Wednesday, November 27, 2013

Frightening Farm Finances

Are Canadian farm finances in a dangerous condition?  Are farmers debt slaves to their banking masters?  Sadly, it appears to be true.

Figure 1
The first graph (Figure 1) of Statistics Canada CANSIM Table 002-0004 shows that Canadian farms are growing at 3.655%/yr in total value produced, which is doubling and re-doubling every 19.15 years.

These are inflating dollars, but seem to be at, or slightly ahead of inflation.  So far, so good.

While the output is going up, it must go up faster than the input costs, or the farm is in trouble, now or eventually.

Figure 2
Stats Canada reports this balance as "Net Value Added", which is Gross Income minus Input Costs.

Figure 3
This data is shown at the right in Figure 2.  Oh oh, the net value added as a % of total production is dropping over time.  That means that input costs are going up faster than the gross total income.  This tells us that the net profits of Canadian farms have been steadily dropping since 1981.

Houston, we have a problem!

Have the farmers been overdosing on new shiny tractors, barns, and other capital investments?

Total interest payments shown in Figure 3 have been going up at a very slow rate, 0.773%/yr. in spite of the far more rapid growth in total production.  It's almost constant, like somebody is trying to keep it constant over this 28 year period.

Bank policies could possibly create this type of effect.

There are two type of bank loans to which interest expenses are attached.  The first are operating lines of credit, used to smooth cash flow such as buying seed and fertilizer in Spring, then repaying the loan once the crop is harvested and sold to market.  The other type of loan is for the investment into capital assets such as land, barns, farm machinery, etc.  If anybody knows for sure, let me know.

Land purchases can't be depreciated, nor can input costs.  If we look at the depreciation charges, it may help determine what is going on.  Farmers aren't forced to claim depreciation, but Income Tax rules set the maximum claim allowed.  We will need to assume that whatever farmers have claimed, it has been consistent over the entire 28 year period.
Figure 4

In the graph at right (Figure 4), we see that  depreciation claims have been growing at 0.94% per year, eerily similar to the 0.773%/yr increase in interest charges.

Figure 5
It would seem plausible (but is only a guess) that most or all of the interest costs for farmers is associated with the purchase of depreciating capital assets (eg. barns, tractors, machinery, etc.).  It is suggested the difference of 0.167% (0.94 - 0.773= 0.167) could account for inflating prices for those assets.

The next graph, Figure 5 shows that the interest expenses as a % of the farm's revenue has been declining since 1981.

The final graph, Figure 6, shows the Canadian bank interest rate for business loans as reported by Statistics Canada.  It is assumed that this business interest rate is a reasonable proxy for the interest charged to Canadian farmers.

Figure 6
Interest rates hit a maximum of 22.75% in August 1981.  Since then, rates have been steadily dropping, mainly due to Central Bank policies on a world-wide basis, lead by the US Federal Reserve, to drop rates after run-away inflation was broken, and to artificially boost the economy as it failed again and again due to mal-investments and financial bubbles (eg. Dot Com bubble, Y2K, 9/11, real estate bubble, sub-prime loans, Wall Street fraud, Too Big To Fail Banks, etc.).

Today, the same interest rate is just 3%.

How do we explain Figure 3 with a 0.773%/yr increase in interest paid when interest rates are dropping like a stone during the same time period?

Assuming that farmers were charged similar interest rates to other businesses (either through FCC or Canadian Chartered Banks), then these facts can only be explained if the amount of farm debt is going through the roof.

Figure 7
This means that as soon as farm assets (eg. land) increase in value so that they can be used as additional collateral to obtain additional loans, and/or interest rates drop so that the farmer can borrow more $ without increasing the total cost of all loans, then the farmers did so.  That theory is supported by Figure 7.

It appears we have guessed correctly.  It appears that Canadian farmers are addicted to debt.

Perhaps this farm debt addiction enabled Farm Credit Canada to rapidly increase its farm loan portfolio.  As I previously reported in this slimy Blog:
This request [Federal Government's request that FCC be risk assessed by OSFI] is said to be linked to FCC's loan portfolio growth of more than 400 percent since 1997 to $24.9 billion, accounting for nearly 30 percent of Canada's farm debt.  That's an average portfolio growth of more than 9%/yr for those 16 years, doubling and re-doubling every 7.7 years.
FCC is tooting its horn, claiming 20 consecutive years of portfolio growth.  While FCC was a major enabler of this debt overdose by Canadian farmers, if FCC had found restraint, most likely Canada's Chartered Banks would have gladly obliged mis-guided farmers.

As reported before, it will take Canadian farmers 70 years to pay off their current debt, more than 3 generations in duration.  Today's farm owner has sentenced himself, his children, and his grand-children to life under the inescapable weight of the debt this generation incurred.  Only the great-grandchildren of today's farmers have a hope of getting debt-free.

The Producer has also published some additional info from the various Chartered Banks and others about scary levels of farm debt.

Canadian Bankers Association ("CBA") notes that it is even worse that the above data suggests.  In addition to the $25 Billion in bank loans, banks have loaned an additional $12 Billion to farmers without additional application (I assume this means a personal line of credit).  Agriculture is 16% of the banks total SME (Small Medium Enterprise) lending.  Banks have 36% market share in this farm debt pit.  With 30% for FCC, that leaves 33% for credit unions and others.  Everybody is exposed when this farm debt bomb goes off.

When an SM5 (Supply Management 5) goes bankrupt, or is under the protection of the Farm Debt Mediation Act will they still be producing the dairy, eggs, and poultry meats that Canadians need?  Perhaps Small Flockers will be some of the few poultry supplier who are left standing.  I have no facts to support this, but I sense that Small Flockers have significant lower debt than the #ChickenMafia.

All Canadians should locate their nearest Small Flocker, and introduce themselves.  That acquaintance may soon come in handy. For the financial challenges that are soon to arrive, the Small Flockers will survive, but the #ChickenMafia will not.

The Chinese are buying up farms all across North America.  This Blog gets 2.76% of our hits from Communist China; 5th place on a country basis after Canada, USA, Germany, and UK.  Perhaps Chinese fans of this Blog will be alerted to get their cheque books ready.  If somebody doesn't do something different, the Chinese and others might soon be buying up the failing farms of Canada as they come onto the auction block.  Excessive debt will unfortunately start killing Canadian farms faster than a spent chicken going through a chipper.

Having farmers tied to their farms as debt slaves is good for bank profits.  And so that is what occurred.  The farmers of today are no better than the people of Israel under the rule of Pharaoh; debt slaves all.

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