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High Risk of Higher Interest Rates

March 17, 2011
By: Jim Dickrell, Dairy Today Editor
 
 

There is high risk of substantially increasing interest rates over the next five years. The futures market indicates interest rates could double from current rates by 2016, says Michael Boehlje, an ag economist with the Center for Food and Agricultural Business at Purdue University.

The LIBOR (London Interbank Offered Rate) is currently at 0.3%. This is the rate banks are able to get short term credit to maintain their liquidity. But the 3-month short term futures markets for LIBOR shows these rates climbing to 4% by 2016 and 5% by 2020.

What that means, says Boehlje, is that if you are paying 4% on your operating loans today, you could double your lending costs by 2016. “A lot of farmers are seduced by these low rates but have not looked forward, thinking these low rates will continue,” he says.

“It should not surprise you to be forced to pay 8% or 9% or 10% interest by 2015 is you do nothing,” he says. To get a quick idea of how this could impact cash flow and profitability, simply double the amount of interest you’re currently paying for your operating loans.

“Right now you could lock in your variable rates for five years for 150 basis points,” says Boehlje. Locking in rates for 10 years will cost you 300 basis points.
 

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