Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Monday 06/16/14

Watch Sticker Prices on Farm Loans

Watch the gap between "average" rates on operating credit offered by agricultural banks and loans of $250,000 and up offered by banks with the largest farm portfolios. In this case, "big" customers at the biggest banks received average operating loans of 3.63% this spring, versus 4.24% offered by all sizes of banks for "average" loans.

Ag lenders tell me interest rates depend on many variables and their customers aren't a commodity like Number 2 Yellow Corn. They apply mysterious risk ratings that can add or subtract to your borrowing costs. But rates can also vary by the size of lender, or whether manufacturers want to subsidize credit to sell their products with teaser rates, so it pays to compare rates before you negotiate terms. DTN tracks current rates from a number of ag credit sources and begins expanded coverage on its Farm Finance page this month.

DTN will continue to publish daily benchmarks such as 10-year Treasury rates, prime rates, 1-year Libor and 30-day Libor, which are the indices for many farm loans. In addition to farm mortgages and operating credit, we are adding coverage of farm machinery and feeder cattle loans. We are supplementing those rates with the quarterly averages of hundreds of agricultural banks surveyed by the Federal Reserve. What's more, we are adding rates on loans above $250,000 that large bank lenders offer, so you can see the spreads between "average" loans and bulk rates offered to big customers.

Sometimes the gaps are significant. For example, rates on all farm loans averaged 3.2% for large banks with portfolios of $25 million or more during the first quarter of 2014, according to the Federal Reserve. Rates at small or mid-sized banks averaged 5.1% during the same period.

Size of loan also matters. Commercial banks charged an average 4.57% for operating loans of $50,000 to $99,000 in the first quarter of 2014, but 3.97% for balances over $250,000. The largest farm lenders discounted those bigger loans to 3.63%, on average. So it does appear boutique banks can charge more for the same service but you should command better rates for bigger loans.

For comparison, point-of-purchase lenders also can offer highly competitive rates. While all farm banks in the Fed survey charged an average of 4.6% on farm machinery loans earlier this year, AgDirect, an on-site Farm Credit System lender available through equipment dealerships in 26 states, now offers fixed-rates ranging from 3.7% for 2-3 years to 4.7% for 6-7 years; variable rates on 2-7 year products now run 2.99%. Rates apply to purchases, leases or refinancing of both new and used equipment.

Most farm borrowers look for lenders who understand their businesses and who will weather the down cycles of agriculture with them. They need lenders who understand farm programs and won't balk when borrowers get a margin call or land markets look like they're swooning. However, as interest becomes a bigger ticket item of farm costs, keeping tabs on interest rate trends could be part of a good manager's due diligence.

"I keep relationships with several lenders because I want them to be competitive at any given time," a Midwest grower with more than 10,000 acres tells me. "But I know if I borrow $1 million and back it up with 800 acres of collateral, I'll get a better rate than if I offer them 120 acres. It also depends on whether I'm a borrower with 3,000 acres bought and paid for, keep an offsetting balance in my business checking account or am a young guy taking out his first mortgage."

Check out our expanded interest rate coverage by clicking on Farm Business page, then hit the tab on Farm Finance on the left.

Follow me on Twitter @MarciaZTaylor.

Posted at 9:43AM CDT 06/16/14 by Marcia Zarley Taylor
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