Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Monday 10/12/09
Interest Rates on Hold

Inflation fears have vanished for the time being, meaning farmers can likely look for continued low interest rates for operating funds and even relative bargains in longer-term rates at least through year-end, according to a recent report from Farm Credit Services of Mid-America, the nation's largest Farm Credit Association.

Inflation is always the key driver of interest rates, but it remains virtually nonexistent at the moment, FCS Mid-America Vice President Bill Medley said in a statement issued last week. The Federal Reserve's policy of stimulating the economy with cheap credit Farm Credit's variable-rate operating loan has been running 3.75 percent since Jan. 1, rates likely to continue through early 2010 in this environment, according to Medley.

However, long-term rates pose a more complex outlook. For the moment, Wall Street investors remain hesitant to commit funds longer than about five years, other Farm Credit sources say, so borrowers must pay a premium to lock in rates for products like 20-year financing. With the spread between short and long-term rates abnormally wide, a 15- , 20- or 25-year variable mortgage that resets rates every five years is running about 4.8 percent today. To fix that same mortgage for 25 years, borrowers would pay 6.65 percent--a 38 percent premium.

If you're confident you can pay off land and other capital items in five years or less, the variable rates offer a bargain. Still, Medley thinks that opting for a fixed rate "is worth consideration and worth acting on now."

The reason is that you won't likely see cheaper interest rates in your lifetime. The 10-year Treasury (which is normally correlated to mortgage rates) has been bouncing below 3.2 percent in recent months, "a level so low that prior to late 2008 hadn't been reached since before 1960," Medley.

As the economic recovery takes hold, fixed interest rates could be the first to ignite. Ultimately, inflation could push fixed-rate mortgages back to more normal 9 percent to 10 percent levels, says Texas A&M economist Danny Klinefelter. The challenge, of course, is that no one knows exactly when rate hikes will happen.

Medley believes that long-term interest rate reversal could start sooner rather than later. Toward the end of the year, the government will begin backing out of its emergency support for Fannie Mae and Freddie Mac mortgages. At the moment, the government guarantees nine out of 10 mortgages nationwide, so its exit could disrupt long-term capital markets. "Most believe that could trigger a rise in the cost of long-term debt and interest rates," Medley cautions.

(DTN readers can monitor trend charts and daily shifts in farm interest rates and 10-year Treasuries on the Farm Finance page, under Farm Business.)

© Copyright 2009 DTN. All rights reserved.
Posted at 7:00AM CDT 10/12/09 by Marcia Zarley Taylor
Comments (7)
From thereports that you attribute to FCS ( or just Mid-America FCS ?) , would suggest that farmers borrowing from the "FCS" are borrowing short term operating funds at 3.75% accross the board , i.e. "The Feds policy of stimulating ,cheap credit Farm Credit's varible-rate operating loan has been running 3.75% since January 1 , rates likely to continue through early 2010 in this environment , according to Medley . Just curious , this story of all the Mid-America Borrowers only paying just 3.75% for operating funds since Jan 2009 , expected to early 2010 , accross the board ( or even for all FCS borrowers everywhere , can not really tell from how the story is reported ?) is somewhat remarkable ! How fortunate it has the quasi backing of the government ( Fannie/Freddie ) to allow its bonds sales to allow its customers such even handed bargain basement pricing . Kind of reminds me of that issue with Government Health Ins Option potentially creating an environment to drive competion in the open market out of business . None the less , it remains remarkable that FCS borrowers have been borrowing operating financing at 3.75% since Jan 1 , 2009 , everyone who reads your article should take note and give them a call , since it is stated that its bargain basement rates are likely to continue into next year !
Posted by Pat Capser at 2:23PM CDT 10/12/09
The quasi government status of all Farm Credit institutions has really put local banks at a major disadvantage. It is a shame because the banks and bank employees are usually far more active in their local communities but they have a hard time keeping customers due to the unfair advantages Farm Credit has. The way FC parades around the county knocking on doors to steal credits is shameful. They are making rediculusly risky loans because they know they can get a government bailout either thru capital infusion or fed backed guarantees. I have ignored all the FC salesmen and kept my business at the local bank and paid the higher rate because I am against government bailouts, for free markets, and for my local community.
Posted by Bill Billson at 3:57PM CDT 10/12/09
Pat, we post Farm Credit Services of Mid-America's interest rates for operating and real estate credit on a daily basis on the Interest Rate Snapshot and Farm Finance page and consider them a bellwether of ag credit conditions. When rates are at a turning point, they affect all borrowers, not just those in the Farm Credit System. FCS of Mid-America notes these are rates for borrowers with good credit, so high risk borrowers may pay more and lower risk borrowers could pay less (no different than commercial banks' risk ratings). In my experience, country banks have been very competitive with Farm Credit on operating money and that should be especially true now that they are paying 0.1% on our checking and money market account balances!
Posted by Marcia Taylor at 3:10PM CDT 10/14/09
Marcia , I merely mentioned that I found it remarkable that per Mr Medley's statement , Mid-America's customers were paying 3.75% for operating funds since Jan. 1 . The story you reported did not say anything other than that was the rate it was charging . Apparently Mr. Medley gave you a broader range of rates being charged than was inferred ( i.e. one rate of 3.75%) , however the reader would not have known that until now . I think country banks can be very competitive , however one can not ignore that the suedo govt. backing of FCS bond funding is not available to them , thus they have to compete in service and talent , beyond the Walmart approach of lowest pricing . Why don't you ask your readers how close to an average rate of 3.75% their local banks are charging them , since Jan. 1 , I think you might be surprised . One can simply follow the treasuries , understand liquidity premiums a little , the TED spread , etc , and could be well forewarned in advance of transitional rate pricing risks , but might be better advised to understand what changes might have taken place in the credit underwriting standards of its lender , Mid-America included . From what I garnered from Mr. Medley's lead on of 3.75% to embelish the story is not unlike those promotional 0% Interest for 30 Days deceptive advertising mailings we all receive ( or DTN quoted representations in this case ) , its the fine print that the tells the real story , but the point is to get the application first , and then tell the rest of the story . P.S. Marcia , based on all the regulatory oversight , new capital ratios , FDIC Ins. costs , I must remark on your comment that "country banks should be very competitive with FCS on operating money , especially now that they are paying .01% on our checking and MM accts " . That might be how you feel , but it is no more ligitimate than the price of a bu. of wheat , or the farmgate price of milk constituting 90% of what the retail cost of bread or gallon of milk would be priced at in your Walmart store . While the FCS does indeed have the lion's share of farm R.E. term financing in this Country , they do not share that position in operating financing , thus they may not be the most representative bellweather snapshot for working capital financing . This financing is often a much more analytical task than underwriting term financing of real estate ( though they may find out once more the perils of soley lending on inflated R.E values as was the case in the early 1980's , and wish they had remembered some 1980's lessons ) . Thanks for the forum , and the freedom to express .........
Posted by Pat Capser at 1:35AM CDT 10/15/09
Pat, healthy competition between lenders is good for farmers. They value their lender relationships and are willing to pay a little premium for those who understand their business, but I also say amen to those who are brave enough to post their rates publicly on a daily basis. From what I can gather, the Federal Reserve is the only one who collects such bank rates, they only do it quarterly and they tend to lag the market by months. For the first half of the year (the latest data), the Chicago Federal Reserve reports that the average rate charged by commercial banks for ag loans in their district was 6.2% for operating money and 6.15% for real estate loans. Of course, rates and terms vary between large/small banks, size of loan and credit quality, as they should. My commercial farmer friends tell me their country banks match what Farm Credit offers on operating money, though.
Posted by Marcia Taylor at 4:48PM CDT 10/16/09
Marcia, Not to bemoan the point , but I think you just affirmed my point when you state that the Chicago Federal Reserve reported its district's commercial banks charged an "average" rate of 6.20% for agricultural operating loans for the for the first 6 months of 2009 . Per Mid-America's presentation , its "implied average rate on varible rates ( m/l standard ) for ag. operating loans since Jan. 1st is 3.75% (personal knowledge of what most the larger community banks and regionals charged would be in-between ) . From your earlier story that the Government would be well advised to model its homeowner's mortgage relief pledge on what the Farm Credit Services has adopted ( arbitration , etc. ) , I can not help but gather that you are a strong proponent of the FCS in general , with good intentions I'm sure . I will grant you that the FCS is competitive , so much so that they it is attempting at every turn to enter into competition with all banks everywhere for commercial real estate loans , manuafacturing , whatever ! As was my point , with its (FCS) Quasi-Government bond backing , and perception that its debt obligations are fail proof ( Fannie , Freddie ) , it enjoys a competitive advantage that its competition does not have , its that simple , that's why the Mid-America rates for 1st half of 2009 were quopted at 3.75% , and Chicago Fed Reserve District ag. operating rates were reported at 6.20 . As I also mentioned in my earlier post , this same Govt. backed logic can alos be applied to the debate over the competiveness in the health care industry if the Government were to create its own plan . Who can compete with an industry peer with unlimited access to capital , and a "get out of jail free card" , as the FCS was handed in the 1980's , and yes , History has been known to repeat itself . In closing , while I respect that you view Mid-America FCS as "being brave enough to post their rates daily" , I would suggest that perhaps "boastful enough" could perhaps be the case ? I do not know what brave has to do with telling the public you charge on average 3.75% ( thanks to the U.S. Govt.) .
Posted by Pat Capser at 11:02AM CDT 10/17/09
History has repeated itself Pat. FCS and AgStar are in deep with the hog guys and their years of equity lending will bite them big again in this deal. Many weak producers in our area go to FCS because they don't have to do cash flows and are only required to provide limited documentation. Basically, they recieved subprime ag loans to finance their operations but FCS/AgStar knows they will be bailed out so they can afford to take the extra risk.
Posted by Bill Billson at 9:35PM CDT 10/17/09
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