With interest rates sharply higher, farmers are increasingly relying on savings or tightening their belts instead of seeking bank loans to cover their expenses, according to ag lenders nationwide. “The outlook for the U.S. farm economy has moderated in recent months as risks of more limited profit opportunities have grown alongside softening in commodity markets and elevated production expenses,” said the Kansas City Federal Reserve Bank.
“Conditions have also encouraged many producers to adjust operations to reduce borrowing needs or utilize cash reserves to fund some expenses,” said the regional Fed in a monthly Ag Finance Update.
The median interest rate on non-real estate loans was twice as high as it was in early 2021. “Half of all new operating loans in the second quarter [of 2023] garnered a rate above 8.5 percent,” said the report, and the interest rate was nearly 10 percent for one-tenth of the loans. “In contrast, at the beginning of 2022, more than half of all loans had a rate less than 4.5 percent, and the sharp change likely influenced operational and financing decisions for many producers.”
Bankers reported a 15 percent drop in the volume of non-real estate loans during the second quarter of the year — April, May, and June — compared with the same period in 2022. Fewer loans were issued and, on average, the loans were for smaller amounts of money.
Nearly 80 percent of the loans, a noticeably larger portion than usual, “were booked with a variable rate,” said the Kansas City Fed.
“The Federal Reserve will raise rates again in July and perhaps once more after that,” said economist Dan Kowalski of agricultural lender CoBank. Despite improvement in the inflation rate, it remains above the Federal Reserve’s target. The Quarterly, a CoBank publication, said an economic slowdown was coming.
“We maintain our call for a mild recession in the fourth quarter of 2023 and into the first quarter of 2024,” said Kowalski.
Net farm income, a broad measure of profitability, was forecast by the USDA in February at a far-above-usual $136.9 billion this year. Still, that would be a drop from record-high levels in 2021 and 2022, due largely to lower revenue from crops and livestock and smaller federal subsidy payments. Farm expenses, a record $459.5 billion, would be up for the fifth year in a row. In June, the USDA projected a modest decline in production costs for major field crops in 2024. An updated estimate of farm income will be released on Aug. 31.