Reduce Interest Expense by Refinancing Debt

Farm producers and operators who are looking to rein in expenses should consider refinancing their outstanding debt. Interest rates are at historic lows and the Federal Reserve has indicated it will keep them there at least through 2023. As a result, loan payments for land, equipment and lines of credit can be reduced considerably.

While these rates are not going away soon, it’s important to call your banker now because you may have to wait in line. Many banks are limited as to the number of loans they can refinance quarterly. You may be harvesting, but you’ve got time to make a phone call to the bank, especially if you want to refinance before the end of the year.

Compelling numbers

The numbers make a compelling case for refinancing your debt now.

Many producers with loans on their land may have financed at 5% or 6%, which are low rates to begin with. But today borrowers can refinance that debt down as low as 3% to 4%.

While the large producers are taking advantage of these interest rates to save millions of dollars, smaller farm owners are benefitting, too. For example, one farmer with about $1.5 million in debt dropped his interest rate by two points and achieved $30,000 in annual savings on his loan payments.

Loan payments on equipment and lines of credit also can be shaved significantly, as with one large producer who dropped the interest rate on his multimillion-dollar cattle loan to 2.25% from 4%.

Equipment and land

Besides lowering payments, these low interest rates are creating a lot of churn in the farm equipment market, and that means opportunity. Large producers are taking advantage of the rates to finance purchases of new equipment, pushing their used equipment down market to smaller farmers.

With new cotton strippers pricing in the range of $750,000 to $800,000 and combines in that same range, the financing for new or even used equipment can be expensive. Today’s low rates will lift a lot of interest expense off the shoulders of farm owners.

Likewise, farmers who are picking up additional land are benefitting from the low interest rates. Land values had dropped slightly before the COVID-19 pandemic, but the low interest rates are helping to create additional demand and, hence, are propping up land prices. So, while the interest rates are good news for buyers, the strong impact on land prices is good news for sellers.

Contact your Adams Brown advisor for guidance on how refinancing can help you reduce costs and achieve your farm management goals.