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Corn+Soybean Digest

It's All About The Money

You would have to be living under a rock not to notice that the Federal Reserve Board lowered interest rates again and again in 2001. The cuts helped drive down interest rates of all kinds and gave farmers the opportunity to substantially cut their interest payments.

“I can't think of anything that's more important to farmers than interest rates because farmers have a lot of short- and long-term debt,” says Barry Flinchbaugh, an agricultural economist at Kansas State University.

Today's interest rate environment offers farmers a rare chance to make a real dent in their interest payments on long-term land loans, equipment loans, yearly operating loans and credit card debt.

Some savings will come pretty much automatically. If you have a credit card with an adjustable rate, compare current interest rates with those you paid a year ago. Chances are the rates have fallen dramatically. But you might be able to save even more money by checking rates offered by other lenders, particularly for credit card balance transfers. (A word of caution: Read the fine print on all credit card offers.)

Getting a better long-term loan may be a little more work. But refinancing long-term farm debt potentially offers the same kind of savings that many Americans are getting by refinancing their homes at lower rates. For example, if you can shave one percentage point off a $1 million long-term farm loan, your savings will amount to $10,000 a year, says Flinchbaugh. Economists say there also may be good interest rate deals on farm equipment loans.

Some farmers may be tempted to gamble that long-term rates will fall further. And they may. For example, if our economy continues to sink, long-term rates may fall further, says Luther Tweeten, retired agricultural economist at Ohio State University. But long-term rates could also rise, even if short-term rates remain low, he warns.

On the surface, that might not seem to make sense. But there's a good reason why a drop in short-term rates could spur a rise in long-term rates — the specter of future inflation.

Here's how that works, says Tweeten. The Federal Reserve lowers the rate in an effort to boost the economy. At the same time, the Federal Reserve usually puts more money into circulation to spur consumer spending.

If these efforts succeed, the improving economy and more money for consumers to spend may spur inflation. Since investors and banks know inflation erodes their return, they demand a higher rate of return. That pushes long-term rates up.

Tweeten cautions farmers who want to wait for long-term rates to fall further. “Farmers should think about renegotiating their long-term debt now,” he says. “It takes about six months to a year for interest rate cuts to show up in their effect on the economy. If these cuts kick in as Federal Reserve Chairman Alan Greenspan would like, the economy will begin to roll. Then, inflation will begin to pick up.” And that, he says, could push long-term rates higher.

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