How 14%% prime
LANCASTER-As the
prime interest rate hit 14%
per cent this week farmers
throughout the area began
reviewing financial plans.
The prime rate is the rate
banks charge their best
customers.
Predictions from all
sectors of the commercial
banking industry were
gloomy as the federal
government attempted to
combat inflation by making
money less available to
potential borrowers.
Still, there are at least two
brighter spots in the farm
financial community.
Becuase of its unique
situation, the Farm Credit
System may not be effected
as dramatically by the in
terest hikes as some com
mercial institutions. And
observers in the market say
the commodities exchanges
should not experience the
beating taken by issues
traded on the New York and
other stock exchanges.
All segments of the money
market predict expensive
money and add that money
will be difficult to come by.
Still, the Production Credit
Association’s rate to far
mers for operating cost
loans is expected to remain
at 11 per cent for the near
future.
The current discount rate
for commercial banks is set
at 12 per cent. This is the
rate commercial banks pay
for the money they borrow to
lend, in turn, to their
customers.
By increasing the cost of
money the banks lend to
farmers and other
customers, the Federal
government hopes to
discourage spending and
thus slow inflation.
The PCA’s do not foresee
any change in their interest
rate at least until the end of
the year. In the changing
money market of today, that
rate is not guaranteed to
hold through December,
though.
PCA loans will remain at
the 11 per cent rate despite
the PCA’s own cost of 11.4
will effect farmers
per cent as of October 1 for
the money it lends. The PCA
can hold its costs lower
because it blends the current
interest costs with old loan
money lent at year-ago rates
nearer 9 per cent.
Carl Brown at the Lan
caster Farm Credit
Association office explains
the PCA was established to
make sure farmers have
money available for
operating expenses no
matter how far interest rates
rise.
He points out there is little
way a farmer can cut back
on borrowing for needed
imputs. It would be difficult
to fertilize only 100 acres of a
150 acre operation and let the
rest go simply because in
terest rates for operating
costs are too high.
Many farmers are hesitant
to commit themselves to
borrowing at current in
terest rates. Brown says he
feels people are waiting until
the last minute to make a
decision on whether to
borrow and how much to
ask.
He does foresee a slowing
of major purchases such as
machinery and less ex
pansion of physical facilities
on many farms.
The Farm Credit system is
regulated by the Federal
government on its interest
rates. All interest has been
on a sliding scale since 1970.
Mortgage money for farm
purchases remains at 9.5 per
cent. As of December 1 the
rate is expected to rise to
9.85 per cent, where it should
stay for about six months.
The current skyrocketing
market in interest rates,
accompanied by plum
meting stock market,
probably will have little
effect on the Chicago Board
or other commodity ex
changes.
Commodities brokers at
Merrill Lynch, Pierce,
Fenner and Smith say the
current money squeeze is
likely to have a harsher
effect on the non-perishable
commodities like precious
metals than it will on
agricultural futures.
Lancaster Faming, Saturday, October 13,1973-
Major effect on markets
like the com or soybean
futures will be seen in an
opening up of the price
spread between quoted
prices for different months.
This spread would widen
to cover the increased in
terest costs incurred for
grain stored over a longer
period than grain sold out of
the field at harvest, explains
commodities specialist
Jerry Pryor.
While most farmers in the
market are hedging—selling
contracts to cover grain they
actually are growing—the
speculator segment of the
market may grow more
active in coming months as
non-farmers attempt to beat
inflation by speculating on
farm futures.
Whether this will result in
price increases or in a
widely fluctuating market
remains to be seen.
For most farmers it will
matter little whether or not
the speculator is able to
meet margin. No interest is
charged on commodity
contracts as it is on stock
sales made on margin. So
the interest rates should not
scare speculators out of the
commodities markets.
Rather, they may encourage
speculators to put money in
the futures.
As far as the hedging
farmer is concerned, it
makes little difference who
holds the other side of his
contract. The farmer will
have made a firm com
mitment to market his
product at that price and the
contract is valid whether the
opposite side of the contract
is a grain buyer or a city
speculator.
Most sources in the money
market agree the current
interest rates will hurt
commercial bank loan
departments more than any
other lending agency.
How tight the squeeze
becomes, and what the
ultimate effect is on farmers
m this area, remains to be
seen.—CH
29