Are interest rates going up or down? I must admit I was a bit confused hearing that farmers should prepare for higher interest rates on their loans and lines of credit even though federal reserve banks, including the Bank of Canada, were lowering their rates. A TD Economics report from November called “2009 Prospects for Canadian Agriculture,” forecasts a 50-basis-point drop in the Bank of Canada rate before the end of 2008. That would put the bank rate at 1.75 per cent. So why then would the cost of credit go up?
The reason, states the TD report, is because financial institutions have to pay more for their credit, and they pass that along to customers. “The bankers acceptance (BA) rate is the cost to financial institutions of raising cash. In recent months, the prime lending rate has declined as the Bank of Canada cut rates, but the BA rate has not fallen in tandem. Canada’s largest lenders take in deposits and make loans, but the loans are greater than the deposits. The difference must be financed in international markets, which are currently demanding elevated interest rates and impairing profitability.”
The TD report adds that, “The strains on credit markets are expected to recede as 2009 progresses, supported by efforts by world central banks and governments to boost liquidity, backstop inter-bank lending and lower short-term interest rates.”
what to do until then
David Kohl, Virginia Tech prof and a regular speaker on farm business management, says good farm managers who have a strong relationship with their banks will have to jump through a few more hoops, but they should get the credit they need. Everyone else, he says, could be in a cash crunch in the spring if they don’t take steps now to shore up credit.
In his Canadian Farm Business Management Council webinar presentation in November, Kohl explained what banks want in an ideal client. For example, they want a debt to asset ratio of 40 per cent or less. And they want operational expenditures to be 70 per cent (or less) of revenue. Banks use these and all kinds of “metrics” to help them assess the health of a business. Healthy businesses get more credit and better rates.
To get a bankers view on these metrics, I talked to Bob Funk, vice president of agricultural services with Scotiabank in Toronto. The first thing he says is that “metrics are guidelines, not hurdles.” If you run the numbers for your own farm and you don’t meet the standards that Kohl describes, it doesn’t mean you’ll be flat out refused for a line of credit. The bank could instead arrange terms to suit your individual situation.
Funk encourages farmers to talk with their lender or financial advisor to get a good handle on their own ratios. “Ask what the numbers mean and how does the result position the business,” Funk says. He also notes that metrics are different for each sector (grains versus cattle, for example), and each farm within a sector is assessed on its individual merits. Some farmers drive better revenues. Some are better at managing costs, he says.
When asked if credit is tighter for farmers, Funk says: “The Canadian financial industry is in pretty good shape. I’m very comfortable in saying that Scotiabank will stand by our clients. You don’t have to be afraid of us shutting off the taps.”
It’s worth asking your own banker the same question.
view from ground level
Finally, I asked Robin Christian Blythe, account manager with a financial institution in northwest Manitoba, if credit was harder to get and more expensive for her clients. She wrote an article to explain how even small-town banks and credit unions have to deal with fallout from global credit shortages. You can read it below.
“the tractor in the haystack” Book launch
Grainews writer Scott Garvey has a new book called, “The Tractor in the Haystack.” It’s a collection of stories from old-tractor hunters around the world. “Each segment focuses on a hunt for a particular old tractor. Some are intentional hunts for a particular machine while others are accidental finds,” Scott says. “I managed to get stories from Canada, the U. S., England, New Zealand and Italy.” The book has photos of these tractors as they were pulled out of collapsed sheds, overgrown brush or some other place, Scott says. Ask for the book at your favourite bookstore or order it online. I know for sure that McNally Robinson carries it.
tell me about your drill
Have you modified or custom-ordered your drill to give you the seed placement, fertilizer placement and row spacing you want? Would you write a short note and tell us what you did and why? Take a photo, too. I’m putting together a collection of drill tips for an upcoming Grainews, and I’d like lots of input from farmers. Please contact me using the phone number or e-mail address at the left.
We bought a 32-foot string of solar-powered LED Christmas lights. They are Noma brand from Canadian Tire. The box says one day of sunshine will provide three nights of light. A built-in sensor and timer turns the lights on when it gets dark and turns them off six hours later. Great idea!
Unfortunately, early November was cloudy for days on end. In the first week the lights came on only two nights, and they were pretty dim. While the concept of remote power is great for trees far from a plug in, the system only works when it’s sunny. Go figure.