The Federal Reserve has been open about their intention to increase interest rates gradually throughout 2018. However, with the unemployment rate at an all-time low—just 3.8%—and key sectors of the economy booming (think: housing), the frequency of increases could change. With that in mind, now is a smart time to discuss a lower rate with your banker.
“Given the increased expectations for the U.S. economy, attention has now turned to whether the Federal Reserve Board of Governors (FRB) will respond by raising interest rates more quickly,” says Jackson Takach, an economist at Farmer Mac. “The FRB is still expected to raise interest rates gradually, despite a change in leadership, and two additional 25 basis point rate increases look likely in 2018. But the probability of an additional rate increase has grown as expectations about the economy have improved throughout the year.”
What could that mean for farmers? While a strengthening macroeconomy is a net positive for U.S. agriculture, farmers with operating lines of credit could see interest rates become a significant pinch point over the coming months.
“You don't worry so much on the fixed rate financing on real estate, but where this really hits home is interest rate on operating lines,” explains Curt Covington, executive vice president at Farmer Mac. “Many of these farmers continue to survive because they are they are doing business in a low interest rate environment but that low interest rate environment on a variable rate loan can go away tomorrow.”
Talk Now. A proactive approach to discussing rates with your lender will be beneficial, says Ashley Arrington, founder and analyst at Agri Authority, a consulting firm.
“You don't need to wait until we get two or three more hikes this year before you go in and speak to your banker,” says Arrington, a 10-year banking veteran. “We're in a rising rate environment and we do not expect this last hike to be the last one of the year. So, get in there and start talking.”
Banks know they have to start moving rates around because a lot of their loans are tied to the prime rate, according to Arrington. Community or smaller banks may not much leeway on rates, so you may want to consider a larger bank that could have more flexibility, she says.
To increase your position in an interest rate negotiation, have your financial records in order, coaches Compeer Financial dairy specialist Jim Moriarty.
“When you go in there and say, ‘I need a better rate’ your banker will be able to more easily accommodate that request if you are able to provide timely and consistently prepared financial statements, which make it easier for the lender to put credit packages together,” he says.
Another tip? Having a risk management plan in place.
Clearly if you’re business is profitable you’ll be more successful at negotiating interest rates, but even if you aren’t operating at profitable levels, a plan that shows how you intend to overcome those circumstances can go a long way with the lender, Moriarty says.
Don’t delay this conversation with your lender, Arrington says. “If you wait till the next hike, the less negotiating power you're going to be able to have.”
How To Know If Your Interest Rate Is Fair
Coffee shops are the breeding ground for all farmer rumors, including how much interest your neighbors are paying on their operating loan. While your neighbor’s neighbor, Jim, kindly informed you that your interest rate is way higher than his, the only way you can tell if yours is fair is to ask other banks.
“But sometimes it's hard to call and have a banker pick up the phone and say, ‘Hey, what's the rate on this?’” explains Ashley Arrington, founder of Agri Authority. “They don't want to answer that question because it depends on this and it depends on that.”
If calling another bank doesn’t work, look online or pick up bank materials that would indicate a fair range.
“A lot of times you can find some type of marketing material with a low and high, and if you're rate falls somewhere in that window and its risk-based pricing, then you know that you're getting something decently fair,” she explains.