Minding Ag's Business

Fed Pause Good for Ag

Once again, Fed watchers feel like the boy who cried wolf.

Seven years after the financial crisis pushed U.S. interest rates to 200-year lows, the Federal Reserve defied what was conventional wisdom as recently as May. Disclosure on June 3 that the economy added only 38,000 jobs last month prompted the slowdown. Instead of gradually hiking short-term rates a second time since December, the next Federal Reserve will likely postpone action until at least July and possibly September, Farm Credit Mid-America officials say.

For capital intensive businesses like farming, the pause is good news. Even with the turmoil in the ag economy, the average effective interest rate for operating loans at agricultural banks ran 3.58% in early 2016, according to the Federal Reserve. Farm real estate loans averaged 4.28%.

"Short-term interest rates especially are still well below long-term averages. That just extends borrower opportunities and is helpful in the current environment, with the increased need for operating funds," says Matt Monteiro, Mid-America vice president. The Farm Credit lender serves borrowers in Indiana, Ohio, Tennessee and Kentucky.

More significant, longer-term rates also are flirting with record lows. Yields on 10-year U.S. Treasuries, which benchmark most mortgages, sank to 1.59% this week, compared to 2.3% a year earlier. The 10-year note's all-time record closing was 1.404% set in July 2012.

With competition still stiff for qualified ag customers, lenders see opportunities for farmland owners who haven't yet restructured farm mortgages. About 60% of the association's borrowers have locked in fixed-rate mortgages in recent years.

But someone with $3,000 per acre debt could save $45 per acre per year with a 1.5% reduction in mortgage interest rates today, points out Vince Bailey, Mid-America's vice president of credit-agribusiness.

"A $45 per acre savings can be fairly significant today in improving fixed costs," he adds.

Follow Marcia Taylor on Twitter @MarciaZTaylor

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RSimpkins1489533924
6/18/2016 | 9:14 PM CDT
Doesn't do much for those with money. I once was earning 12 percent on CDs.