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Tag Archive for: Interest Rate

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Rows of Cut Corn Field in Winter
News, Resources

From the Fields: Choppy Waters Ahead for Row Crops in 2024

By Adam Sommer

Winter in Wisconsin is defined by many words, but rarely are the words crisp or comfortable one of them. February has brought some unseasonably warm weather to the state as we wrap up the month, and it has been quite crisp and comfortable. It has left us dreaming of spring. With spring comes one of the wonderful seasons of year on the farm. Crops are being sewn across the state, calves are being born, and the season brews new hope for the agricultural year to come.

However, 2024 looks like a year of some uncertainty across many agricultural fronts in Wisconsin. Interest rates have remained higher than recent memory, inputs are costly, and commodity prices have tumbled. Farmers are whispering of concerns for what the year ahead looks like, and choppy waters look like a near certainty.

So, what does this mean for our row crop operators? A year of tighter margins and pricing challenges is likely ahead. Barring global economic shifts, geopolitical forces upending the current pricing outlook, or a major weather event changing the current trajectory, farmers are preparing for prices that are down from a year ago. Below are two charts (one for corn and one for soybeans) using CME Group data on pricing for the March, September, and December corn contracts, and using the same data on pricing for the March, August, and November soybean contracts. This illustrates the trend we continue to see for both old crop and new crop pricing in 2024.

Even as the trend points down for crop pricing, many farmers here in the state of Wisconsin will reference a dry 2023 crop year and the hope for a spring bump in price. Anecdotally, there is still a large amount of grain stored in bins across Wisconsin. This unpriced crop could be troubling for the income statements of farmers, in some cases, against borrowed funds. The concern is that even as the year was dry, production remained at a strong, although not bin-busting, level. What that can mean going forward is that production across the United States could be at record levels given good growing conditions, should that occur in 2024. Much of what is driving these future markets is the anticipation of this higher production level and challenges on the trading front with a strong U.S. dollar to boot. Ending stock projections for corn could reach one of the highest levels since the late 1980s should projections ring true. With that concern in mind, it prompts the question as to how the farmer and banker can respond?

In our world, this means that conversations with farmers early in 2024 are all that more important as expectations are set for the coming crop year. Conversations should address the needs of the producer, alternative strategies for shortfalls, and plans regarding insurance coverage and marketing strategies. Not all that different than the annual conversations, but with more depth around the downside risk. Anticipating corn prices with a three or four leading the way hasn’t been a consistent concern over the last few years. Doing so will harken back a few years and with inputs elevated it leaves some concern.

In conclusion, some of the best steps row crop farmers and ag bankers can take are steps of preparation and communication. Farmers are a resilient bunch who have weathered the ups and downs of the rolling commodity cycles. Preparation and awareness will help each of them in this cycle as well. And the hope is that this is all premature speculation. The hope is that farmers in Wisconsin have a bumper crop, with international partners buying more, and a prosperous year ahead. We wish all the farmers the best as they tackle this next crop season.

Sommer is assistant vice president – ag and commercial loan officer at Bank of Brodhead. Sommer also currently serves on the WBA Agricultural Bankers Section Board of Directors.

February 21, 2024/by Hannah Flanders
https://www.wisbank.com/wp-content/uploads/2024/02/Winter-Field-scaled.jpeg 1709 2560 Hannah Flanders https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg Hannah Flanders2024-02-21 09:29:342024-02-21 09:29:34From the Fields: Choppy Waters Ahead for Row Crops in 2024
News

Rising Tide: Bonds To Own for a Rate Hike Environment

By Jim Reber, president and CEO of ICBA Securities 

Community bankers are nothing if not predictable, and I mean that as a compliment. They are bright, enterprising, have a nose for the risk/reward dynamic and a sense of duty and loyalty to their customers and staff. They’re also deathly afraid of rising interest rates.

The last is understandable, speaking as one who has A. worked for a bank when overnight rates were double-digit, B. personally borrowed money for a home at 12%, and C. worked in financial services during the near-death of the thrift industry. We know how low rates can go. What we don’t know is how high they can go, nor for how long.

But what’s a bit curious about this widespread fear is that by a number of measures, community banks in 2022 stand to profit from higher interest rates. This comes from banking regulators, interest rate risk modelers, and even bankers themselves. I suppose the notion of a bond portfolio losing four, five or six percent of its value drives some of this thought process. So, as we haven’t had to endure a rate hike scenario since 2018, we’ll use the rest of this column to remind ourselves which bonds stand a good chance of performing well if higher rates do indeed prevail in the near future.

Old School

Certainly, the bonds that fit the most traditional definition of a floater are those which have very short reset periods, are indexed to money market equivalents, and have large or no caps, both periodic and lifetime. The model for such a security is a Small Business Administration (SBA) 7(a) pool. These securities float based on the prime rate, which is 100% correlated to fed funds. Most SBAs reset monthly or quarterly and have no caps—so wherever prime goes, so goes your yield.

The rub on SBAs, at least from a risk standpoint, is that many of them come with large premium prices of 108, 109 or even higher. This exposes the investor to unwelcome prepayments. Still, the many benefits (have we mentioned 0% risk weighting?) make them attractive to short investors. It’s not uncommon for them to yield around prime minus 2.75%, which will beat fed funds by about 25 basis points (0.25%). They are true money market alternatives.

Mortgage Floaters

These days there are few true mortgage-backed securities (MBS) floaters. The ones that do exist usually have an extended period of time with a fixed rate, before they convert to adjustable. This “extended period” can be three, five, seven years or more so they’re really not floaters, yet. However, the fact that one day they will adjust can help their market value stay relatively stable.

Something new about these is that the Secured Overnight Financing Rate (SOFR) index is becoming more visible. SOFR is the U.S. alternative to London Interbank Offered Rate (LIBOR), and it has generally tracked fed funds, so far. And, since these will have prices closer to par, the investor doesn’t have to take a gigantic bite of prepay risk. Starting yields are wholly dependent on the fixed rate period and other variables, but they deserve a look.

Clip Coupons

Even if you don’t own a floater, an easy-to-execute trade that will help limit your price volatility is “up-in-coupon” securities. It doesn’t matter if they’re MBS, agencies, or munis: The bigger the stated interest rate, the greater the cash flow and the lower the duration.

The best example of this strategy is a tax-free municipal bond that has a big stated interest rate, or “coupon.” It’s common to see a newly hatched security with a 4% rate, that comes to market at an original issue price of 120 or more. This is a quality to be embraced. For one thing, the fact that the yield is tax-free makes the security less volatile that a taxable bond. If (and when, it appears) interest rates rise, the large interest payments will further help keep the value of the bond from falling off the table.

Do-it-Yourself

There’s another way to inject floating rate securities into your bond portfolio, and that’s to build them yourself. It’s a simple task to buy and own a collection of long-durated municipal bonds—that’s how they typically come to market. A recent innovation is the ability to execute an interest rate swap to instantly, or at some designated point in the future, turn the munis into floaters.

Interest rate product providers are equipped to price out transactions whereby a community bank can convert a bond, a collection of bonds, or a subsector of your balance sheet into short-duration assets that will see their yields improve every time the Fed has a “policy adjustment.” Maybe the best news is that these transactions can now be executed in sizes that fit your community bank’s needs.

How many rate hikes might we see this year? That’s the subject of myriad conversations around the board room, water cooler, and ALCOs. I’m pleased to report investments that are built for rising rates can take on a variety of appearances, and are fully accessible to your community bank.

March 1, 2022/by Hannah Flanders
https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg 0 0 Hannah Flanders https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg Hannah Flanders2022-03-01 07:00:592022-03-01 08:00:16Rising Tide: Bonds To Own for a Rate Hike Environment
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