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Interest Rate Update

Ask the expert series

Interest Rate Update

Ask the expert series

Published on 6/17/2022

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 manger, 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 in recent months? Is now a good time to buy?

Interest rates haven’t impacted ag equipment purchases as much as low equipment inventory and supply chain issues. Producers are cognizant of interest rates, but at the same time they need to upgrade or replace farm equipment. Inventory and supply chain issues are pressing producers to buy or order equipment so that they can stay current in their replacement cycles.

Profitability in certain ag segments has also pushed producers to purchase equipment for tax purposes. New equipment price increases are continuing and used equipment prices remain high due to lack of inventory. The question of “Is now a good time to buy?” boils down to a producer’s situation, their need to replace or upgrade equipment, and finding what they need or ordering new equipment that could have a delivery date up to a year out or longer.

What are the advantages of fixed vs. variable-rate financing? Can you provide a side-by-side hypothetical example of how each option impacts payments?

The advantage of variable-rate financing is that the rate is typically lower than a fixed-rate which saves the producer interest costs. However, in the event the variable-rate increases, the producer is taking a risk on higher interest costs.

The advantage of a fixed-rate, on the other hand, is that the producer is locked in and knows exactly what their interest costs are without the risk of the rate increasing.

The spread between the fixed- and variable-rate is what the producer needs to take into consideration. The wider the spread, the more advantageous the variable-rate is to a producer. The variable-rate is typically advantageous to producers who trade equipment frequently or are known to pay off equipment debt early.

The following hypothetical example compares a five-year fixed-rate to a five-year variable-rate program on a $200,000 equipment loan. The figures used in this example are based on expected interest rate increases by the Federal Reserve for 2022 and two .25% rate increases every year for the remaining term of the loan.

If you take a $200,000 loan for 5 years at a 6.20% fixed rate and 5 years at a 4.00% variable rate and align the variable rate with aggressive rate increases for the remainder of 2022 (increasing from 4.00% to 5.75% by end of 2022) and gradual rate increases over the remaining loan term , it’s still cheaper than taking the fixed rate out of the gate.  That gets a lot of farmers’ attention. 

Plus, with AgDirect, customers can convert from a variable-rate to current fixed rates available at the time of conversation for no fee.

Fixed vs Variable Rate Comparison (Hypothetical Example)

5yr loan, 6.20% FIXED rate

Event

Date

Payment

Amount

Loan

06/16/2022

 

200,000.00

Payment

07/01/2023

47,971.75

165,117.14

Payment

07/01/2024

47,971.75

127,553.27

Payment

07/01/2025

47,971.75

87,599.66

Payment

07/01/2026

47,971.75

45,134.52

Payment

07/01/2027

47,056.17

0.00

Total Interest

  

35,280.85

5yr loan, 4.00% Variable, various rate increases over term of loan

Event

Date

Rate

Payment

Amount

 

 

 

 

 

Total Interest

 

 

 

39,243.41

Loan

06/16/2022

 

 

200,000.00

Rate Change

07/27/2022

Rate: 4.50%

 

 

Rate Change

09/21/2022

Rate: 5.00%

 

 

Rate Change

11/02/2022

Rate: 5.50%

 

 

Rate Change

12/14/2022

Rate: 5.75%

 

 

Payment

07/01/2023

 

47,187.86

164,125.22

Rate Change

07/01/2023

Rate: 6.00%

 

 

Rate Change

12/01/2023

Rate: 6.25%

 

 

Payment

07/01/2024

 

47,733.39

126,801.00

Rate Change

07/01/2024

Rate: 6.50%

 

 

Payment

07/01/2025

 

47,956.46

87,201.08

Rate Change

07/01/2025

Rate: 6.75%

 

 

Payment

07/01/2026

 

48,125.77

45,043.13

Rate Change

07/01/2026

Rate: 7.00%

 

 

Payment

07/01/2027

 

48,239.93

0.00

**Hypothetical Example - variable rate could change more or less during term of loan**

What factors need to be taken into consideration to determine whether a fixed- or variable-rate equipment financing is the best option for an operation?

 •  Trade cycle – Does the producer trade certain pieces of equipment frequently (every 2-3 years)?
 •  Early payoffs – Has the producer been known to payoff equipment early?
 •  Cash flow – Is the producer payment sensitive and/or looking at a set cost per acre?
 •  Risk tolerance – Is the producer willing to take on some interest rate risk to possibly save interest costs?
 •  Tax situation – Is it advantageous for the producer to take depreciation on the asset or deduct lease payments?
 •  Term debt vs. line of credit – Depending on the rate, is it more advantageous for the producer to take a variable-rate or put the purchase on their line of credit? Term financing can help a producer maintain working capital and keep their line-of-credit open for other possible financing needs.

Interest rates have been rising this year, with more increases expected as the Federal Reserve tries to address inflation. How will this impact producers and their machinery financing decisions?

Interest rate hikes will ultimately increase producers’ equipment costs. Producers will have to decide whether they need to replace or upgrade equipment and weigh in the factors of increasing interest costs, lack of used equipment inventory, price of used equipment, new equipment price increases and order delays, and repair costs to their current equipment if they choose not to trade or upgrade. Throw that all in with the tax benefits of buying or trading and producers have a lot of pros and cons to consider.

What advice do you have for producers planning to purchase new or used equipment this year?

Have a plan and plan ahead. Know your cash flow and focal points of your operation such as payments, cost per acre, equipment needs, etc. If a producer knows that they will have to replace a piece of equipment in the next 6 to 12 months, start looking now due to lack of inventory and supply chain issues. Producers will have to weigh the cost/benefit factor of equipment price increases and possible interest cost increases and how it will affect their operation from a financial aspect.

To learn more about AgDirect rates and financing terms, contact your nearest AgDirect territory manager or the AgDirect Finance team at 888-525-9805.

Learning Center

Agriculture is constantly evolving, which is why AgDirect® works to help you make the right decision for your operation when it comes to financing your next tractor, combine or other ag equipment.


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