When Wall Street heads for safe havens like U.S. Treasuries, borrowers benefit down on the farm.
Just ask Nebraska corn and soybean producer Bart Ruth. He started farming in the 1980s when corn was $1.75 and interest rates 18%. Today some farm lenders are advertising rates on machinery as low as 2.9%, a fact that prodded Ruth to finance two new tractor purchases in 2011, the first in his career. In the last two years alone Ruth and his son have replaced every stick of equipment on the farm, except for a combine.
?I wanted to be equipped to the point that we could add another 750 rental acres without thinking if a landowner offered it,? Ruth says of his technology upgrades. ?If you hesitate a day in this market, somebody else will take it.?
Farm incomes will soar past $100 billion for the first time in 2011, up 31% from last year thanks largely to record row crop prices. But cheap credit has also prodded U.S. crop producers to retool or replace everything from sprayers to farm shops, grain bins, fertilizer storage and irrigation rigs.
In August, Wall Street investors aided the borrowing binge. Panic over the global economy drove U.S. interest rates to their lowest levels in almost 60 years. It was a virtual stampede from stocks to safer havens like Treasuries and Farm Credit System bonds.
The move seemed counterintuitive to financial experts like Mark Hancock, treasurer of Louisville-based Farm Credit Services of Mid-America, who never expected to see 10-year Treasuries dipping under 2% and short-term rates near zero. It was especially surprising since Congress was mired in debate over federal debt ceilings and Standard and Poor?s had just downgraded U.S. Treasuries a notch.
?The last time rates were this low was 1954. This is a once or twice in a lifetime event,? Hancock says. When 20-year mortgages slipped below 5%, farm borrowers jumped. Some 15,000 FCS of Mid-America clients refinanced or converted loans to lower interest rates so far this year?half in August--saving an estimated $13.6 million annually in lower payments. Further Fed action might mean even lower mortgage rates by fall.
Borrowers on floating terms automatically benefit from lower rates. FCS of Mid-America?s variable rate operating credits hit 3.6% in August. In October 2007, the same quality borrower paid 8.6%, a rate much closer to the norm over the last 30 years. On a $500,000 operating note, that 500 basis point difference saves $35,000 in interest annually.
Inflation won?t be the wild card that reverses cheap rates this time. Investors need more confidence in policymakers and signs of a stronger recovery before the situation changes, cautions Doug Williams, managing director for the $200 billion Farm Credit System?s Funding Corporation. At the moment, ?the market is telling you to expect inflation to be quite low. There are continued signs of weak economic results, stubbornly high unemployment, and excess capacity. There?s not currently a lot of inflation out there.? As long as that risk remains fairly benign, borrowers rule.
? Copyright 2011 DTN/The Progressive Farmer, A Telvent Brand. All rights reserved.
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