TIME TO REFINANCE YOUR AG LOANS?

Consider cash flow needs, long-term financial consistency

Challenging economic times often create financial opportunities. The Federal Reserve recently lowered the federal funds rate to near zero and eliminated reserve requirements, as it seeks to stimulate the economy and eliminate bank liquidity concerns as recession looms.  Reassessing our farm and personal financial positions, specifically our debt structures and costs, must be a fundamental response to the rapidly changing economic environment. But does a lower funds rate mean you will benefit from refinancing assets like farmland and equipment right now?

When was your last refinance?

The answer is that it depends on one major factor.  Have you refinanced long-term debt in the last six to eight months?  If so, you’ve likely already locked in a rate that is competitive in the current market (as of late March 2020).  If it’s been longer than that, there could be significant opportunity to benefit from the lower rate environment.

But the Fed funds rate has been slashed; why hasn’t that led to even lower mortgage and other long-term interest rates?  The answer, it did, but only for a week to two-week period in early March.  First, in times of economic stability, changes in treasury yields and the federal funds rate are indicative but not perfectly correlated to commercial and consumer rate movements.  In times of economic uncertainty, such as we are experiencing today, investments like commercial bonds and mortgage-backed securities require larger spreads to attract investment away from perceived safer alternatives.  In other words, rate savings do not always trickle down to the consumer level.

Why did rates go back up?

Economists are predicting the Coronavirus pandemic will push the US into recession.  As unemployment claims increase as entire segments of the US economy are temporarily shut down, mortgage lenders and investors in commercial bonds and mortgage-backed securities are pricing in an expected increase in default rates.  Decreased optimism in repayment capacity leads financial institutions to price in perceived risk.

Tactically, this means lenders must increase the spread requirements on commercial bonds and mortgage-backed securities. 

Consider potential refinance benefits

At Conterra Ag Capital, we are getting a high volume of phone calls from existing clients and new customers inquiring about rates on repricing and refinancing. Although we have been able to significantly reduce interest rates for many,  it is at times disheartening when the subsequent discussion reveals that if they’ve refinanced already in the last year, there’s not much to gain in doing so again, especially with so much discussion in the media and general discourse about the current federal funds rate.

It’s important at a time like now, to recognize that interest rates have been at historically low levels  since Q3 2019. While recent events have caused more variation in financial and treasury markets, it’s important to have realistic expectations on what those movements mean to your operation’s financing options.

Have questions about refinancing?

If you have questions about whether your operation would benefit from refinancing, Conterra Ag Capital can help. Contact us today to find out how we can work with you to make an informed decision today. 

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