Interest rates
have a significant impact on producers’ borrowing costs and investment
decisions, including their machinery purchases. Deciding when to invest, how
much to invest in and whether to finance with a fixed or variable rate largely
depends on risk tolerance.
AgDirect
offers competitive fixed- and variable-rate financing for both new and used
equipment purchased at the dealership, at auction and through private party
transactions. Chris Steinkamp, Iowa AgDirect territory manager, shares his
insights on the current rate environment and key considerations for evaluating
rate options.
Describe
the current interest rate environment. How have interest rates impacted ag
equipment purchases and financing activity in recent months?
The current
interest rate environment is night and day compared to the past two spring
buying seasons. Interest rates are approximately 4% higher today than they were
in the spring of 2021 and 3% higher than in 2022, so it has been a shock for
anyone financing purchases.
The impact on
financing is customers are borrowing less to cheapen their overall interest
expense. We are seeing more customers paying with all cash for smaller
purchases and utilizing as much as 50% cash on larger expenses. Fortunately,
row crop producers are coming off some profitable years so they have the cash.
Currently,
the need to purchase equipment for replacement purposes along with income tax
implications is greater than concerns over interest rates. Demand for equipment
remains strong for both new and used equipment and that does not appear to be
easing in the next 12-18 months. Producers are hopeful the Federal Reserve will
pause interest rate hikes and provide them with interest relief soon.
Where
are interest rates headed and what are the implications for producers
considering machinery updates in 2023?
As expected,
the Federal Reserve increased interest rates by another one quarter of a
percentage point at their May meeting. This places the benchmark rate between
5% and 5.25%.
There is
speculation the Federal Reserve will pivot after its May meeting and pause rate
increases to assess the overall impact of their monetary policies. However,
additional rate hikes are possible in 2023. If rates rise, it will force
producers to look even closer at their cash flow and how it affects their
operation.
What
are some strategies for managing equipment costs during this period of higher
interest and volatility?
If
producers are focused on cash flow, there are options to look at such as longer
term financing or lease and balloon options. When rates start to go down
customers can always look at refinance options to help reduce their interest
costs.
When
it comes to financing, borrowers often focus on interest rate. What else needs
to be taken into consideration to ensure equipment debt is being structured to
meet an operation’s cash flow needs?
In addition to interest
rate, other important financing considerations include the terms of the loan or
lease, payment dates, prepayment penalties, warranties and repair costs. At
AgDirect, we work with dealers and customers to help you choose the financing
option that is right for your operation’s unique cash flow situation.
What
advice do you have for producers planning to purchase new or used equipment
this year?
There
are a lot of different variables a producer has to navigate. Equipment
inventory remains low, new order lead times are 6-12 months or longer,
equipment prices remain strong, customers are needing to replace equipment,
current commodity prices for the fall 2023 crop have decreased, margins have
tightened and rates could continue to increase.
Producers
planning to purchase or upgrade equipment will benefit from knowing how the
purchase or upgrade will affect their cost per acre and cash flow as well as balancing
repair costs versus replacement costs. Understanding how the purchase will
affect the financial side of your operation is key.
The
AgDirect Mobile app is a convenient tool you can use to calculate cost per
acre, check current rates, estimate individual payment quotes, compare payment
options or apply for financing as you navigate upcoming machinery purchase
decisions.
To
learn more about AgDirect rates and financing
terms, contact your nearest AgDirect territory manager or the AgDirect Finance team at 888-525-9805.