INDIANOLA, Iowa (DTN) -- There's a silver lining to the Great Recession: With interest rates running at 50-year lows since July, many farm borrowers think today's fixed-rate mortgages are their last best chance to lock in security.

Rates on 20-year, fixed-rate farm mortgages at some Farm Credit System lenders tumbled from 6.75 percent in early January to 5.2 percent in the past few weeks, approaching levels not seen since 1958 and far below the average 9-percent-and-up rates charged over the past 30 years.

That freefall prompted Perry, Iowa, farmer Tom Vincent to become a serial refinancer: He has reduced his interest rate on various agricultural loans four or five times since March. On one loan, he lowered the rate twice within the past two years.

"I think we're going to look back on this summer and say, 'Gee whiz, those were just incredibly low rates.' I don't think we'll likely see these levels again in our lifetime," said Vincent, who also works as an associate with Russell Consulting Group.

Other farmers are rushing to their lenders to lock in lower rates. Since Jan. 1, Farm Credit Services of Mid-America has converted $4 billion in long-term farm mortgage loans out of its total portfolio of $16 billion. And they're not finished yet, said Executive Vice President Tom Schlenker, whose FCS association serves farm customers in Kentucky, Ohio, Indiana and Tennessee.

"Robust activity," is how Bill Davis, chief credit officer with Farm Credit Services of America based in Omaha, describes the rush to refinance ag loans. "We've seen about a three-fold increase in refinancing this year compared to normal activity," said Davis.

Of the 80,000 customers in his district, which covers Iowa, South Dakota, Nebraska and Wyoming, Davis said they've re-priced 15,000 loans so far in 2010. Borrowers can lock in a 15- to 20-year fixed-rate farm mortgage for 5 percent to 6 percent (actual rates depend on the size of the loan and credit-worthiness of the borrower). For a five- or 10-year loan, average interest rates now range from 4 percent to 5 percent, said Davis.

"That's 100 basis points (1 percentage point) lower than one year ago at this time," he added.

Greg Elwood with AgriBank in St. Paul, Minn., said many customers who rode low rates down with adjustable-rate mortgages are now converting to fixed rates. "A number of customers have said, 'I've waited long enough. I've had short-term rates and variable rates, now it's time to lock in a longer fixed rate,'" Elwood said. Instead of the normal five- or 10-year terms, AgriBank sees more demand for loans of 15 years and longer. Of the $3.4 billion of new loans so far this year for AgriBank, half are in long-term (15-30 years) fixed-rate mortgages.

MOTIVATION

Unlike consumer mortgages where closing costs can discourage refinancings, there's little stopping many farmers from re-pricing their real estate loans so long as they carry no prepayment penalties. Farm Credit Services of Mid-America charges a $350 conversion fee that will allow a customer to re-price his mortgage loan at a lower interest rate and avoid the refinancing process with its closing fees, title fees and extra paperwork. In some cases, there may be a fee due to the billing cycle of a loan; however, the interest savings gained typically far offsets that cost.

Most farmers refinance to lower their real estate debt, noted farm financial consultant Moe Russell with Russell and Associates, Panora, Iowa. Others want to refinance at a lower interest rate, keep their payments the same and pay off their debt in a shorter period of time, say 15 years instead of 20. Another motivation, added Russell, is to use the long-term money for working capital.

"Let's say you have no debt on your equipment, but you refinance it over a five- to seven-year period. You effectively have locked in 5 percent to 6 percent money over that period, and you can use it to pay for seed, fertilizer and fuel," Russell said.

However, Schlenker with FCS of Mid-America thinks most FCS borrowers still find short-term rates too attractive to pay that kind of premium for operating money. "Our revolving operating lines carry interest rates as low as 3.85 percent. We haven't seen many farmers wanting to lock in a higher rate for working capital at this point," said Schlenker.

With cheap credit available, many farmers are retooling operations. Russell is advising his farm clients to purchase new equipment, if it fits into their business plan, for three reasons. Rates are at 50-year lows, and "the new technology in combines, planters and sprayers works and can improve your farming," he noted. What's more, Russell doesn't think the cost of equipment (especially new combines, planters and sprayers) is going to go down in the future.

Rates on 10-year Treasuries have begun edging upward in the past few days, but such moves don't necessarily indicate the cheap credit era is over. The Federal Reserve indicates it will keep rates low for an extended period, possibly until at least the second quarter of 2011. Still, Texas A&M economist Danny Klinefelter said growers shouldn't try to hold out for a better deal in the interim. Credit markets change in a flash, he said. "You don't want to be trying to refinance in the middle of a market upheaval."

Editor's note: To stay abreast of ag interest rate trends, watch DTN's Daily Interest Rate Snapshot and historic rates on the Farm Finance page under Farm Business.

Elizabeth Williams can be reached at elizabeth.williams@telventdtn.com

(MZT/AG/SK)

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