Headwinds are intensifying for the farm sector, although high commodity prices support a positive outlook for farm finances through the end of this year, said a survey of ag bankers on Thursday. Alongside increased loan volume during the summer, “interest rates rose sharply and pushed financing expenses to the highest level since 2019.”
Borrowing costs were historically low in 2021, but the picture has changed with the Federal Reserve campaign to stifle high inflation rates through higher interest rates.
“Based on the current rate for an average operating note, the annual interest expense for a hypothetical midsize grain farm in the Midwest would total about $15 an acre, or two bushels of corn at current prices,” said the Ag Finance Update, compiled by the Kansas City Federal Reserve Bank from surveys by regional Fed banks. “The notable rise in financing costs pushed interest expenses slightly above the recent historical average and could be more pronounced for operations with higher debt needs.”
Strong commodity prices continue to support the farm economy, but the rapid rise in production costs could pressure profit margins, said the report. Still, the outlook for farm finances was positive for the rest of the year.
“Uncertainty about supply and demand for many farm products in the coming year has led to price volatility. In addition, large portions of the United States continued to be heavily impacted by drought, which could hinder revenue prospects and has been particularly challenging for cattle producers,” said the Ag Finance Update.
The volume of non-real-estate farm loans was up 15 percent from a year ago. “Loans for operating expenses drove the increase in overall lending activity,” said the report.