If you have a variable-rate loan or line of credit, you may have heard of the London Interbank Offered Rate (LIBOR).
Simply put, LIBOR is an interest rate international banks charge each other for short-term loans. You might not think that has much to do with you. But LIBOR is used worldwide to set interest rates on variable-rate financial products, too.
LIBOR is being phased out over the next two years for regulatory reasons. To accommodate this change, Farm Credit is working on ways to help borrowers transition to other kinds of rates.
Traditionally Farm Credit has used LIBOR for short-term loans for operating expenses, construction and other working capital needs. These have variable interest rates, meaning the rate you pay changes — generally every month — based on the underlying benchmark rate.
In late 2020, Farm Credit launched the Farm Credit 1-month SOFR Index (FCSI) as an alternative to LIBOR. The prime rate also remains an option.
New loans and renewals will still be set up like they were with LIBOR. Your loan documents will just say FCSI or prime instead.
Helping borrowers make the transition
Every Farm Credit institution has its own transition plan to help its borrowers.
“The majority of our LIBOR-based loans are revolving lines of credit,” says Kay Lynn McLaughlin, chief financial officer at Plains Land Bank in Amarillo, Texas. “Farmers use those for their everyday operation, whether it’s farm inputs and expenses or equipment purchases. We also participate with other lenders in agribusiness loans tied to LIBOR.”
"We’ve always had prime, and now we have the new Farm Credit index. We’ve been monitoring how they compare with LIBOR so we can have an educated discussion with borrowers."
– Chris Griffith, Mississippi Land Bank
The transition affects similar customers at Mississippi Land Bank, which started informing borrowers about alternatives early this year as one-year crop loans renewed.
“We've always had prime, and now we have the new Farm Credit index,” says Chris Griffith, Mississippi Land Bank vice president and credit analyst. “We’ve been monitoring how they compare with LIBOR so we can have an educated discussion with borrowers.”
Functioning just like LIBOR
While associations have two options, Griffith and McLaughlin expect to use the new Farm Credit index the most.
“Few borrowers are concerned about the index behind their variable rate,” Griffith says. “They just don’t want the rate they pay to be so volatile that it’s hard to manage their cash flows. We feel comfortable with this new index after monitoring it for months, and want them to know we wouldn’t offer it without gathering data to see how it behaves.”
Griffith and McLaughlin also say Farm Credit was forward-thinking in providing an alternative to LIBOR before most other lenders.
“I think that says we are forthcoming and proactive,” McLaughlin says. “And that's just another example of Farm Credit's customer service.”
About the LIBOR transition
What is LIBOR?
LIBOR is an international interest rate used to set interest rates on short-term, variable-rate financial products. Lenders use LIBOR as a reference rate and add a spread. Institutions such as newspapers and banks publish reference rates online.
What’s happening? And when?
U.S. LIBOR rates will phase out by June 30, 2023. Financial institutions everywhere are transitioning to other benchmark rates for variable-rate loans.
What will replace LIBOR?
A Federal Reserve committee recommends replacing LIBOR with the Secured Overnight Financing Rate (SOFR). SOFR-based loan products will take time to develop, so in the interim, Farm Credit offers two alternatives:
- The Farm Credit 1-month SOFR Index (FCSI) is published by the Federal Farm Credit Banks Funding Corporation. FCSI reflects the Farm Credit System’s average cost of borrowing at the SOFR rate for one month.
- The prime rate is published by the Wall Street Journal.
What do I need to do?
If you’re renewing or obtaining a new variable-rate loan, ask your loan officer about rate options.