Updated October 8, 2009 - Inflationary pressure – always the key driver of higher interest rates – remains non-existent in the U.S. economy and farmers can probably look for continued low rates on short term borrowings, and relatively flat rates for longer term loans as well.

 

Farm Credit’s variable rate loan for operating expenses remains at a low of 3.75% -- a mark it has held since January 1 of this year.   “We’ll likely see rates remaining at that level (or very close to that level) into the Spring when the 2010 operating season begins,” said Bill Medley, marketing vice president. “There might be a mixed message in that news though, because although lower rates are welcomed, they also indicate a continued sagging economy, one that’s now punctuated with low prices and soft demand for farm products.”

 

The outlook for longer term rates – products like 20-year fixed rate financing – and other mortgage loans is less predictable.   Recent trends have proven rates to be soft, and many FCS customers used the time window to convert their loans to lower prices. But there is a definite steepening of the interest rate yield curve (reflecting the price difference between short and long term rates). Farmers now have some more interesting choices. For example a 5-year adjustable with a longer 15, 20, or 25 year term has been priced as low as 4.8% recently.   That compares to a 25-year fully fixed rate of 6.65%.   So, to purchase long term fixed rate security costs almost 2 % more than a 5-year fixed.  

 

Still, in a historical view, that’s a relatively low rate, worth consideration and worth acting on now.  To provide some context, longer term interest rates correlate to 10 year Treasuries.  The 10 year Treasury is below 3.20%, a level so low that prior to the credit crunch in late 2008 hadn’t been reached since before 1960. You can likely expect to see more rate volatility as the end of the year approaches when the Fed has to begin dealing with exiting the government support of Fannie Mae and Freddie Mac as well as managing the bail-out related inflated US Treasury debt. Most believe that could trigger a rise in the cost of long term debt and interest rates.