Here Come Higher Interest Rates
February 6, 2017
As this is written, it is almost certain that the Fed will increase short term rates in 2017. In addition, rates have already been trending up slightly for the past few months. Inflationary pressure is peeking around the corner in the form of higher wages (including the many minimum wage laws effective January 1, 2017) and an apparent growth trend. Oil prices are also trending upward modestly since the recent OPEN agreement. In addition to signaling rate increases, the Fed has intimated that it would not be displeased with an incremental increase in inflation.
An increase in short term rates would affect the cost of operating loans, of course, but the impact of incrementally increased longer term rates is less obvious. Remember, some have mentioned the potential for three more increases in 2017.
For buyers of farmland who don’t need financing, the increase is simply a slightly greater position for a competing alternative investment. However, for buyers who intend to finance their acquisition, the total cost will rise absent some reduction in the price itself. The question is how much will the increase in carrying cost impact the value of the land itself. Frankly, unless the increased rates are dramatically higher, we see minimal impact on underlying land values. In terms of magnitude, we would expect continued soft agricultural commodity prices and the risk of dampening of export markets to have a much greater impact on the industry, farmland lease rates, and land values.
For those who already have mortgage debt or are near closing on a land purchase the likelihood of rising long term rates clearly call for a “lock down” approach. Locking in today’s rate level and even extending the term of an existing note should be sound strategy.
Additionally, in an environment of downward trending farmland lease rates and rising interest rates, it’s distinctly possible that in the next twelve to eighteen months, the attractiveness of returns on other alternative investment vehicles may surpass that of farmland for some investors.
Those farmland investors that are considering selling may want to act soon and take advantage of the strong asset prices available in today’s marketplace.