Farmers borrow government cash as grain backlog continues

Western Canadian farmers still stuck with last year's harvest are turning to the government for credit help in record numbers, and insiders fear problems could cascade through the agricultural economy as the new planting season gets under way.

A record-breaking harvest and harsh winter last year overwhelmed Canada's two big railways, backing up the flow of grain from western elevators to ports and leaving farmers with few buyers. Up to C$20 billion ($18.1 billion) worth of crops was stuck in storage as of late March, according to the Canadian government.

Dealers and lenders are softening terms for farmers caught in the unusually severe cash crunch, but some fear it won't be enough to stop a drop in fertilizer and machinery purchases that in turn could limit crop yields and weigh on land prices.

Railways ordered to move grain

Under government order in March, Canadian National Railway Co and Canadian Pacific Railway Ltd have doubled weekly grain traffic, but that's not enough to end a massive glut by the time the next harvest arrives in the world's sixth-biggest wheat-growing country.

"You'll likely see some lasting impact of this transportation crisis," said J.P. Gervais, an economist at Farm Credit Canada (FCC), the country's biggest ag lender. "We're going to feel that into next year and the years after it."

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Farmers face an unpalatable choice between deploying debt and savings to fund spring planting on the usual scale, or cutting costs on seed and fertilizer, thus risking smaller returns.

Will Dodd, who farms with his father near Lanigan, Saskatchewan, ran out of storage after being unable to sell or move nearly 90 per cent of last year's harvest.

Until recently, Dodd had 20,000 bushels of barley piled on the ground, rising some 30 feet (9 meters) above the prairie.

"We've never had this kind of problem before," he said.

Unprecedented glut

The farm has dipped into savings to pay for planting and general costs, and also bought two bins costing $21,000 each. Planting his 4,000-acre farm will cost about $750,000.

At times, Dodd has worried he may miss payments on a tractor he bought in the fall before the backlog's magnitude became clear.

"We figure we can make it through about a year, and after that if (cash flow) doesn't improve, we're going to be in trouble."

Farmers have turned to the government like never before. A record 12,739 Western Canadian grain and oilseed farmers used loan guarantees through the federal government's Advance Payments Program in the year ending March 31. The average cash advance was about $128,500 for a total payout of $1.6 billion, the highest ever.

Farmers have long been big borrowers. Total Canadian farm debt has increased every year since 1993, hitting nearly $73 billion in 2012. That trend, based on Statistics Canada data, reflects a long-term rise in land values fuelled by low interest rates and strong grain prices in recent years.

But this winter, Farm Credit's Gervais said he has often heard farmers say they will scale back plans to buy additional land or machinery. Farmland values, which have risen 21 straight years, are likely to slow their ascent, and machinery demand will likely cool by the second half of the year, Gervais said.

Expensive equipment

Cash-strapped farmers may be scouring auctions for more affordable buys, said Manitoba auctioneer Bill Klassen. On April 19, he sold a 35-year-old tractor for $22,000, nearly twice what he expected. A new tractor with similar horsepower costs about $100,000

Ritchie Bros Auctioneers Inc has seen the prices of used seeding equipment dip while demand for grain storage equipment rose, said Simon Wallan, vice-president of agricultural sales.

Rocky Mountain Dealerships Inc, which sells CASE IH farm equipment made by CNH Industrial , is waiting to see if the cash crunch causes lost, or just deferred sales, said chief financial officer David Ascott.

"We think there is enough liquidity in Western Canadian farms to mitigate any short-term cash flow problems. But on the other hand, a lot of equipment demand is related to customer confidence," he said.

The problem hasn't resulted yet in a noticeable number of bankruptcies, as most farmers have an abundance of grain to act as collateral against credit, said Randy James, manager of agriculture in Manitoba for Bank of Montreal, the largest Canadian agricultural lender among chartered banks.

Both FCC and BMO rolled out programs this year to aid farmers against the cash crunch, such as foregoing fees and deferring payments.

But then, it's early to say what will happen.

"The repercussions usually come long after the event takes place," James said.

Some farmers will scrimp on fertilizer and other costs, but others remain in good financial shape after years of strong prices, said Manitoba farmer Doug Chorney, president of the province's Keystone Agricultural Producers association.

Buying on credit

The crunch has led Cargill Ltd, the Canadian arm of the global agribusiness giant, to take the unusual step of teaming with Farm Credit Canada to allow farmers to buy farm supplies now and pay for them after the harvest.

"We've done some unique things that we normally wouldn't to help farmers with the cash flow they will require to plant a crop," said Jeff Vassart, president of Cargill Ltd.

Farmers who can afford fertilizer face an additional problem: railway bottlenecks are also slowing fertilizer movement, and supply is a problem after a shutdown in March at Agrium's Carseland, Alberta nitrogen plant.

"Lack of cash and lack of fertilizer availability is going to affect yields down the road," said Larry Weber, a farm analyst at Weber Commodities in Saskatchewan.

Agriculture Canada said on April 17 it expects about 16 percent less production this year, which would still amount to a big crop.

Statistics Canada reported last week that farmers intended to plant slightly less canola - one of the most expensive crops to grow - surprising the trade that was expecting the second-largest seeding on record.