What do interest rate increases and bank downgrades mean for farmers?
Three recent headlines from the financial world have farmers asking how those events could affect their lending situation.
At the end of July, the Federal Reserve raised interest rates o the highest level in 22 years by increased its benchmark lending rate by a quarter point to a range of 5.25 to 5.5%.
In early August, Fitch Ratings downgraded the U.S. long-term foreign-currency issuer default rating to 'AA+' from 'AAA' saying this move “reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden.”
Also in early August Moody’s cut its ratings of 10 U.S. banks (Commerce Bank, BOK Financial, M&T Bank, Old National Bank, Prosperity Bank, Amarillo National Bank, Webster Financial, Fulton Financial, Pinnacle Financial and Associated Bank), and the firm put some major lenders on watch for a potential downgrade (Bank of New York Mellon, U.S. Bancorp, State Street, Truist Financial, Cullen/Frost Bankers and Northern Trust).
Alan Hoskins president at American Farm Mortgage and Financial Services points out many of the institutions being named by Moody’s are publicly traded banks and are very different than the banks many farmers work with. But he’s says, it’s time for farm business managers to pay attention to what’s happening in the larger financial space.
“It's important to remember banks make money by buying and selling money,” Hoskins says. “With interest rate costs doing what they've done in the recent months, that's the expense side of the bank. And you're seeing profitability pressures because the costs are going up.”
He says he’s not envious of the job Federal Reserve Chairman Powell has, “He has a difficult job on its best day.”
From Hoskins perspective, the banking system is still very sound and the changes in the credit ratings or bank ratings aren’t terribly shocking.
“Take this opportunity to be mindful that banks costs are going up,” he says. “I wouldn't say it's anything to be overly concerned about. And certainly, if you go back to the mid-80s and what had then, we don’t have anything like that today.”
While his warning level is low, he does advocate farmers stay aware and as such here are three things:
- Be comfortable with the institutions you are doing business with.
- Be diligent, and keep your finger on the pulse of what is developing.
- If farmers have questions or concerns about their institution and its profitability, the publicly and privately held bank data is available at ffiec.gov.
“In any environment, we can see banks be challenged, but every bank is managed by individuals,” he says. “For farm managers, just sitting down with the folks they do business with and having a good honest conversation has value. Increased communication I don’t think has ever resulted in a bad outcome.”
One example Hoskins shares is in regard to farmer cash flow.
“Recent events have opened the dialogue to a new avenue that candidly should have been a little more present all along,” he says “There’s more of a focus on the overall cash flow than a few years ago. Because of the low interest rate environment, just saying yes was a lot easier because you get higher profitability and you have a very low interest rates.”
He shares on the perspective is weighted with looking at how much of the gross farm revenue is being spent on interest and project that figure out in the future.
“For example, if a farmer has real estate loans that many be coming up to reprice in the next three years, what would that look like if we hold prices and yields constant—what does that do to their operation? When folks are looking at expansion, it really allows us the opportunity to focus more on how we within the banking industry provide more value to the customer,” Hoskins says.
