As agricultural producers reach a time period of moderation in the livestock and crop markets, cost management will be of the utmost importance, reminds Scott Clawson, Oklahoma State University Cooperative Extension area agricultural economics specialist.
“Analyzing interest rates and repayment terms is one step in examining your cost position,” he said. “The interest rate environment for agricultural producers overall is positive, making it a good time to refinance a variable interest rate note to fixed-term financing.”
At some point, the interest rate market will change, and the change will likely be in an unfavorable direction for the borrower. Operating loans with short maturities will be less impactful in most situations.
“As farm incomes decline, keeping that operational loan down can become more difficult,” Clawson said. “Being diligent in the use of those operating credit lines can pay dividends in the future."
Good recordkeeping is always recommended, and can help producers determine if funds should be applied to his or her operating line of credit or taken as profit.
“Keeping money in a cash account that should be applied to a producer’s line of credit will end up costing him or her money as the interest received will assuredly be lower than the interest rate on an operating loan,” Clawson said.
Securing a fixed rate option now, Clawson explains, may not be a bad management choice given the next rate adjustment after an upward move in the interest rate market may squeeze already tight farm margins.
“It’s always a good idea for producers to regularly review their financial situation, and now is certainly a good time to do so,” he said.
Source:okstate.edu