| ||Recent changes in U.S interest rates could have some rippling effects on Canadian farm operations.
“Last week, the U.S. Federal Reserve raised interest rates slightly for the first time in nearly a decade, stating that the U.S. economy is strong enough to keep growing with less help from the central bank,” says Todd Bergen-Henegouwen, farm input analyst, Alberta Agriculture and Forestry, Edmonton. “Generally, central banks raise interest rates to reduce borrowing and slow inflation. In reaction to the announcement, numerous U.S. banks were quick to boost their own prime lending rates.”
Central banks are able to influence interest rates by way of the overnight rate. The overnight rate is the rate at which banks will lend and borrow from each other on a daily basis. Adjustments in the overnight rate will eventually trickle down into the commercial lending rates.
Historically, when the U.S. changes its interest rate, Canada tends to follow suit.
“However, considering the state of Canada’s economy right now, we may not see history repeat itself. The fragileness of Canada’s economy right now has economists predicting steady to lower interest rates for Canada. The U.S. decision can also impact the U.S./Canadian exchange rate. Since last week’s announcement, the Canadian dollar has fallen by more than a cent. The decision to raise rates can certainly impact Canadian individuals and businesses.”
Just like any other business, farms carry debt in order to generate financing for their operation. “As such, changes made by the central bank can have large implications to a farms balance sheet,” says Bergen-Henegouwen. “Changes in interest rates can have a direct impact on financing costs for farms. A rate increase would most directly impact short-term loans such as your operating loan, but could certainly also have trickle down effects on long-term as well.”
As an example of the effect on a long-term loan, an increase of 0.5 per cent on a $1 million 10-year loan would increase semi-annual payments by $1,445. This change would also increase total interest expense by $29,000.
An increase of 0.5 per cent on a $500,000 operating loan could result in an additional $2,500 in interest expense in a year.
“Each individuals financing situation is different,” says Bergen-Henegouwen. “Producers are encouraged to think how a change in interest rate might impact cash flow and what options and rates are available to producers today.”