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The down side of lower interest rates

Agriculture.com Staff 02/12/2016 @ 4:29pm

The worst year of my farming career was 1984.

Mediocre corn yields, the worst soybean yields in history and sky-rocketing interest rates made for bad times on the Smith farm. My community was not hit as hard as many by the bad farm economy of the early 1980's because four years of drought from 1974 to 1977 made most of us very conservative. Still, with one daughter in college and the second only a year away from the tuition black hole, times were not good.

You might think that after that experience, I would be excited about the super low interest rates in effect today. That incident was 24 years ago. I have a different perspective now than I did then. My farming today consists of only the acres I own or have interest in. I do not borrow money for operating capital. My non-farm activities include two volunteer positions where I manage money for non profit organizations. I am finance chairman for a church of approximately 300 members. I am also treasurer for the local cemetery board.

As finance chair for the church, it is my responsibility to keep adequate funds flowing to meet our operating budget. In addition, we have a mortgage on a facility that was built in 1996. The original loan as paid off last fall, but we since have borrowed to do some waterproofing that should have been part of the previous building project. The low interest rates of the last few years have kept the annual payments low. The down side is that retired members on fixed incomes are hurt financially by low interest rates on their bonds and certificates of deposit. We are fortunate that we have a mix of all ages so the whole congregation is not being hurt at the same time.

My position with the cemetery board has to be the worst volunteer job in the world. Our sole source of income besides selling burial lots is interest on a one year bank CD. One of two things has to happen to make the finances work with low interest rates. Either people have to die so we sell lots, or the summer has to be hot and dry so that the grass does not need frequent mowing. With the interest rate at four percent, we just barely meet our cash flow needs for mowing and snow removal.

My personal situation is opposite from what it was in 1984. Back then, interest was one of by biggest farm expenses. Now, I invest my non farm resources so that interest and dividends supplement my other retirement income. With CD rates less than four percent, knowing where to invest ranks right up there with trying to manage grain sales for the maximum return. Money market accounts are handy but interest rates are less than two percent. That rate does not begin to keep up with inflation. This causes me to look to possibilities that expose me to more risk than CD's and bonds.

I hope that recent measures taken by the government work as expected. It seems wrong to me to force prices to extremes, whether grain or interest rates. Extremes in either cause disruption in normal business patterns. Financial situations eventually correct themselves. When prices go to extremes, the adjustment can be long and painful. We are in that process now. I hope it does not last too long.

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