How to Navigate a Volatile Interest Rate Environment

The low and stagnant interest rates of recent years are likely to fade. ( AgWeb )

The low and stagnant interest rates of recent years are likely to fade. You probably saw that during your operating line of credit renewal meeting.

Rates are entering a new reality, says Ashley Arrington, of Farmhold Financial, and farmers need to factor that into their business plans. 

“I have talked to bankers who have offered prime minus .25 (5.25) all the way to prime plus 2.00 (7.50), says Arrington, also a 10-year veteran of ag banking. 

Why is there this range? Arrington says most banks offer risk-based pricing. “If an operation has had a few less than breakeven years and their financial ratios aren’t the strongest, they may not get offered the same rate as a farm that had solid net incomes and have strong ratios,” she says. 

Also, Arrington says, banks have responded to increased interest rates in multiple ways. Some banks have gradually eased clients into higher rates. While other banks made those increases more rapidly.

The bottom line: better performing banking relationships receive better rates.

Rates change, she explains, and 3.25 is not the reality anymore. 

“In most cases your banker is not trying to gouge you. Unfortunately, rates have just gone up,” she says. “As we get more accustomed to the rate environment, we will probably see the range of interest rates tighten. But there will always be a range because banks operate differently. The range is just a bit wide right now as we adjust to a new normal.”  

Future rates are impossible to predict. But Arrington says now is a smart time to talk to your banker. 

“Ask for help in running a rate sensitivity analysis,” she says. “You can see how much your debt load would increase and your overall debt service coverage would be impacted.”

Interest on operating lines can be a major expense. “Don’t wait until the last minute to run the numbers to see how different interest rate levels will impact your operation,” Arrington adds. “It can do more than you think.”

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