Interest rates doubled in the past year for agricultural loans, the fastest increase since the early 1980s, with the least-profitable farmers feeling the impact the most, said the Minneapolis Federal Reserve Bank. “All producers should prepare for elevated interest rates by incorporating higher interest expenses into cash flow projections regardless of profitability and debt levels” it said.
“Elevated interest rates will impact producer financials in 2023 and beyond, especially for the least-profitable producers,” wrote Tait Berg, senior agricultural coordinator at the Minneapolis Fed. “Producer cash flows since 2008 benefited from historically low and stable interest rates that are no longer a reality.”
The least-profitable farmers feel the pinch the most because they generally have the highest debt levels per acre and pay more per acre in interest annually, said Berg. In the Minneapolis Fed district of Montana, North Dakota, South Dakota, Minnesota, and northern Wisconsin, the 20 percent of farmers who were the least profitable spent nearly three times as large a share of their earnings on an acre of corn on interest expenses in 2022 than the 20 percent who were the most profitable.
“Most importantly, higher liabilities per crop acre farmed leave the least-profitable producers most sensitive to rate increases,” he said. “As rates increase, they face larger interest costs per acre, further straining their cash flows and reducing profits.”
As an example, Berg calculated total liabilities of $2,526 an acre for the least-profitable growers in 2022 and $1,373 for the most-profitable. The gap between the two groups has widened in the past decade. “Since 2021, price increases have impacted the least-profitable producers more than others because they are less likely to receive bulk discounts, have less working capital, or are highly leveraged,” he said.
Interest expenses averaged $92.69 per crop acre for the least-profitable growers, compared to $36.04 an acre for the most profitable growers in 2022.
Farm production expenses have climbed every year since 2018, with sharp increases in 2022 and this year, according to the USDA.
Producers will pay $33.6 billion in interest as part of estimated production expenses of nearly $452 billion this year, said the FAPRI think tank. Expenses are forecast to fall in 2024, but so is net farm income, a gauge of profitability, down by 12 percent, or $16 billion. Projected net farm income of $131 billion this year and $115 billion in 2024 would be well above the 10-year average.