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SW Saskatchewan | In another life I had worked with the Provincial Farm Land Security Board and then the federal Farm Debt Review Board when it was established in the late 80's. The crisis in the 1980's was largely in the Prairies because of our greater reliance on crop production- the boom times of the 70's continued on into the 80's fueled by boundless optimism (on both the farmers and lenders part). Toss on the the 1985 US farm bill that pricked that balloon and we were up the creek with no paddle.
Ontario's problem at the time was that off-farm real estate was booming, with easy credit many farmers parlayed their equity in the farm to an investment in suburban development, golf courses and sun belt trailer parks. BC had a somewhat similar situation but Alberta had taken the NEP $hit kicking and was more pulling in their horns rather than taking more risk. Raise the interest rates (or have farmland values drop) and a lot of these loans made for some very nervous bankers given their propensity to have an easy money branch manager that loaned followed by the bad cop that came in bayoneted the wounded.
During the boom times, the banks' VP's in charge of farm loans were writing articles in economic journals and in the farm press decrying the unfair competition from the gov't loan agencies. Their cry was "give us a level playing field and watch agriculture prosper".
Farm Credit wasn't going to disappear and lose their pensions so the taps were turned wide open. I saw many a loan proposal worst case projection that had it taking five years of minimal profit before $10.00 a bushel wheat prices(starting in 1986) would save the farm. Tie this in with a scenario of land prices climbing at a steady 12% per year and any loan would be well secured.
Note - this was done by Chartered banks, Credit Unions, Trust Companies, Farm Credit and by Alberta Treasury Branches. Flu is very contagious.
The Royal Bank had "bought" the lion share of business on the prairies, both for farm loans and for Rural Businesses--guess who financed Frigstad manufacturing. In fact, Royal Bank built new Branches in nearly every Prairie town. It was the first to smell the dirty diaper and their director of farm lending suddenly became Deputy Minister of Ag in Grant Devine's Conservative Govt.
Suddenly, the role of the provincial Govt in Sask was to take bad loans off Royal Bank's books. The first move was subsidizing a lot of farm loans down from 16-18% to 5%.
Then big virtually unsecured loans to every farmer in the province- no repayment for 3 years.
At 20.00$/cult acre and $125.00/cow, suddenly every farmer had cash in his pocket to pay out that bank loan that was causing nightmares on Bloor street.
From 1986 to 1993 hundreds of millions of farm debt was converted into lender owned equity with the surrendered land leased back to the farmer. Hundreds of millions more of debt that had no security backing or hope of repayment was just written off.
Thousands of farmers took the "three years and out" lease backs using the time to arrange a new life outside farming. Many more hoped for that $10.00 wheat to let them buy the land back and others tried to postpone the problem by extending loan terms. While creditors, afraid of how many other bad loans they would have if the foreclosed on every farmer offered interest rate cuts or interest only loans if it would salvage a situation that was giving everyone indigestion.
In Saskatchewan, farm debt dropped by half, from about 15 billion to 8 billion with the provincial govt eventually holding about 2/3 of that amount.
Supplier and Machine dealer credit dropped to near zero. Chartered banks disposed of 2/3rd of their portfolio. Credit Union's were virtually bankrupted.
Across Canada farm debt dropped by a third, from 33billion in 1986 to 22 billion by 1993.
In the US, the cut in farm debt was even more significant but it was accomplished by unprecedented farm program spending. Conservation Reserve and other payments were sufficient to cut their farm debt largely via the pay down from the income in farmers pockets.
Hardly had we got the genie back in the bottle than the new Mantra swept the lending institutions that Debt was necessary to underwrite the new generation of farm managers that would take over from those donderheads who made such a mess of the 80's. Luckily, 6, 7, or 8% mortgages rather than 16-24% rates that bloomed in the optimism of the 80's plus farmland prices that were about 40% of the 1983 peak actually made some of these operations cash flow. But that 22 billion was soon swamped by new loans.
The US did not have the increase in debt, much land was financed off farm and rented compared to Canada. Reinvestment of windfall capital gains made a lot of land available to renters. US debt was largely production and machinery debt and without the "reserve" built into mortgages, problems became visible at the beginning of the next production cycle. Plus, US farm income was did not make it necessary for debt to replace income in the farm budget.
The most rapid increase in farm debt since 1993 has been debt to finance supply management quota. After years of attempting to limit quota prices and restrictions on the use of quota as security for loans, the Banks lobbied to have changes made and now they have Billions of loans for quota purchase.
Farm Credit switched its lending focus to "diversification" so ethanol plants, large chain hog barns, shortline railroads and Inland terminal elevators have been built with FCC money and labeled "Farm debt". A whole new range of ways to disguise non performing loans is clouding the horizon.
50 billion in debt- I amazed at how small the total is.
It's going to be interesting to see who has been swimming with no trunks when the tide goes out.
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Canadian Farm Debt
