Farmers borrowing more money, paying higher interest rates

Ag bankers are charging higher interest rates and asking farmers to pledge more collateral in the face of a rising demand for loans, the Federal Reserve said Thursday in its quarterly Agricultural Finance Databook. Forty percent of non-real estate loans, a category dominated by so-called operating loans, which are used to pay day-to-day bills while waiting to sell crops or livestock, carried an interest rate above 6 percent. That was a marked change from the same point in 2015, when interest rates were below 4 percent for nearly half of all loans.

“The combination of increased lending needs and higher interest rates has continued to raise the cost of financing at a modest pace,” said the Databook, produced by the Kansas City Fed. For a midsized Midwest farm that has not needed additional financing in recent years, annual interest expenses are up by nearly $3 an acre. For operations that received moderate amounts of bank lending, annual interest costs have increased by about $10 an acre.

“In the current price environment, this [$10] increase in annual interest expense would equate to about three bushels of corn an acre, a modest but nontrivial amount of production,” said the Fed.

The average U.S. corn yield last fall was a record 178.9 bushels an acre and was expected to fetch an average of $3.60 a bushel at the farm gate. The USDA estimates the variable costs of corn production, including interest expenses, at about $345 an acre. Beyond that is the fixed cost of renting or owning land.

According to the Fed report, the average operating loan in the final three months of 2018 was $74,190, the highest ever. At the same time, the volume of money in operating loans was $10 billion higher than in the final quarter of 2017.