The interest rates on your farm’s loans might not be top of mind during the growing season. If you typically meet with your banker in the winter, interest rates may have gone up several times already throughout the year – before you ever see or talk to your lender. Often, farmers can feel caught off-guard in that situation.
Over the past ten years, interest rates have remained flat, relatively speaking. But now we’re starting to see them rise more consistently than the previous decade. In the past couple years, they’ve been edging up. Last year, it was about ¾ of a percent. It’s moved that much this year so far – and there’s talk about more increases into next year as well.
Farmers with variable rate loans had been able to reap the benefits without having to deal with rate increases – but that’s changing. It’s time to get clear on your current loans and determine whether rising interest rates will lead to different decision-making.
Our advisors are actively working with our farmer clients to get this analysis going – and uncover any risks to the clients’ operations associated with particular types of loans and rising rates.
Educate yourself on the variety of strategies that can be used to lock rates in. First, get a strong understanding of your farm’s financial situation and how your current loan structure will best fit into that.
For example, if a farmer has cash on hand and would be able to pay down a variable note right away, he might be able to take on more of the risk of an interest rate increase. This is because he could just pay off the note if necessary, and was still able to reap the benefits of past low interest rates.
Other farmers who don’t have the cash or equity built up may not have the ability to take this type of risk. They may need to think about locking rates in. One important thing to consider is what it will mean for your farm if an operating line would rise simply because interest rates are higher.
Figure it out
Our advisors ran a scenario around this for one of our farmer clients. The farmer was thinking about locking in interest rates on a loan. They found that he could choose to spend the money to lock that in today, or he could choose to simply keep an eye on interest rates. If rates continue to increase the way they have the past two years, in three years from now, he could make a $7,000 extra payment on his note and still be in the same situation financially as if he had fixed the rate now.
In that situation, the farmer was better off having a little extra cash on hand to pay the note down later. The result is he’ll still come out financially the same as if he had fixed the rate now.
Every farmer’s situation is different. The key is to understand the types of loans you have, what’s out there and the benefits and risks involved. Know the terms of your notes and be able to answer: What are the costs if I want to move from a variable rate to a fixed? Does it make financial sense to do that now? How will it fit into the bigger picture of my operation’s current working capital and equity?
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.