One question that has been asked in every conversation with my customers lately is – what are rates going to do? We all know that rates are going to move (the Federal Reserve has made every indication that multiple hikes should be happening this year), but the main question is how soon and how high?
What most fail to realize is that a changing rate environment is actually considered normal. Historical data on Wall Street Journal Prime (the base rate used by most banks), shows rates moved 131 times in the 1970s, 109 times in 1980s, 25 times in the 1990s, 43 times in the 2000s, only 12 times in the 2010s and twice since 2020. Although the number of rate changes has slowed considerably, the stagnant rate environment we have mostly been in since 2008 is not normal.
When things stay the same, we get used to that, so when change does occur, it’s a shock. For many borrowers today, we have known nothing but a stagnant environment, which leaves us unsure how to navigate this changing rate environment we find ourselves in. Having heard the horror stories from our parents and grandparents of the rates they faced in the 1970s and 1980s, we start to panic when we hear talk of rates changing. However, when you look at the historical Wall Street Journal Prime rate, the cumulative average is 6.82 percent (since 1947). As of the date of this writing, the rate is 3.25 percent, less than half the historical average. One needs to go back to 1955 to find rates lower than today.
This is not to make light of rate changes today. Those of us in the lending industry are fully aware of how changes one way or another can affect an operation or industry. However, it does go to show that we have weathered higher rates before and are still here today.
The big question still is how do we cope with rising rates? There are a few things we can consider. One, remember that rate is not the only factor in determining payment; amortization plays a significant role in that. While a higher rate does have an effect, if you are able to amortize the loan over a longer period of time, your payment may actually end up being lower. For some, that might mean it is time to explore the idea of a government guaranteed loan through the Small Business Administration (SBA) or the Farm Service Agency (FSA), among other entities. Lending institutions can use these tools to work with customers who might need a longer amortization than the institution traditionally provides.
Secondly, a changing rate environment does not necessarily mean rates continually move up. It should also be noted that throughout the multiple historical changes noted above, rate changes were both up and down. Depending on what your operation can handle, it might be advantageous to explore an adjustable as opposed to a fixed rate, to take advantage of rates when they move down without having to redo your loan in full.
Thirdly, for some operations, times like these might mean it is time to tighten the belt and take a good, hard look at your income and expenses. When times are good, we tend to live a little bit higher and are okay with things costing more. When things taken a different turn, however, it is harder to adjust our living expectations and operating expenses.
Regardless of how we chose to cope with this rate environment, the agriculture industry has been through it before and survived. We will continue to stay resilient and live to fight another day.
Jessica Allan is an agricultural lender and commercial relationship manager at Guaranty Bank in Carthage and Neosho, Mo. She may be reached at [email protected]