Interest rates are rising, what does this mean for agricultural and recreational land owners?
In September, the Federal Reserve raised its benchmark federal-funds rate for the third time this year, as an effort to help sustain a strong economy for the long-run. Increases to the benchmark rate affect both short-term and long-term interest rates; however, rates on short-term loans such as revolving lines of credit and operating loans are impacted the most. This is of significance to farmers and ranchers who often employ these types of loans for day-to-day operational expenses. Economists speculate the government will increase rates once more this year in December, with that in mind, now is the prime time to review your operation’s financial plan.
Fixed Rate vs. Variable Rate Land Loans
The key feature of a fixed interest rate loan is that the interest rate charged on the loan will remain fixed for the entire term of the loan, regardless of what happens with the market interest rates. With this type of loan, borrowers will have the same payment amount for each cycle.
The interest rate on a variable interest rate loan is subject to fluctuations in the market’s interest rates. With this type of loan, a borrower’s payments will vary based on the rate adjustment method selected at the loan closing.
Advantages & Disadvantages of Fixed Rate vs. Variable Rate Loans
Depending on the needs of your operation, there are advantages and disadvantages to both fixed interest rate and variable interest rate land loans.
If you decide to receive a short-term loan under five years, it is recommended that you receive a variable rate on your loan, but there is a risk you take with that if the interest rate increases. If the interest rates increase too much, there is a risk of the payment amount becoming too high to afford. Even though variable rate loans offer borrowers more options, it is important that you understand the adjustment frequency and the characteristics of the market index to analyze your ability to make payments.
Fixed interest rate loans, on the other hand, can offer borrowers the stability they are looking for in a volatile industry. The increased certainty of a locked-in interest rate provides farmers the ability to better plan, understand profit potential, and manage their cash flow and operating capital.
To determine which loan rate is best for your operation, borrowers should consider the current and future interest rate environments, as well as discuss the market with their ag lender. As it is expected the Federal Reserve will raise their benchmark rate a few times over the next two years, locking in a fixed interest rate now can help save you money in the future.
Moreover, experts recommend not making decisions solely on interest rates; keep in mind interest is only one of your operating costs.
Steps Farmers Can Take
Years of decreasing farm income and profitability, trade uncertainty, and rising interest rates are all weighing on the minds of American farmers, ranchers, and ag land owners. One aspect of your operation you can control, however, is your finances. Here are three steps you can take to improve your financial posture in this environment.
- Review your operation’s bottom line and long-term goals. Rates are increasing slowly, but steadily, which affords borrowers the opportunity to analyze their situation to make the best decision for their operation. As rates continue to rise, it becomes even more important to strategically manage your operation’s cash flow and working capital. This positions your operation to better handle the unexpected, such as weather events, variable commodity prices, and increases in input expenses, without the need to borrow more at a higher interest rate.
- Determine if you are eligible to convert your variable interest rate loan to a fixed interest rate loan. This can help your operation save money on future payments if the market’s interest rates increase. A few years ago, short-term adjustable rate money was inexpensive, and many farmers capitalized on those savings. As those short-term rates increase, we encourage you to make sure you understand your loan agreement, the costs associated with your financing, and determine if you are eligible to refinance to a lower interest rate, long-term fixed rate loan product.
- Discuss your operation’s finances with an ag lender. Sitting down and analyzing your operation’s finances with an ag lender, can assist you in obtaining solutions for your long-term financial needs. If you are looking for an agricultural land loan, AgAmerica has a full spectrum of solutions, including long-term and short-term options with both fixed and variable rates.
How AgAmerica Can Help
AgAmerica understands that our nation’s farmers, ranchers, and ag land owners have unique operations with unique needs. We offer customized land loan packages that meet these needs and provide long-term stability for your operation. Now is the ideal time to consult with our land loan experts and discuss the future of your operation. Learn more about our custom loan packages today.