Southwest Georgia Farm Credit Warns of Interest-Rate Risk
Wednesday, June 29th, 2011
Interest rates remain at historically low levels due to the extraordinary bond-buying efforts undertaken by the Federal Reserve to address the 2008 financial crisis and subsequent recession. In June with the end of the second round of quantitative easing, the Fed’s bond-buying program, the potential for rising interest rates has increased.
“The prime rate has fallen to 3.25 percent, but the long-term average is 7 to 8 percent so the potential for interest rate risk is currently high,” said Richard Monson, president of Southwest Georgia Farm Credit.
Managing interest-rate risk
Now is the time to review balance sheets and profit/loss statements to identify areas that are susceptible to increasing interest rates. For example, Monson advises farmers to address interest-rate risk by replacing any floating-rate debt with a fixed-rate loan that extends over a longer period of time.
“Interest costs are a fairly significant input cost for most farmers. We can use our long-term funding advantage at Farm Credit to help farmers refinance loans and move from variable to fixed-rate debt,” Monson explained.
Southwest Georgia Farm Credit is one of about 95 locally owned Farm Credit cooperatives in the U.S. All are individually owned and operated by their own board of directors. The cooperatives are financed by the national Farm Credit Funding Corporation, which issues farm credit bonds. According to Monson, farm credit bonds offer unique credit qualities that are attractive to many investors.
“We are well capitalized with greater than 20 percent capital ratios compared to 8 to 12 percent for regional and community banks. Even during the recession when we experienced a higher than usual percentage of non-performing assets, we always had access to funds,” he continued.
Southwest Georgia Farm Credit, which was formed by the merger of a number of small cooperatives, currently has approximately $350 million in total assets and $280 million in outstanding loans.
Financing high-dollar agribusiness inventories
While increasing commodity prices have been a huge benefit to farmers, they also have created much higher inventory values. Financing higher valued inventory can be a challenge for farmers and financial institutions.
“When commodity prices go from $2.50 a bushel to $10 a bushel, a farmer requires four times the capital to finance the inventory. Borrowing more capital on the same equity base is a challenge, but we believe it is part of our mission and responsibility as Farm Credit,” Monson said.
Monson believes farmers in southwestern Georgia are for the most part well capitalized, efficient and have good business models. Looking ahead five years, he sees a healthy farm economy in the region.
“I think Georgia farmers are in a good position to take advantage of today’s high prices and withstand future price volatility,” he said.
More information on Southwest Georgia Farm Credit is available at www.swgafarmcredit.com or call 229-246-0384.