There’s nary a farmer in Canada without some level of debt. Loans for equipment, land, buildings, inputs — all of them being hit hard just now with rising interest rates. Rob Strilchuk is a tax and agricultural business advisor with MNP in Edmonton. He says there are some things every farmer can do to manage the financial burden of higher interest payments, and he’s not just talking about locking in rates before they go up again — although that’s part of it.

Farmers should be looking at their whole operation from three interest rate perspectives — marketing, land values and profitability — and be prepared to make decisions that may mean doing some things differently to reduce the financial risk that high interest can bring, he explains.

HOLDING INVENTORY CAN BE COSTLY

“High interest should change marketing patterns,” says Strilchuk, adding that crop in the bin is crop you’re likely carrying interest on. He offers this scenario: “Say canola is $18 per bushel and there’s a 10-cent price change, so you hang onto some canola because you can get $18.10 in a couple of months.” You need to ask yourself what you may be trading off to gain that extra 10 cents and if it’s worth it, he says.

In the previous low-interest world, holding on to crop to gain a price advantage was definitely a good idea. But today, you have to balance that price gain against the interest you’re paying on current debt. “Because interest rates are higher, you’re carrying that cost in your stored grain,” says Strilchuk.

In other words, if during the few months you’re holding that canola, the interest accruing on your debt works out to be higher than the additional profit you’ll make when you sell, you might be better off selling at $18 and paying down debt.

INTEREST ON THE LAND

Another area where the impact of high interest may not be so obvious is land value. “Is it cheaper to rent from the bank or a neighbour?” asks Strilchuk.

The answer lies in how much money goes to service land debt versus rental and which approach gives you the lowest payments. “Say you’ve got $3,000 per acre land at three per cent interest,” he says. “That’s $90 in interest per acre if you’re ‘renting from the bank.’ If the neighbour wants $110 per acre rent, then it’s cheaper to rent from the bank, and buying is a consideration only if there is upside value increase, or other benefits, such as bordering on other owned land. But if the interest rate goes up to six per cent, then the bank now wants $180 per acre, so renting from the neighbour becomes a cheaper option.”

While this scenario is a bit of a fancy — you don’t always have the option to choose between bank and neighbour on the same bit of land — Strilchuk’s point is that it’s worth taking a look at how you’re financing land from the perspective of interest payments. “Whether you’ve got cash in the bank or not, you’re always borrowing from somewhere,” he says. Focus on what that borrowing costs and on the entire value of the land, not just on what is still outstanding.

ARE YOU MAKING MONEY?

Strilchuk says that farmers should have a clear picture of where money is going out and coming in so that they can make better profit-driven decisions. And for him, there’s only one way to do that: accrual accounting.

Unlike cash accounting, which notes transactions only when money changes hands, accrual accounting notes revenue and expenses as they are incurred, regardless of when the money is spent or earned.

“Whether you’ve got cash in the bank or not, you’re always borrowing from somewhere. Focus on what that borrowing costs”
ROB STRILCHUK
TAX AND AGRICULTURAL BUSINESS ADVISOR MNP

He says you should know exactly what it cost to grow your 2022 crop and what you made selling it — no matter when you sell it — so that you can see on a per acre basis if you’re making margin. Your “accounts payable” column should go beyond input and fuel costs to include administration costs, interest payments, contract fees, basically all outgoings across the entire farm. The “accounts receivable” column should note all crop income for the 2022 crop alone, no incomings from last year’s crop still in the bin or from deferred grain cheques.

Crunching all the numbers to calculate revenue and costs on a dollar per acre basis will help you make informed decisions as to where you can reasonably minimize costs, including interest costs, says Strilchuk.

“Lay out your finances over the next 12 months, and see where you can alleviate pressure,” he says. “People may drop the ball when they focus only on how direct input costs will change. What they’re failing to account for is the interest they’re paying on the loans to buy those inputs.”

USE EVERY TOOL AVAILABLE

“Interest rates more than doubled this year,” says Strilchuk. “People need to start using every strategy they can to reduce interest.” He lists a few for consideration.

Cash advances. “The Canadian Canola Growers Association will issue up to $1 million with the first $250,000 interest free, and the remaining $750,000 at prime minus 0.75 per cent,” says Strilchuk. There seems to be a general reluctance to use tools like this and urges farmers to focus on the lower interest rate rather than the amount borrowed.

Be proactive with debt renewal. Strilchuk has had a few calls lately from panicked farmers realizing a debt is about to renew and the interest rate about to go up a lot. “If you’ve got debt renewals coming up in the next six to nine months, then start thinking now about that and talk to the bank,” he says.

There’s no such thing as a zero-interest loan. Remember the days of zero per cent interest loans on capital items? Strilchuk says no one is truly offering those anymore, but he has seen a few questionable attempts to pretend otherwise. For instance, a dealer has a combine for $800,000 with a five per cent interest loan or $840,000 with a zero per cent loan. The dealer is getting the interest either way, so be wise about your choice and your cash flow.

Get help, run scenarios. “Go and see your banker and your accountant to ask what’s the right strategy for tax gain and interest reduction,” says Strilchuk. “Run your marketing plan and input plan for the coming year to see when you should be buying to minimize interest. Make the right business decision for the right price based on your operation.”