With average 30-year home mortgage rates falling to an all-time low of 3.29% on March 5, the markets, economists and investors were hardly convinced that COVID-19-induced market swings were over. If you’re thinking about borrowing for existing operations or acquiring farmland, you’ll need to watch the market very carefully in the coming months.
The virus is still spreading at an increasing rate in the U.S. at the time of writing, and the only certainty in the debt markets is uncertainty. Lenders responded to being swamped with refinance applications and rates quickly increased by about 50 basis points over the past several weeks, a hint of what can be expected in the debt markets in the coming months.
Interest rates and farm borrowing
Interest rates are one of the key components in determining farmland values. High interest rates increase borrowing costs and suppress crop yields, farm investment, and farm income. Farmers who have limited experience or who are cash-strapped may have difficulty providing sufficient collateral for borrowing. Many large banks have stopped lending to farmers amid the U.S.-China trade wars and falling commodity prices, making it even harder for farmers to get a line of credit.
One good sign for farmers is that on March 15, the federal government slashed interest rates by a percentage point and committed to purchasing $200 billion in mortgage bonds – a strategy known as quantitative easing (QE). This suggests that enough liquidity will remain in the market to keep borrowing costs low throughout 2020.
Despite the prospect of lower interest rates, the QE is a response to massive economic disruption. Economists are forecasting a 25% reduction in GDP for the U.S. economy based on year-over-year and 2020 Q1 data. The January trade agreement with China is also likely to have a negative impact on crop demand and, consequently, farm values as China will not meet provisions to purchase U.S. farm products at levels equal to or greater than those of 2017.
Prior to the outbreak of COVID-19, the outlook for farmland values across the nation was fairly strong due to the combination of three factors: low interest rates, relative scarcity of available farms for sale, and robust buyer demand. Now, in addition to the effect of COVID-19 itself, there is concern that investor confidence may weaken. Falling crop demand from trading partners, along with a weak U.S. economy, may also exert downward pressure on crop prices, in turn squeezing margins and profits for growers.
The solid market fundamentals that preceded the coronavirus outbreak – demand, low interest rates, and limited supply – will somewhat mitigate broader economic challenges. Food supply and health care are at the top of critical supply chain priorities for the country, and the government will be forced to ensure that the food supply is stable and that farmers remain solvent through the current crisis.
Farm lenders may find themselves struggling in the next several quarters. If liquidity starts to dry up, or if some lenders elect to exit the farm market, it may make borrowing for farm operations and farm acquisitions more difficult for the balance of the year.
Bearing in mind that there are still operational challenges for farmers with regard to crop yield, weather disruptions, and ongoing concerns about trading partners, there may be opportunities to enter the market that otherwise would not have existed.
Compliments of Halderman Real Estate and Farm Management. https://www.halderman.com