Interest rates – where from here?
Nothing sharpens management skills like a mortgage. For most producers, debt is an inescapable part of the business. In fact, it’s possible that knowing how to manage and optimize debt may be at least as important as agronomy and productivity considerations.
For agriculture, the silver lining to a global recession in outside markets is historically low interest rates. The temptation to take advantage of cheap money is very strong. For crop producers, strong markets over the past year reinforce the urge to expand and/or update equipment and technology. I’m doing some of this myself, which means accessing more debt.
The recent slide in crop prices provides a good lesson, though. Just as high prices do not last forever, low interest rates are not guaranteed to persist. I’m feeling somewhat vulnerable to a sharp rise in financing costs.
You can find experts who say low rates will remain for at least the next year or so, but there are also those who warn that inflationary pressures could lead to sharp increases in interest rates. It’s true that we’re in an unprecedented environment. Never before have so many governments worked simultaneously to inject huge amounts of stimulus spending into the global economy. But my Economics 101 logic tells me that trillions of dollars of government money will eventually lead to some level of inflation. But how fast will this happen? How long will it take before interest rates respond to inflation and creep up? How high will they go?
The upshot of all the economic-speak is that taking on more debt, while it may still be the right thing to do, should be done with a strategy that acknowledges the potential for crop prices to soften further, and for interest rates to rise somewhere down the road. Secondly, variable rate and flexible financing tools are very attractive right now, but it might be a good idea to draw a line in the sand and be ready to lock down the interest rate on at least some of your longer term debt to limit your exposure to sharp rises in rates.
Are you feeling vulnerable on this front? Do you see potential for interest rates to rise dramatically in the near future? What is your approach to managing this risk?
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