It’s time to talk about interest rates. For years they’ve played a minor role in your budget projections and profitability, but change is afoot. From 2010 through 2021, the bank prime loan rate averaged 3.67%. As of early December, the rate sits at 7%.
In 2021, interest paid as a percentage of farm gross revenue was 2.6%, according to Illinois Farm Business Farm Management (FBFM) data. That compares to a 10-year average of 3.6%.
“Farm interest has been a small portion of gross returns and will continue to be until more of the intermediate and long-term loans on the balance sheet have a higher interest rate due to new purchases,” says Bradley Zwilling, vice president of data analysis for Illinois FBFM.
With higher interest rates the new norm, it’s time to assess your debt structure and interest rate risk, says Brandon Baller, chief credit officer for Security Bank in Hartington, Neb.
“You and your lender should look at your entire balance sheet and break your interest costs down on a per-acre basis,” Baller says. “Luckily these interest rate increases are coming at a time when farm financial statements are really strong.”
TIME TO NEGOTIATE?
Once you run your numbers, you might want to discuss a lower interest rate with your lender. To have negotiation success, you first need to understand the process, says Ashley Arrington, director of real estate for Ag Resource Management.
Each bank sets its own rate, taking competition into consideration. The prime rate is the interest rate banks use as a basis to set rates for loans and lines of credit. For instance, if your loan has a variable interest rate of “prime plus 3” and the prime rate is 3.25%, your loan will have an interest rate of 6.25%.
“You want to ask how much your loan rate is above the prime rate, as in plus 1 or plus 3,” she says. “At prime, the bank is making money and there’s wiggle room. Your lender can do a rate matrix to determine a rate for you based on variables.”
Understand, not all bankers have authority to offer you a lower rate, Arrington says: “If your loan officer tells you they have to ask someone, don’t take that as a no, they truly do have to ask somebody.”
Two of the big factors a lender will evaluate in the negotiation process are your borrowing volume and financial strength, Baller says. To show you are a good investment, he suggests knowing your financial numbers and having frequent dialogue with your lender as loyalty can be reciprocated.
