Economic Research Service expects rates to decrease some in the first half of year, followed by a mild rise in the second half of 2002.
If you’ve been thinking about buying the land adjacent to your dairy, or expanding, now may be a good time to do so — at least from the perspective of interest rates. A report issued by the USDA’s Economic Research Service predicts that rates will continue to ease during the first half of 2002. Then, as the economy picks up in the second half of the year interest rates will likely tick upward.
Interest rates, the same as your milk price, are dictated by supply and demand. In addition to the 11 interest rate cuts by the Fed last year, the decrease in farm interest rates is fueled by a much lower credit demand by businesses, an increase in consumer savings, a loosening of foreign monetary policy and a moderate fall in the expected level of inflation.
However, since changes in farm interest rates tend to lag behind interest rates in the other sectors, the low rates consumers saw last fall, for example to refinance their mortgages, starting arriving this Spring in the ag sector. “Both nonfarm and farm loans rates are expected to fall further in the first half of 2002, with interest rates on non-real-estate and real-estate farm loans expected to hit 5.9 percent and 7.3 percent by the second quarter of 2002,” says the report.
Many economic forecasters believe the recovery in the first half of 2002 will be “quite subdued.” If that happens, interest rates will receive continued downward pressure from both the supply side and the demand side.
On the supply side, six main factors are expected to place mild downward pressure on interest rates for the first half of 2002. They are:
1. Continued low inflation.
2. An expected mild rise in consumer savings.
3. A gradual increase in the willingness of lending institutions to lend money.
4. Continued easing of foreign monetary policies.
5. Slow economic growth, recovery.
6. Possible additional easing of U.S. monetary policy by the Fed.
Several factors prevent farm interest rates from falling as low as interest rates in other sectors. One of those is the uncertainty of farm income, and the current price outlook for 2002. Despite the fact that in ag you won’t get the best bottom-dollar interest rate, the current drop in interest rates does reduce your cost to borrow money. So, if you have a project you’ve been putting off, you might want to take it off the shelf and run the numbers. Interest rates like these won’t last forever. And if the economic recovery takes off in the second half of the year, as many analysts expect, you will probably see interest rates start to trend up, too.