How a Rise in Interest Rates Could Affect Farmers

August 5, 2015 01:00 PM
 
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The Fed is likely to begin raising interest rates in September, but the pace of those hikes may be so gradual that producers may not notice  much impact, depending on their farm's financial situation. 

“It will be a slow process. Inflation remains fairly muted,” said Ernie Goss, a professor of economics at Creighton University in Omaha. “After September’s rate hike, there could be another rate increase in December, and then another in the first quarter of next year.”

If each of those three hikes in the federal funds rate is 25 basis points, the equivalent of 0.25 percent on the prime rate, producers borrowing money based on prime would pay 0.75% more interest annually on their short-term loans, including operating and vehicle loans.

American Farm Bureau Federation Economist Bob Young noted that the Federal Reserve might only increase rates by 10 basis points in September, which would mean the prime rate would only increase 0.1 percent.

“The rate that folks are paying at Farm Credit may not move right away,” Young said. “After about three to six months, the full bump might be reflected. The commercial market might not respond as quickly as prime.”

Farm Credit operating loans such as long-term rates are based on the commercial market, which this week was 3.85% , or 0.35% above prime.

Those producers who need a loan will feel the interest rates increases first. “We are going to have to pay more money to finance debt,” Young said. “As real estate loans begin to rise, probably in 2017, land prices will start to fall.”

Long-term rates don’t always follow increases in the federal funds rate and may even run in the opposite direction from short-term rates. For example, if Greece and Puerto Rico were to default on their debt, Goss said, long-term interest rates would go down as investors look for safe-haven investments, namely U.S. Treasury bonds.

Typically when the Federal Reserve begins raising rates, it does so in a fairly consistent pattern.

“I can’t envision that happening this time, though,” Goss said. “The economy is just too weak, and wage growth and inflation are too low.”

Interest rates have been notably low for six years, and the prime rate has been stuck at 3.5% since December 2008. By comparison, since 1949, the prime rate has ranged between 2% and 20.5%, averaging 6.7% for the entire 66-year period.

“If I were a farmer, I would protect myself against rising short-term rates by locking in these very low long-term rates. (I would) take out equity on the farm, understanding that I may be using the funds for operating,” Goss said.

Young says having a cash reserve going forward and limiting the amount borrowed will be crucial to keeping costs low.

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Comments

 
Spell Check

Mark C. Daggy
Des Moines, IA
8/5/2015 11:07 PM
 

  I want those that move into ownership to earn it over a lifetime, not by out-bidding the established marathon style farmers for land and equipment. What ever happened to working your way to wealth over decades? Maybe the rapid growth these Millennials desire should be earned over decades. To stop the borrowing for wealth, interest rates rate need to return to 12%.m Just maybe these younger farmers need to tenants for 30 years, establishing themselves. Just maybe patience for their time of ownership should be the plan. At some point the old guys and their wives will die and opportunity will come knocking. At the current rate of .25% paid by banks for savings, land should be selling for $100,000/acre to equal $250/acre cash rent. Either interest rates are too low or land prices need to explode.

 
 
Mark C. Daggy
Humboldt, IA
8/5/2015 07:36 PM
 

  As a person who has spent 48 years and sufficient failures to get where I am today, I tire of the younger generation simply wanting to borrow their way into wealth and prosperity. A dose of the 26% interest I paid in the early 1980s would bring reality back. Most of the Millennials I deal with are focused on their pleasures, big boy toys and weekends rather than building for their future. Their wives have the expectation of large homes, SUVs and dining out. I personally want the soup kitchens to return.

 
 
Cavin
Forsyth , MT
8/5/2015 08:56 PM
 

  I feel that the two previous comments are just a touch narrow minded. Not alll young farmers are blowing money on toys and trips. Also not all people who carry debt are doing it because they over payed for land. I myself work my butt off every day to try are build something so that I am about to complete with the 50-60 year old farmers that have been fortunate enough to become well established and have way more ability to compete for land. Expanding an operation is expensive whether you are buying land or renting it and so there are some of us out here that carry a fairly heavy debt load simply because we are trying to get a good operation going. I personally feel sorry for any man or woman that has become so jaded as to hope for someone else to fail because that have had to struggle at some time in their life or have to pay a little more for something. I wish good luck to all of our county's producers and hope that nothing gets to much further out of wack. Have a safe and happy harvest all!

 
 

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