Interest rates on the rise?
The Federal Reserve has kept interest rates near zero for over two years, but the second phase of easing is scheduled to end this month. The Wall Street Journal prime rate is 3.25 percent, which has not been as low since the mid 1950s. The historical low levels of interest rates indicate an increase is inevitable.
Predicting the timing and degree of an increase will depend on both domestic and international economic wellbeing, as well as inflationary expectations. Federal Reserve chairman Ben Bernanke reported that after the most recent central bank policy meeting, the Federal Reserve does not have immediate plans for a spike in interest rates. Market investors are predicting rates to stay low through the end of the year, with potential increases beginning in 2012.
How does this affect farmers?
Increase in interest rates will presumably have the most effect on farmland prices. A recent study conducted at the University of Illinois by Schnitkey and Sherrick found that a one percent increase could decline farmland value more than 20 percent.
There is still time to borrow money with low interest rates. The Kansas City Federal Reserve reported the average interest rate on non-real estate agricultural loans is at 4.86 percent at the end of the first quarter of 2011.
“One piece of advice I will offer is to examine your options before financing anything,” said agriculture equipment retailer Don Aberle on a Farmersforthefuture.com forum. “Sometimes zero percent for a short term is not the way to go. If you can get a higher fixed rate for a longer period, it will free up more operating cash, but might cost you more in the long run.”
A general rule is to keep interest costs below 20-25 percent of the farm’s gross income. Farmers should assess the impact of a potential increase of interest rates on their future profit margins and loan repayment ability.