Minding Ag's Business

Tick, Tick, Tick on Higher Rates

A poll of chief financial officers for Farm Credit lenders in 15 states found that the cost of borrowing is expected to rise midway through next year as the Federal Reserve tightens monetary policy.

The survey of CFOs of AgriBank's 17 member associations reflect their growing consensus that the five-year spree of bargain-based interest rates could be coming to an end. Experts have been wrong many times before, but this alert is meant to jar growers into action. Rates have been low so long, some people think near-zero rates are normal. Just remember, the Kansas City Federal Reserve reports the average rate on non-real estate farm loans nationwide is 3.8% today--versus a more "normal" 9.7% in 2000. Borrowers at big banks pay a mere 3.1% on average.

“The poll reflects the consensus among economists and market participants that the Federal Reserve will begin raising interest rates by the middle of 2015 or early 2016,” Brian O’Keane, executive vice president Banking and Finance, and CFO of AgriBank said in a press release. “The Fed has kept interest rates low to encourage economic activity, remove slack from the labor force and keep inflation from falling too far, or turning into deflation. Now that the economy is slowly but steadily growing, the Fed is expected to increase interest rates to help keep inflation in check.”

P[L1] D[0x0] M[300x250] OOP[F] ADUNIT[] T[]

The Federal Funds rate, the short-term interest rate set by the Fed and upon which other short-term U.S. interest rates are based, has been effectively zero since 2009 near the end of the Great Recession, AgriBank noted. The CFOs said they expect the Fed Funds rate will be, on average, 0.46% in one year, 1.09% in two years and 1.89% in three years. The CFOs expect the 10-year U.S. Treasury yield--an index used for some mortgages--to increase from about 2% now to an average of 2.64% in one year, 3.18% in two years and 3.82% in three years.

Farm Credit's estimates jibe with a presentation I heard today from Scott Mather, co-manager of PIMCO's Total Return Fund, one of the largest bond funds in the U.S. Mather also believes the Fed plans to push short-term rates slowly in this round, very close to the Farm Credit CFOs levels. But he believes we are moving into a much different interest rate cycle than the extremes we've experienced the past 30 years. He doesn't think we'll rebound anywhere close to 1980s levels, but float in a period of "neutral" rates--higher than currently but far lower than the past several decades. (Bonds and mortgages over 10 years are riskier, since they can't be as easily controlled by the Fed and pose more inflation risk, he added.)

The issue for growers to consider is whether the premiums they pay to lock in fixed rates now outweigh the risk of variable rates moving higher later. For example, some Farm Credit associations offer one-year fixed-rate operating credit at 2.99%. AgDirect, a Farm Credit equipment lender available in 26 states (www.agdirect.com), offers 5-year, fixed farm equipment loans at 3.9%.

Bargain basement rates--particularly on farm machinery--give growers the opportunity to refinance equipment they may have paid in cash over the last year or two. Several growers I know see this as a way to "lock in" operating money at reasonable rates and pad their cash flow for the storm in 2015. Given several recent doomsday economic forecasts at last week's Ag Bankers conference, it might be time to get those finances in order.

If you missed the message from the Ag Bankers conference, read last week's "Best of DTN Newsletter" at http://www.dtnprogressivefarmer.com/….

Follow me on Twitter@MarciaZTaylor

P[] D[728x170] M[320x75] OOP[F] ADUNIT[] T[]
P[L2] D[728x90] M[320x50] OOP[F] ADUNIT[] T[]

Comments

To comment, please Log In or Join our Community .