Farmscape for July 14, 2017
Farm Credit Canada is advising farmers and agribusiness operators to review their financial strategies following this week's modest increase in the Bank of Canada's overnight interest rate.
On July 12, for the first time since September 2010, the Bank of Canada increased its overnight target rate by 25 basis points, increasing its lending rate to .75 per cent from .5 per cent.
When the overnight rate changes, the prime rate typically changes by the same amount affecting overall borrowing rates.
J.P. Gervais, Farm Credit Canada's Chief Agricultural Economist, says we've become accustomed to interest rates going down but this week's increase sends a signal that we're about to see this trend coming to an end.
Clip-J.P. Gervais-Farm Credit Canada:
One rate hike of .25 percent is not that big of a deal but I think, just pause and say do I have the right strategy, what is the mix of loans that I have in my business, in my operation?
Do I need to convert some of these loans from variable rates to fixed rates?
That can be done almost at any point in time.
Those are the questions that a business needs to be asking itself because it may that some time later in 2017 we have another rate hike and maybe than another one in 2018 and then it starts to add up and you want that you address what's the right strategy for you, what's the risk profile that you want to have when it comes to interest rate risk.
Do you want to see everything float and everything vary or do you want to lock in some rates now knowing that perhaps down the road they'll be higher.
That's the type of decision that you have to make and the answer is going to be different for everybody.
Gervais says we need to realize this is an excellent time to pause and reflect on the financial strategy.
He says, if anything, this rate increase brings attention to the idea that we need to be revising fanatical plans at least once a year and ideally every quarter so it's a good time to run some scenarios.
For Farmscape.Ca, I'm Bruce Cochrane.
*Farmscape is a presentation of Sask Pork and Manitoba Pork