We’ve had quite a few questions lately from farmers about interest rates – regarding direction for the future and action to potentially take based on that. With the new presidential administration in place, farmers are wondering if and when there may be major changes ahead for our country’s overall economic situation.
The answer to that depends on your thought process around one main thing: the general direction of the U.S. economy over the next few years. In recent years, interest rates were lowered and then untouched in an attempt to kickstart a sluggish economy. With rates frozen or barely moving, we haven’t seen very much inflation in the past few years, nor a great deal of economic growth.
When an economy does start to boom and grow, the end result tends to be inflation. So if you believe that economic policies and the results of those policies will bring about a different situation than in the past few years, it may be a wise decision to take action.
In other words, if you’re bullish on the future of this country’s economy – if you think the overall economy may go in a different direction and ‘wow’ everyone – it may be smart to lock rates in now.
If you’re like most farmers, this can be a very tough call to make. Let’s say you have a 15-year land note. Perhaps you’ve hesitated for the past year or so to lock in rates on that note. You thought it might be a good idea, but were unsure about what would happen in the 2016 presidential election. Because of that, you didn’t take any action.
Maybe you think our country’s economy will be in growth mode in the coming years. As a result of that economic growth, inflation might begin, with rising interest rates following. If that’s the conviction you hold as you think about the future, then you may want to move forward to get rates locked in.
Here are four steps to take now:
- Look at the facts of your farm’s situation. What notes do you have right now? What interest rates do you have currently? How will your farm be affected if those rates go up? Stay the same? How much longer before the rates you have locked in are open to the market rate?
- As you consider how a rise in interest rates may impact your farm, ask yourself whether you’ve taken potential future growth of your farm into account. If your operation increases in size due to opportunities, your operating note will likely have to be larger and potentially at a higher interest rate than what you are currently paying, if you think the economy is headed for a bullish course.
- Evaluate your personal opinions on the future direction of the country’s economy. Wouldn’t it be great to get a clear sense of your beliefs and make a decision you feel fantastic about, based on your farm’s data and your values?
- Get perspective and analysis from others knowledgeable in ag financial issues. Consider getting in touch with an ag finance advisor. Their knowledge of ag financial issues can be helpful as they provide perspective and analysis on your farm’s situation.
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The opinions of the author are not necessarily those of Farm Futures or Penton Agriculture.
Darren Frye grew up on an innovative, integrated Illinois farm. He began trading commodities in 1982 and started his first business in 1987, specializing in fertilizer distribution and crop consulting. In 1994 he started a consulting business, Water Street Solutions (www.waterstreet.org), to help Midwest farmers become more profitable through financial analysis, crop insurance, commodity marketing, and legacy planning. The mission of Finance First is to get you to look at spread sheets and see opportunity, to see your business for what it can be, and to help you build your agricultural legacy.