Will interest rates impact profitability?

Increase has made some producers question if now is right time to put on interest rate hedge through traditional fixed rate or interest rate swap product.


By Nic Rue, Compeer Financial

via National Hog Farmer - Jun 15, 2022


Vince Lombardi once said "We will chase perfection, knowing we can never attain it. But, we shall catch excellence." It is often quoted and is posted on almost every locker room in the country, and dare I say I have even seen it in a few sow farms in Minnesota.  However, often we forget the second part of that statement: "we will never attain it."


Too often, especially when it comes to a company's hedge program, perfection is the enemy of good and even great risk management plans. This seems particularly applicable as we look at interest rates at this time as a part of the global risk management plan. 


Interest rates cratered to all time lows in 2020 as a response to coronavirus, lock downs and economic uncertainty. Rates remained near historic lows in 2021. Many operations were able to take advantage of this environment to lock in favorable interest rates. Rates have been driven higher in 2022 due to inflation and the market and Federal Reserve's reaction to it. The following chart shows the movement of 1, 10 and 30-year treasuries in only the first six months of this year.


The recent increase has made some producers pause and question if now is the right time to put on interest rate hedge through a traditional fixed rate or an interest rate swap product. The following chart shows the Libor rates going back to 1986. For the better part of the past 20 years we have enjoyed a historic run of low interest rates, and probably have given us a false sense of comfort. While current rates are not at all-time lows, they would still be better than any rates experienced prior to the great recession. More importantly, they can go materially higher. Some readers will remember rates being even higher than what is shown in following chart during the late 1970s and early 1980s. 


This article is being written the eve prior to the Fed's June 15th meeting, in which at least 50-bps rate hike is widely expected. The current Fed Futures, as shown in the following chart, would indicate that the Federal Reserve will raise rates over 300 bps this year alone. 


For the first time in a long time, interest rates could begin to notably impact profitability...


more, including charts [3]