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Power Hour: Farm Interest Rates to Stay Low in 2013

October 12, 2012
By: Ed Clark, Top Producer Business and Issues Editor
Bank
  

However, producers should still exercise caution and consider fixed rates, lenders say

One key input cost promises to stay low for the next 24 months—in fact, the lowest in half a century. Actions taken on Tuesday (Oct. 9) by the Federal Reserve Board (Fed) to maintain a liberal supply of money in the economy almost guarantees that farm interest rates will stay low for 2013, if not the next two years.

That’s good for farmers, and not just because borrowing costs will be kept low. The action also all but guarantees a continued weak dollar for months to come, which is good news for ag exports. Of course, were Europe to totally collapse—an unlikely scenario at this juncture—the U.S. dollar would strengthen as a "safe haven" investment, and billions, if not trillions, of foreign funds would flood to U.S. shores.

Power HourWhat does the action mean for farm loans specifically? "I doubt if we’ll see a significant rate increase next year," says Keith Lane, senior vice president of AgriBusiness at Farm Credit Mid-America. Rates are likely to stay near where they are now, at least in the near term, he says.

Interest rates right now at his institution, part of the Farm Credit System, are these:

  • Short-term variable rates for operating loans to good risk customers at 3.6%
  • Five-year fixed rates used for farm equipment and other purposes at 3.5%
  • Fifteen-year real estate loans at 4.1%.


His institution covers Indiana, Ohio, Kentucky and Tennessee.

By comparison, rates at commercial banks in the Federal Reserve Bank of Chicago district were 5.27% for new operating loans and 4.94% for real estate loans as of July 1, according to the Chicago Fed’s latest farm bank survey.

Even though the Fed has virtually promised no rate change until 2015, Lane believes it behooves producers to convert as much debt to fixed, longer term instruments as possible now, because you never know what could trigger a run-up in rates, or when. Furthermore, long-term rates are presently very attractive. Once the direction of rates changes, it could happen pretty fast, many lenders say.

"We’re looking at the lowest interest rates—for an extended period of time—in 50 years," Lane notes. "From where we’re at now, the pressure is all up. Take as much in fixed rates as you can."

No lender interviewed looks for farm interest rates to rise in the short term, however.

In taking action, the Fed implies that it foresees virtually no hope of rapid economic growth and very low risk of inflation. The central bank’s hope is that the announcement will generate investment and risk-taking. How? Through convincing markets that borrowing costs will not rise the next two years.

Here is how the Fed has put downward pressure on long-term interest rates: It has acquired a portfolio of more than $2.5 trillion in Treasury securities and mortgage-backed securities. Such purchases have encouraged investors to put capital into the stock market and other investments. Even farmland purchases by Wall Street investors have benefited from such Fed actions. This has created new buyers for farmland that, at the margin, has created more buyers chasing limited farmland.

Ironically, the government is trying to have it both ways, says Les Anderson, a Cannon Fall, Minn., producer who sits on a local bank board. On the one hand the government is trying to stimulate economic growth through fiscal policy (congressional appropriations) and Fed action, yet on the other hand the government is tightening up bank regulations through Dodd-Frank legislation and other ways that toughen up regulatory standards, including higher capital requirements. "I didn’t realize how much regulators actually run banks," Anderson says.

"Banking regulations continue to pose challenges," says Keith Geis, president of Platte Valley Bank in Wheatland, Wyo. New regulations are causing additional paperwork for banks and more time spent on loans ultimately will drive up bank costs, and some of that will have to be passed down through the system to customers in the form of higher interest rates, he says. "There will be a little trickle down."

 

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