Call the last eight years of profits in agriculture a Golden Era if you wish, but I also consider them the Golden Era of Borrowers. To be honest, near-zero interest rates have been a fantasyland for capital intensive businesses like agriculture that rely on credit to retool technology. They've also greased the way for many beginners to enter agriculture and for large scale operations to expand.
As I interviewed Farm Credit Mid-America's CEO Bill Johnson about his upcoming speech at the DTN-Progressive Farmer Ag Summit next week, he reminded farmers to examine what "normal" interest rates are (see chart for some clues).That's a good exercise as you stress test your financials and consider how the credit cycle--combined with lower commodity prices--might doubly shock your business going forward. He says the very best businesses spend time looking out five years and take precautions now to bolster their positions later.
"We're still very upbeat about the future, but the cycle is changing. We will be facing shorter economic cycles and much more volatility than in the past," said Farm Credit Mid-America's Johnson. The good news is that growers are headed into this challenge in much improved positions compared to the 1980s. In the future, they will need to start looking at what risks they can take off the table."
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Real estateis particularly rate sensitive.Professional farm managers and economists remind us, farmland that's worth $16,000/acre when capitalization rates are 2% is worth only $8,000 at 4% rates. At 6%, it's worth about $5,300. The bottom line is interest rates and real estate typically move in opposite directions.
As the chart shows, 10-year Treasuries--the benchmark for many farm mortgages--bottomed at 1.53% in July 2012. That was a 63-year low for 10-year Treasuries--anything but standard fare. Rates on 15-year farm mortgages have already jumped more than a full percentage point since last spring, from 4% to about 5.2% now. Over the next few years, it might not be unrealistic to see those benchmarks more than double.
So if you need some help cutting through the fog of what rate shifts mean for your land and equipment values--as well as your future cost of capital--join us at the DTN-Progressive Farmer Ag Summit Dec. 9-11 in Chicago. Not only will our kickoff speaker Richard Fisher, president of the Dallas Federal Reserve, answer questions about interest rate policies, but a slew of other top farmers and agribusiness leaders like Johnson will share what to do about it. Find details and an agenda at www.dtnagsummit.com
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