Now is the time to lock in low rates
As farmers and agribusinesses owners across the country seek certainty in the post-pandemic economic outlook, a $3.5 trillion investment proposal by the White House casts a huge shadow over the economy.
At this point, the uncertainty is so widespread that, no matter where you sit on the political spectrum, it is impossible to predict the outcome of President Joe Biden’s proposed stimulus investment package. There are those who question whether the package ever will get through Congress. However, Tom Stenson, executive vice president at Conterra Ag Capital, maintained that – no matter the outcome of Biden’s proposal – this is the perfect time to review your operation’s farm debt structure.
Interest rates today are low. So far, the government has been willing to buy the debt that politicians incur. How long that will last in the face of adding about 20% to the nation’s debt is a major issue to be resolved. However, the first question farmers need to ask, according to Stenson, is what any inflationary impact will be on farm debt. In addition, producers need to ask whether the Democrats will be able to get all the votes they need plus the vice president. Even if the Democrats do line up the requisite votes, the mystery remains about what exactly they will be voting about.
“We need to be watching the things buried inside the incentives,” Stenson warned. There is an old saying to the effect of “When elephants fight, ants get trampled.” Gone are the days when agriculture was an elephant on Capitol Hill. While farmers are not exactly ants, in decades there has not been an ag bloc large enough in itself to sway the way the U.S. House votes. Now, the Senate’s focus and knowledge about farming has changed, too, Stenson said. This leaves a lot of uncertainty about exactly what farm programs will mean to farmers.
Programs continue to surface
Some of the proposed programs are a mixed bag, depending on which side of the fence you farm. Right now, if you are a protein producer — a corn-and-soybean farmer in an area with ample rainfall — things look pretty good financially. If, on the other hand, you are a consumer of protein – running a dairy, a feeder operation or a poultry farm — the current fiscal outlook is not quite so rosy. “That’s the yin and yang of high feed prices,” Stenson said. As commodity prices rise, there is a squeeze on protein consumers.
“If you are in the corn-and-soybean business, you are feeling pretty good,” he continued. Hog or cattle feeders, not so much. The proposed Biden stimulus package promises to bring inflationary pressures on both sides of the hedgerow, whether you produce or consume feed.
On top of that, there are outside influences which could make the whole issue of financing the President’s package more serious. For example, China and Russia both are rattling military sabers. Even if the stimulus gets funded in a workable way, any need for a major ramp-up in military spending would throw sand in the bearings of the American economy.
Biden administration priorities
The President maintains that he does not see a big inflationary impact from his program. He promises to raise the $3.5 trillion by taxing the rich, getting more revenue from corporate America, and closing tax loopholes. As Stenson observed, we all have heard that rhetoric before. What remains to be seen is how domestic and world markets react to that payout. “The Federal Reserve says that this is transitory,” Stenson said. “But each day brings more inflationary pressure.”
Take a close look
Whatever the outcome of the President’s proposal, Conterra is encouraging its customers to sharpen their pencils and take a close look at debt that will not be retired in the ordinary flow of business. Many operations have structured that debt to be tied to adjustable interest rates.
“Those operations have done well with adjustable rates due to the low interest rate environment,” Stenson said. Given the uncertainty over the economy, this is a good time for operations to look at long-term debt structure and consider any needed changes while rates are still at historically low levels.
Even if you feel bullish about the President’s and Congress’s ability to pull off a $3.5 trillion spending package without disrupting the financial markets, Stenson reiterated his original point. “Look at debt that will not be retired,” Stenson said. “Producers should critically evaluate their debt and make smart decisions for their operation in the long term.”
Regardless of your politics, that’s solid advice.
Have questions about refinancing your farm debt? Our ag lending team at Conterra would love to chat. Get in touch today.