Act now to cut interest-rate risks
Take steps now to minimize your operational risks from expected rising interest rates. That’s the advice of top officials at a leading farm lender — Farm Credit Services of America.
The general view following the mid-June Federal Reserve meeting is that interest rates will hold at or near present levels until 2015 or perhaps early 2016, in which case producers have time to understand and minimize the impact of rising interest rates on their farming operation, says Bob Campbell, a senior vice president with FCSAmerica.
“Most producers who borrow money for operating expenses have loans with variable interest rates,” Campbell says, offering two examples to illustrate what rising interest rates would mean to operations:
• A farmer borrows 50% of his or her operating costs on 1,500 acres of irrigated corn for an estimated line of credit of $525,000. A 1% increase in the cost of credit would equate to $5,250, or about $3.50 per acre.
• A producer who feeds cattle for 200 days would be impacted about $8 per head at the same 1% increase in the cost of credit.
As part of their total risk management plan, Campbell says, producers also need to consider the impact of rising long-term fixed rates. An example:
• A producer has real estate debt of $3,000 per acre and a 20-year loan. If the loan doesn’t have a fixed rate and the producer doesn’t pay off the loan early, he or she faces interest-rate risks. A 1% hike in interest would cost the producer an additional $30 per acre the first year, and more than $300 per acre over the life of the loan.
“Future increases in short- and long-term interest rates may not move in unison, so operational risk for each case could be different,” Campbell notes. “An effective hedge against rising short-term interest rates is to maintain adequate levels of working capital. A good strategy for managing long-term interest-rate risk is to structure the loan maturity and interest rate options to match the goals for paying off a loan.” Producers have time to lock in very favorable long-term fixed rates and to address their working capital, Campbell says, but the time to act is now.
Source: Farm Credit Services
This article published in the August, 2014 edition of WALLACES FARMER.
All rights reserved. Copyright Farm Progress Cos. 2014.