The Coronavirus Refinance

MOUNT JULIET, Tenn. (DTN) -- The rush to safer investments amid the COVID-19 pandemic has pushed the 10-year Treasury rate down by about a percent over the past few months, providing farmers and ranchers with the opportunity to refinance at very low interest rates.

The 10-year Treasury rate is what lenders use to establish interest rates on long-term loans, and Farm Credit Services of America Chief Credit Officer Tim Koch told DTN it presents an opportunity to not only lower your rates, but also to extend your amortization periods.

"We're at a point I don't think most of us have ever seen on the 10-year Treasury, so long-term rates that we're quoting people on real estate loans are as low as -- I always struggle to say ever -- but certainly in recent memory," he said.

Brian Philpot, CEO of ag real estate lender Ag America, said it's one of the only good things amid the current pandemic. Many of the variables in farming are outside of farmers' control, like the weather or the state of global trade, but input costs are one thing farmers control.

"We've got cheaper gas and we've got cheaper interest rates," he said. "When rates tick down, it's really a good time to reduce an expense item in the interest you're paying, and that can be done by refinancing your current real estate, but also by consolidating what you're paying for equipment and other types of debt."

After several lean years for the ag economy, Philpot said, working capital has become a concern, and some farmers have dipped into their equity. Refinancing could be an alternative way to free up more working capital.

"You've got to have cash on hand to be able to put the crop into the ground and get it out. You don't need to be burning through that in a time of uncertainty," he said.

Koch said the potential cash-flow savings are staggering. He offered the example of a 160-acre farm purchased three years ago at about $7,000 per acre. If the farmer borrowed 60%, a 20-year loan would be about $770,000. Interest rates are about 125 basis points lower now than when the loan originated, so by refinancing at the same 20-year term, the farmer would save about $44 per acre on his or her payment.

"That's not that far off what a lot of people got in their Market Facilitation payments, which people thought was very favorable, very positive to their overall cash flow. And if you can do that by just refinancing your existing debt, OK," he said.

What's not as intuitive is expanding the loan's term out to 30 years.

Interest rates on 30-year loans, currently around 4.5%, are about a percent lower than a 20-year loan, Koch said, adding that everyone's rate will be slightly different. But for the example above, extending the loan to a 30-year term would amount to $112 per acre in savings.

"Most people are borrowing operating money between 5% and 6% percent," Koch said. "When have you had an opportunity to get a 30-year fixed rate loan for less than you're probably going to borrow operating money for?"

Koch knows this advice runs up against the age-old adage of wanting to pay off your real estate loan as fast as possible. However, he said, "That only makes sense as long as you're not borrowing other money at a higher interest rate. You've got to pay that first. That's the environment we're in today. I think producers, to take that 30-year loan at, you know, 4-point-something, they're going to look at that three years from now and say, 'Wow. I am never going to prepay that loan.'"

Koch said recent market moves have been fear based, because we just don't know how long the pandemic will last or what its ultimate impact will be on the global economy. That's why he compares this refinancing opportunity to crop marketing.

"When the opportunity presents itself, it's always a good idea to be in a position to take advantage of it," Koch said. "If we find a cure for COVID-19 and Russia decides they want to follow along with OPEC, you could see an extremely rapid increase in interest rates, not to places that alarm us, but this opportunity just went away."

Katie Dehlinger can be reached at katie.dehlinger@dtn.com

Follow her on Twitter @KatieD_DTN

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