Farmers know a deal when they see it: The surprise collapse in mortgage interest rates the past few weeks has triggered another wave of refinancing at Farm Credit System lenders. And that's helping growers build a stronger line of defense for the day when the Federal Reserve eventually reverses course and today's cheap credit returns to normal.
You'd have to go back more than half a century to lock in rates like the 5.7 percent, 20-year mortgage charged good borrowers by Louisville-based Farm Credit Services of Mid-America the week of July 4, says FCS of Mid-America's Treasurer Susan Hammond. Between 1953-1958 (which is as far back as the records go), those same rates bounced between 2.9 percent and 3.76 percent.
A slew of economists and business school professors who lecture to farmers have been recommending that growers lock in fixed rates since January of 2009. They wanted growers to avoid repeating the 1980s debt crisis, when the majority of farm loans floated on variable rate interest that at times hit 16 percent to 22 percent.
Likewise, Texas A&M Economist Danny Klinefelter has been urging growers to fix interest rates, even if it means paying 1 percent to 1.5 percent more than on a variable rate. Consider the margin "an insurance policy," Klinefelter says. (See his most recent "By the Numbers" column on the DTN Farm Business page for more insight).
The most recent slide in interest rates was fueled by a panic in money markets over Greece's debt problems. International investors triggered a flight to quality and loaded up on U.S. Treasuries in the process. But that reaction created opportunities for farm borrowers seeking to switch from variable to fixed interest rates or to refinance existing loans.
“Customers that converted during the first six months of this year alone could collectively save over $15 million in annual interest expense,” Hammond adds. FCS of Mid-America, which serves Kentucky, Ohio, Indiana and Tennessee, has already converted almost 13,000 loans representing $2.2 billion in volume.
“With 50-year record-low rates, our customers are really taking advantage of the conversion option,” says Hammond. “We processed as many as 500 loan conversions to lower rates in one day in May, the busiest month on record for conversions. And during the first six months of the year, we averaged over 110 conversions per business day. With a signature and very little money down, it is easy for farmers to lower their long-term fixed rates.”
At the moment, the Federal Reserve indicates it will keep rates low for an extended period," Hammond says. So she's not expecting any major moves until at least the second quarter of 2011. Still, Klinefelter says you shouldn't try to hold out for a better deal in the interim. Credit markets change in a flash, he says. "You don't want to be trying to refinance in the middle of a market upheaval."
[To stay abreast of ag interest rate trends, watch DTN's Daily Interest Rate Snapshot and historic rates on the Farm Finance page under Farm Business. Also join former New York Federal Reserve official Jamie Stewart--now president of the Farm Credit System's Funding Corp.--for a discussion of what farm borrowers should expect when rates reverse. He's a speaker at the DTN-Progressive Farmer Ag Summit Dec. 8-10. See details at http://www.dtnpf.com/…]
© Copyright 2010 DTN/The Progressive Farmer, A Telvent Brand. All rights reserved.
