Fixed and Variable Farm Mortgage Rates Tick Lower

February 24, 2015—Farmland buyers are stepping up their reliance on debt to finance property purchases and operating loans for working capital. The volume of loans secured by farmland in the third quarter of 2014 continued to grow at a 6.5% year-over-year pace, according to the Federal Reserve Bank of Kansas City.

But the step-up in debt financing is occurring amid a continuing low interest rate environment, as investors turn to U.S. Treasurys as a haven amid turmoil overseas. The interest rate on 10-year Treasury bonds—a benchmark indicator for mortgage rates—stood at 1.99% on February 24. Federal Reserve Chairwoman Janet Yellen has begun laying the groundwork for interest-rate increases later this year. The central bank has held its benchmark rate near zero for more than six years in an effort to boost economic growth. If the economy continues to strengthen as the Fed expects and officials become more confident inflation will rise toward their 2% goal, the central bank will begin considering an increase in the target range for the federal funds rate. The market will be looking for insights on when and how fast rates will move up. In December, economists polled by the widely followed Livingston Survey revised downward their forecast for 10-year Treasury bonds to 2.72% at the end of June 2015, from their previous estimate of 3.5%. The forecasters look for the 10-year rate to rise to 3.2% at the end of 2015, and to 3.75% at the end of 2016.

Borrowing costs on both fixed and variable rate farm real estate loans continued to tick lower in the fourth quarter of 2014. Banks charged an average 4.68% on variable-rate farm mortgage loans in the October through December period, ranging from a low of 3.54% among Farm Credit banks in the Heartland, to 5.39% across the Dallas Fed region. Fixed rates averaged 5.20%, and ranged from 4.61% in the Midwest to 5.77% in the Dallas Fed district.

In one example of recent large-scale mortgage financing, on December 15, Gladstone Land Corp. (LAND ), a publicly traded strawberry-oriented farmland Real Estate Investment Trust, announced a borrowing agreement with the Federal Agricultural Mortgage Corporation (commonly known as Farmer Mac) to borrow up to $75 million. Gladstone has initially borrowed $3.7 million from the agency in an interest-only note at a 3.25% fixed rate for five years. This compares to the 2.3% fixed rate on a three year interest only note that Farmland Partners Inc. (FPI ) secured from Farmer Mac in July. Gladstone Land is paying an initial 3.52% on a $4.3 million mortgage struck in September with Farm Credit of Central Florida. Starting in July 2017, the interest rate on the 20-year term loan will adjust to the one-month London Interbank Offered Rate plus 2.875%. Gladstone Land is also paying an initial 3.5% fixed interest rate on a $100-million, 15-year note from Metropolitan Life Insurance Co. for working capital and to fund additional land purchases. The note’s interest rate is tied to 3-Year U.S. Treasury obligations plus a spread determined by MetLife. The rate is subject to adjustment on each disbursement and in January 2017, and every three years thereafter. The also note includes a 0.20% fee on undrawn amounts.

The Fed’s low rate policy continues to support the farm real estate values. Lower borrowing costs expand both the number of qualified potential buyers of farmland and the price they can afford to pay for land. Falling mortgage rates have also helped landowners with existing debt to lower their costs through refinancing.

Source: Farmland Investor Letter analysis of Federal Reserve data. St. Louis region includes southern Ill. southern Ind. western Ky. western Tenn. northern Miss. Ark. and eastern Mo. Data collection for St. Louis region commenced 2Q12.

Source: Farmland Investor Letter analysis of Federal Reserve and AgriBank data. *Heartland region includes Ark. Ill. Ind. Iowa, Ky. Mich. Minn. Mo. Neb. N.D. Ohio, S.D. Tenn. Wis. and Wyo. Because the Federal Reserve Bank of Chicago doesn’t collect variable rate data on farmland loans, we use the quarterly average variable rate charged by AgriBank-funded Farm Credit Services associations as a proxy for the region. St. Louis region includes southern Ill. southern Ind. western Ky. western Tenn. northern Miss. Ark. and eastern Mo. Figures in italic represent data from fewer than 10 lenders and may be less indicative of regional trends. Data collection for St. Louis region commenced 2Q12.

Midwest farm borrowers have historicaly enjoyed lower mortgage rate costs over Western U.S. borrowers. The spread for fixed-rate mortgages between the Chicago and San Francisco Fed Districts has averaged 79 basis points since the first quarter of 2003. The lower interest rate advantage for Midwest borrowers continued to tick higher in the fourth quarter of 2014 to 55 basis points, from 50 basis points at the end of September. That compares to an average 36 basis points in 2013 and 55 basis points in 2012. (1 basis point = 1/100th of a percentage point.)

You must be logged in to access links below. Login

Current Farm Mortgage Rates