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The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

Lock in Low Rates Now

Oct 21, 2010

Dr. Michael Boehlje, a farm economics professor at Purdue University spoke at out opening day of the National Ag conference of the American Institute of Certified Public Accountants (I know that is a mouthful).  He gave a 4 plus hour presentation on the agricultural economy both currently and insights into the future.

One of the insights that he had was that current interest rates are at almost an all-time low.  The normal yield curve currently has a dip in rates between the three to seven year maturity before it steepens out to the normal curve.  He indicated that this presents a great current opportunity to lock in great rates in that three to seven year period.

He also indicated that it is much tougher to lock in low rates as compared to about a year ago due to the futures markets already pricing in higher rates beginning next year.  For example, he presented a chart showing the projected 3 month LIBOR rate (which a lot of banks use to set interest rates).  That rate is currently about .2%, however, the futures market is projecting this rate would be as follows:

  • 2011 - 1% or so
  • 2012 - 2% or so
  • 2013 - 3% or so
  • 2014 - 4% or so
  • Beyond 2015 it trends up to about 5%

 

This means that banks are not willing to lock in rates beyond a three to five period at a rate much lower than the expected LIBOR rate plus their normal spread of 200 to 300 basis points.

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