What Latest Interest Rate Hike Means for Farm Country

March 16, 2017 10:53 AM

The Federal Reserve is fulfilling a widely-expected move, raising its benchmark interest rate on Wednesday.

This hike is the second in three months, and the Fed is signaling more hikes could be coming. It increased the short-term rate by a quarter point.

“The economy continues to expand at a moderate pace,” said Janet Yellen, Federal Reserve chair. “Solid income gains in relatively high levels of consumer sentiment and wealth have supported household spending growth. Business sentiment is at favorable levels.”

Rising interest rates will change the dynamic of the farm economy as the cost of borrowing money starts to increase. Economists, bankers and analysts are saying now is the time to pay attention.

“We’re seeing more farmers come in for operating loans, and we’re seeing operating loans a little bit larger,” said Bill Johnson, president and CEO of Farm Credit Mid America.

More borrowing means more exposure to interest rate expenses.

“Farmers are particularly conservative and a lot of them have fixed rates,” said Matthew Monteiro, vice president of finance with Farm Credit Mid America. “A lot of them are going into this environment very well prepared, and they’ve also paid down some of their loans.”

Some producers are more vulnerable than others, such as existing farmers ready to expand or younger farmers just starting. Those with fewer assets and more debt are getting a careful eye.

“A producer that’s younger is not accustomed to seeing higher interest rates,” said Charlie McConnell, senior vice president of Farm Credit of Western Arkansas. “It’s going to be very interesting to feel out what their cash flows, what their margins that they’ve budgeted for can handle in terms of interest rates.”

Bankers say rolling to fixed rates might be an option.

“That protects you against that element of risk going forward and that’s an important part, especially if someone is highly leveraged,” said Johnson. “Interest expense is a pretty big piece of overall operating expenses.”

How many rate hikes and how high they will increase is still up for debate.

“It won’t move up fast enough or high enough to have an impact, but you can see why they would do that,” said Andy Shissler of S&W Trading. “There’s so much money flowing into the U.S. We’ve blown every high out forever and it’s so overheated—it looks like a disaster waiting to happen.”

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Spell Check

bad axe, MI
3/16/2017 08:56 PM

  The problem with all these lender stories is they all say everything's all right . They never comment on how many of there loans have a FHA guarantee on them. The trouble with this whole thing is you still have half price interest on these farm loans. If you take 6% interest on a $3,000.00 an acre mortgage you have $180.00 interest a year take that up to normal interest rates of 10% your in big trouble on it. With 68 trillion out in credit in this country , 14 times higher than it was in 1980 , like S-W trading says it's a disaster waiting to happen.


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