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It is likely that today’s rate environment will not exist forever. How can you manage your farm finances with this prospect in mind?

First, get your spreadsheet and do a sensitivity analysis. Take a look at a modest increase and a medium-term increase. At the extreme, conduct a shock test of what would happen to your cash flow if interest rates were to rise to 5 percent. How does it impact margin and your ability to service debt?

Do you have working capital reserves or cash to cover your expenses and debt-service obligations if interest rates rise?

Is the prospect of rising interest rates keeping you awake at night? If it is, keeping rates variable may be against your risk tolerance level, or that of your spouse or your business partner. You might consider using a combination of fixed and floating rates or you could look at a strategy known as laddering which can reduce the influence of interest rate changes on your cash flow and interest costs. Laddering involves staggering the interest maturity dates of your loans so that only a portion of your loans are locked in for the same length of time.

You may also want to have a disciplined strategy around hedging rates as well. This is more complex and something that you should explore with your financial advisor.

The bottom line is, whether you are borrowing or investing, rates are likely to rise. It is better to take a proactive stance in managing your interest rate risk. The more information you have and the more you manage those risks, the better positioned you are for the future.

What’s your next move? At RBC®, we’re ready to help. Talk to one of our agriculture banking specialists today.