How to benefit from higher interest rates

The cost of money has changed dramatically as we head into a new growing season. Over the past year to supposedly battle inflation, the Bank of Canada has steadily increased its trendsetting rate and interest is now a much bigger farm management consideration. A couple ways exist to potentially turn this to a producer’s advantage.

After the federal budget passes, the interest free portion of the cash advance program is going to increase from $250,000 to $350,000. Last year’s increase from $100,000 to $250,000 was described as temporary, but rather than dropping back, the feds have announced another plum.

If you use an operating loan, the interest free cash advance is a no-brainer. Let’s assume an operating loan in the 7 per cent range. If you qualify for $350,000 at zero per cent and even if it’s only for six months, it’s a cost saving of over $12,000.

What if you don’t need an operating loan? Should you take the interest free money and invest it? The best interest rates seem to be on one-year non-redeemable GICs where you might be able to get 4.5 per cent or more. Unfortunately, since a cash advance is meant to be repaid as you sell production, locking the money in for a year may not be practical.

For a secure investment that’s redeemable, you might have to settle for a bit over 3.0 per cent. However, even 3.0 per cent for six months on $350,000 is $5,250.

Personally, I haven’t needed operating credit for quite a few years and it’s been a long time since I’ve used the interest free cash advance. I hate paperwork and application forms, but I also hate to look a gift horse in the mouth.

Should someone who doesn’t need an operating loan feel bad about taking the interest free money? Not at all. Just don’t let it encourage you to make purchases you otherwise wouldn’t.

No doubt the increase in the cost of borrowing and the expanded interest free portion of the cash advance is going to increase uptake in the program. Now that they’ve set the precedent, it will be hard for the government to backtrack on the amount.

Will interest rates be lower a year from now? Will farm input costs be lower? Probably not. So how will any decrease in the interest free cash advance be rationalized?

Here’s another way you might be able to earn extra interest income. While some producers regularly pull accumulated funds from their AgriInvest accounts, others leave their money and the matching government contribution to build a rainy-day fund or perhaps a fund to make the down payment on a land purchase.

Have you checked how much interest your AgriInvest money is earning? From what I can determine, banks and credit unions are only paying interest rates of 1.25 to 1.6 per cent. Not sure why it’s so low compared to other investment vehicles.

When you take money out of AgriInvest, the government money comes out first and it’s taxable, but that’s always going to be the case. If you take the money out of AgriInvest and put it in a one-year non-redeemable GIC, you can earn the aforementioned 4.5 per cent plus. Depending how much money you have in AgriInvest, the improved interest rate can make a significant difference.

For many years, with interest rates extremely low, these sort of strategies didn’t add up to much. Now the dollars can be substantial.