Between 2005 and 2014, farm debt has increased by 43% to reach almost 85 billion dollars (constant 2014) in Canada. The gross value-added (in constant dollars) of the Canadian agriculture increased by 23% over the same period in a context of historically very high agricultural prices.
If the last decade was to repeat itself over the next one, farm debt would reach more than 120 billion dollars in 2014 terms. Canadian farming businesses may need tens of billion dollars of additional credit over the next decade in order to remain competitive and to make farm assets transfer possible.
Credit availability and affordability has not been a critical issue so far, but it will be unwise to assume it won’t be in the future.
In a previous post, I questioned the financial capacity of the Canadian agriculture as a whole to increase significantly its indebtedness over the next 10 years. In this post, I want to open a discussion about the availability and affordability of agricultural credit from financial institutions over the long run.
The following quote from Rabobank’s Capital Adequacy and Risk Management Report 2013 reminds us some of the basics of credit portfolio management, which apply to any credit portfolio, including agricultural credit :
Rabobank wants to continue its prudent credit policy and controlled growth in the credit portfolio which is in line with Rabobank’s strategic framework and image. In order to accomplish this:
- the credit portfolio must retain a low risk profile;
- the credit portfolio cannot grow without bounds;
- capital and funding will need to be used selectively
Understanding how a credit portfolio is managed is critical for any business or sector, which will need to access credit to fund its development. It is all the more so when credit is overwhelmingly the primary source of capital such as in the case of the Canadian agriculture.
Bertrand Montel, ©2016