jubinville said.

“Producers in Western Canada are already starting to discover this,” Jubinville said. “In talking with producers who have tried to extend their operating lines of credit with financial institutions, they have discovered the banks will only extend a fraction of what they would have normally.”

Jubinville noted that a producer went to his financial institution in Western Canada seeking to get an extra $100,000 on his operating line of credit. The bank would only give him $20,000.

“Banks want cash”

Producers in Western Canada are very rich in assets, meaning they own a lot of land and have a lot of machinery, but the banking system is choosing not to give them credibility for that when it comes to obtaining new credit.

“The banks want cash, and they are going to force farmers to put up more this year relative to operating credit than they have in the past,” he said.

The freeze on lending will also have implications for companies trying to complete international business.

“Grain companies in Western Canada are also going to find that putting big business deals together will be very difficult unless the buyer is willing to pay cash,” Jubinville said.

“The economic turmoil goes right up the food chain,” he said, noting that while grain companies appear to have cash reserves, they are not overwhelmingly flush with cash.

Jubinville said trying to get a line of credit for buyers will be very difficult, if not impossible in some cases, based on the current financial environment.

“The thing is that the producer will end up having to cover the increased cost of doing business by these grain companies,” Jubinville said.

“Whatever expense is required to make a grain or oilseed deal, that cost will be reflected down into the cash market for sure, and if that means a widening of basis, that is what is going to happen,” Jubinville said, noting this is how those costs are going to trickle down to the farmer.

Ball felt that the impact of the global economic meltdown on nearby grain and oilseed business in Western Canada will be minimal, but the longer-term prospects will be impacted negatively, especially given the reluctance of financial institutions to extend any further credit.

Sitting on liquidity

“If a producer is located in the U.S., they cannot get a loan to buy anything at present,” the broker said, noting that financial institutions there, if they have cash, are not willing to lend it given the uncertainty of who may go bankrupt next.

“The U.S. government, of course, is trying to give that market some liquidity in a number of different ways to the tune of hundreds of billions of dollars, but the U.S. banks are just taking that liquidity and sitting on it instead,” Ball said.

“That means end-users in the U.S. who want to bring in Canadian canola will need to place cash on the barrel, so to speak, in order to bring in supplies,” Ball said. “If they can’t, that could mean ending stocks of canola in Canada could end up being a lot larger than expected.”

Ball also noted that the U.S. was just one example of where credit extension could be a problem. “There are a lot of other end-users in other importing countries that will be facing the same problems,” he said.

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