For the first time since 2008, long-term farm interest rates showed upward movement. They moved 0.8% higher within weeks. However, the future of rates is a bit like betting on No. 35 on a Las Vegas roulette wheel. Nobody really knows.
For the next 18 months, the rate outlook is largely good, a blessing with new crop futures prices moving decidedly lower. "Long term, 15- to 20-year fixed rates might move 50 to 100 basis points higher from now through 2014," says Kreg Denton, First Community Bank of Western Kentucky senior vice president.
Long-term rates moved higher at his bank and others following Federal Reserve Chairman Ben Bernanke’s comments about potential quantitative easing.
Denton says to keep that in perspective. "Fifteen- to 20-year rates are just 5% trending toward 6%, at most," he says. "These are very good rates and remain close to historic lows."
Before 2008-09, the long-term average was 7.5% to 8%. He does not see rates approaching that, so the cost to finance farmland purchases is expected to remain modest for the near future.
However, Denton is concerned for farmers who continue to finance long-term purchases with short-term rates. "Many farm borrowers have recently switched to fixed rates," he says. "But some think they will be able to anticipate rate rises and convert to fixed rates right before they take a major bounce."
That strategy is fraught with risk. "Once the economy heats up, interest rates could rise faster than anticipated, and producers could miss out on low fixed rates," he says.
So far, anticipated Fed action has only impacted long-term rates. Short-term rates, such as farm operating loans, haven’t really moved.
It all centers on how the U.S. and global economies perform, as the two are interconnected.
Outlook Hinges on Economy. "At some point, interest rates have to go up," says Nate Franzen, First Dakota National Bank, Agri-Business Division manager. His outlook is for short-term rates to remain near current levels for the next year or two, unless the economy catches fire.
Central bank officials disagree on the U.S. economy’s direction and what the Fed should do in response.
The hubbub over rates began in June, when Bernanke said the central bank could begin tapering its stimulus program this year and potentially altogether in mid-2014. Later, he said the Fed might need to stick with quantitative easing a bit longer, causing bond markets and interest rates to back off. It all depends on whether the economy strengthens the second half of 2013, Bernanke said. The economy grew at only 1.8% in the first quarter, which is considerably below predictions.
"The current exceptionally low level of short-term interest rates is likely to remain in place for some time, at least until unemployment reaches 6.5% and inflation is not projected to exceed 2.5%," said Esther George, Federal Reserve Bank of Kansas City CEO.