The interest rate dilemma
Posted on October 29, 2013 in Dairy Performance
By Gary Sipiorski
Every expense on a dairy farm has an impact on the cash flow. Those that remember the 16-percent interest rates of the 1980s have bad memories of how high interest rates can derail a checkbook. The question is: “Are we on the interest rate edge of the 80s again?”
When deciding to move interest rates, the Federal Reserve
looks at the financial information from the entire U.S. economy, not just individual sectors like agriculture. I am sure that I do not have to remind anyone of the “Great Recession” that brought the entire economy to its knees. The Federal Reserve had to not only lower the overnight federal funds rate, which banks use each night to borrow back and forth, but it also used other newly created “tools,” such as buying $85 billion dollars each month of U.S. Treasury and Agency Bonds. This has taken borrowing interest rates down to never-before-seen low, low rates. The whole idea is to get businesses to borrow, build and create jobs, and ultimately hire workers. The Federal Reserve has two important jobs: Keep employment high and inflation low. In the past, moving overnight federal fund rates up or down was enough to move the economy, even though it may have taken a little time to react. At the time of the last Federal Reserve meeting on September 18, the market expected the Federal Reserve to start “tapering” or buying fewer Treasury and Agency Bonds. But the chairman announced that the data did not show enough strength yet. Therefore, it did nothing. Some think lower interest rates could be with us for a while (whatever “a while” means). So, the question for your farm is: “Where are you now and where do you go from here so you can avoid higher future interest rates?”
The first place to start is to look at your current interest rates. Are you locked into an interest rate? Are you on a variable rate that can move from month to month? What if interest rates go up? Will it require a 15-, 25- or 50-cent or higher cost per hundredweight to make the new payment? With margins tight and probably staying lean into the future, what kind of cost are you looking at? The difficult question for you as well as the Federal Reserve is: “When will interest rates move?” The honest answer is that no one can say, not even the Federal Reserve, because they don’t know. Here’s what you can do. As you approach year-end, prepare your balance sheet, finish your 2013 income statement and prepare a 2014 cash flow projection. This is a good time to sit down with lenders to get their thoughts. If interest rates stay low, are you risking a historically low rate opportunity? If you have low interest rates already locked in, are those locks coming to an end? Is it time to re-lock? The bottom line: You have to decide, but get your lender’s advice.
Try to take out some of the guesswork from your cash flow. Do your best to minimize at least one of your farm dilemmas. Contact ABC Consulting
if you are interested in assistance with setting financial and business goals. ABC Consulting can also help you assess your business and provide guidance in making the important decisions that affect the success of your operation in the short and long term. About the author: Gary Sipiorski
is the Vita Plus dairy development manager. He grew up on his family’s dairy farm in eastern Wisconsin and attended the University of Wisconsin-River Falls. Sipiorski spent 17 years with Citizens State Bank of Loyal and worked his way up to president and CEO. In 2008, he transitioned to his current role at Vita Plus and continues to serve on the CSB board of directors. In addition, he served on the advisory committee on agriculture and industry for the Federal Reserve Bank of Chicago. He is also an advisor for the Professional Dairy Producers of Wisconsin and a regular contributor to Hoard’s Dairyman and other agricultural publications.