Banks Credit and Interest

[farmers_son]

While I got to hand it to Grassfarmer on his ability to take a thread on Banks, Credit and Interest and turn it into an opportunity to plug the NFU I think some important points are being missed.

• Agriculture in Canada is heavily, heavily burdened with debt.
• Agriculture is sensitive to changes in interest rates, both up and down.
• The majority of Canadian agriculture debt is with banks.
• By lowering the overnight lending rate from 6% in 2000 to 2.5% in 2008 the federal government has lowered the cost of lending for agriculture by what should be $2 billion dollars annually. This should have had the same benefit as if the federal government had written agriculture a subsidy cheque for that amount.
• The banks have not passed this along and at least today the cost of credit at the banks is higher today than it was in 2000 in spite of the Canadian banks being gifted billions of dollars by the feds (more than the automakers got from Canada and the U.S. combined). A comparison could be made between BSE subsidies all ending up in the hands of the packers… the banks are keeping the benefits of the lower overnight bank rates and billions in direct government support all for themselves. Finance Minister Flaherty said as much.
• While the Bank of Canada Rate is 2.5% and TD Bank Prime is 3.5% the banks are squeezing agriculture and the larger overall economy by doubling and tripling (or worse) the amounts over prime they are charging their clients for loans.
• The TD Bank (I am picking on the TD Bank because they claim to have managed their affairs best through the sub prime wreck) is offering 0.95% on one year fixed deposits, 2.35% on fixed five year deposits. Yet to get even a one year fixed fully secured open loan from the TD Bank will cost you 8.55% today (advertised rate).
• In effect the banks are operating like loan sharks.
• It is only going to get worse.

Cattle are the largest segment of agriculture in Canada. The effect of even a 3.5% change in the cost of credit will have on agriculture is roughly equivalent to BSE in the worst years. Producers hung onto the cows tail through BSE but I question if they can through a credit crisis, made worse by irresponsible greed at the banks.

The end result of a credit crunch will be producers selling cows to pay debt. The Canadian cow herd has already shrunk from 5.4 million cows to 4.4 million cows. If we lose another million cows (and I think we will) even if it is only from selling cows to pay down debt then Canada will produce just enough beef to meet our domestic needs with no net exports.

If one million cows were sold at $600 each and the entire amount went to pay down agricultures debt (with nothing going to pay the resulting tax) that $600 million dollars would only reduce agricultures debt by 1%. Hopefully that gives some perspective on the magnitude of the problem.

[grassfarmer]

Sawbones, I know the point about concentrating more on domestic supply is the thing producers have the biggest job accepting about the report. I have concerns with it too but the reality is the FTA is not working for producers, the disastrous results outlined in the NFU document have been gained under the FTA.
The point I made to Darren about having a herd reduction to domestic consumption levels was that this in itself would not raise cattle prices in Canada as long as we only have 2 packers and no competition in the processing/retailing sector. The conditions that would make a herd reduction policy successful would be that Government intervention would bring about more competition, less captive supply etc. If these actions were taken it would also allow us to continue to export, only now we may actually benefit from exporting, something that has not happened thus far. Darren accepts that argument and I think the final wording he included acknowledges this. Certainly diversifying our markets both geographically and product wise (eg hormone free, bse tested, grassfed etc) are things the NFU support wholeheartedly.

[smcgrath76]

There is a pretty good ebinar featuring George Brinkman on the farmcentre.com website (available in audio for dial up I think). His work is pretty interesting. Basically he has found Canadians pay WAAAAYYY too much for land in comparison to other places such as the US. The amount of capital financed to generate $1 of income is way out of whack in Canada. In the webinar he suggests that if land values in Canada were scaled back 50% it would just be a good start. I think this is reflective of two things here. 1. That we are not good in Canadian agriculture at generating income/extracting value for various reasons largely outlined in previous posts.
2. That for some reason we pay to much for capital.
I dont understand the reasons for #2 but it has certainly slowed our farm growth, when land within the vicinity is priced out of its agricultural capability and is be purchased by agricultural producers. I don't understand it, but it is a key challenge to our industry. The solutions I see are a correction in the price of land or a way to capture more revenue from the same land base.
Some of our problems are always self made, many are policy driven and I think the solutions are only possible through a combination of prodcer effort and responsive policy. That said, I would also be disturbed if the value of the largest part of my equity (on paper) was to decline by 50%.