Lock and Load
I have received numerous e-mails and questions recently from producers concerning locking in interest rates on intermediate and long-term loans. The following is my philosophy concerning rates:
If your business cannot withstand a three percent rise in interest rates without depleting all margins and reserves, then it would be best to fix your interest rates for some period.
Before you sign any loan agreement, make sure that you ask whether the fixed rates come with a prepayment penalty.
Ask about closing fees when comparison-shopping.
If your business can handle a five percent rise in interest rates without depleting the margin, I would suggest a variable rate.
Concerning interest rates outlook, there is an 80% probability they will continue at current levels or slightly lower, and a 20% chance they will increase to 1998-2000 levels.
Road Warrior Caution!
Before selecting any rate, please examine these other factors:
Stability of the lender
Lender’s interest in agriculture
Stability of your loan officer or account manager
Your account manager’s knowledge of your industry
Alan Greenspan was asked the following:
Question: What was the biggest surprise of the 9-11 terrorist attacks?
Answer: How concentrated our world financial system had become in one small area in New York.
Road Warrior Thoughts: Based upon that answer, has our agricultural system become too concentrated also?
This week the Road Warrior and his Ag Management and Problem Solving class are on the road touring farms and agribusinesses in the Shenandoah Valley. There’s no better way to learn about the industry than to talk to producers and business owners.
My e-mail address is:email@example.com
Editors' note: Dave Kohl, Soybean Digest Trends Editor, is an ag economist at Virginia Tech. He recently completed a sabbatical working with the Royal Bank of Canada. He is now back at Virginia Tech with his academic appointment, which is teaching, extension, and applied research.
To see Dave Kohl's previous road warrior adventures type Dave Kohl in the Search blank at the top of the page.
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