Are they headed up or down? That’s usually the question about interest rates.
But for now, said Tom Nakano, the answer is neither.
“The sentiment now is that the Federal Reserve will keep short-term rates where they are for most of 2014,” said Nakano, the executive vice president, chief administration officer and chief financial officer for Northwest Farm Credit Services. “What we are seeing is probably late 2015 or early 2016 before they start to raise interest rates.”
There are a couple of dynamics, he said. The domestic U.S. economy is looking better, unemployment rate is down, there’s a strong payroll number, so confidence is building here.
“The driving negative statement on rates is geopolitical,” he said. “The Federal Reserve is saying that even though the United States is doing OK, we have enough concerns about the international world that we want to wait before raising rates.”
What does all this mean for agricultural loans, such as operating loans?
“Agricultural producers typically don’t base decisions about borrowing for short-term needs based on the interest rate environment,” said Curt Hudnutt, chief risk officer for Rabo AgriFinance. “Since most producers have on-going short-term financing needs, they always carry operating debt. In addition, interest rates on operating loans are generally variable in nature and thus will increase as the short-term rate environment begins to strengthen.”
Nakano added that with the interest rate looking stable for the next couple of quarters, his company has been working with its customers to address some of their variable-rate debt.
“On our operating loans, unless it’s a new customer, they’ve been with us for a while, and we’ve told them that if they are on a variable rate, we can fix that rate,” Nakano said. “If they have a variable rate on their farm mortgage, we can tell them it looks like rates are (eventually) going to go up, so you ought to start looking at fixing those variable rates.”
Overall, Nakano said, short- and long-term rates are looking relatively stable for the next 12 months or so.
“Longer-term rates, like those tied to mortgage loans, those will stay where they are at for now, they might go down a little,” he said. “Now is a pretty good time for an expansion, or buying the neighbor’s place, if it’s an option.”