The financial outlook for many farmers is favorable, thanks to high commodity prices, but higher interest rates are an ongoing concern, according to ag bankers surveyed by the Federal Reserve. Interest rates on farm loans to farmers were 3.5 to 4.5 percentage points higher in the opening months of this year than they were at the end of 2021.
“Alongside additional increases in the federal funds rates, interest rates on farm loans rose sharply,” said the Ag Finance Update released by the Kansas City Fed. The average rate was the highest since 2007.
“Three-fourths of new loans in the first quarter had an interest rate above 7 percent,” said the report. “In comparison, more than half of farm loans had rates below 5 percent on average from 2011 through 2020.”
The Federal Reserve has raised its federal funds rate nine times since March 2022, including an 0.25-point increase last month, in a drive to quash inflation. The U.S. inflation rate dropped to 5 percent on an annualized basis this month, after topping 9 percent last June.
Higher interest rates discouraged farmers from borrowing money during the first quarter of this year, said the ag bankers. “The softening in lending activity kept total operating loan volumes at about 15 percent below the average over the past decade,” said the Kansas City Fed. Producers applied for fewer loans and borrowed smaller amounts when they took out loans.
“Remarkably strong farm income during recent years has bolstered liquidity for many producers and supported historically strong farm loan performance,” said the Kansas City Fed in a summary. “The outlook for farm finances remained favorable alongside elevated commodity prices, but higher interest rates, increased production costs, and drought remained key ongoing concerns.”
U.S. net farm income set back-to-back records in 2021 and 2022 and is expected to be third highest on record this year. Cash expenses were projected to be the highest ever, but feed, fuel, and fertilizer costs would be lower than last year. In March, the Kansas City Fed said, “Farm real estate values increased considerably in 2022 but showed signs of softening during the final months of 2022 as interest rates rose sharply.”
The Ag Finance Update is available here.