If the Federal Reserve raises interest rates, “it will mean higher costs for many producers” at a point when farm income is falling and growers are making increased use of credit, says Brent Gloy at Agricultural Economic Insights. “The practical issue is whether this increase is enough to make a large difference in the profitability.”
A 1 percent-point increase in interest rates could add $4 an acre to operating costs, writes Gloy, using an example of a corn farmer with $400-an-acre in costs – “not a welcome increase but not the end of the world.” The impact would be more apparent on machinery purchases; a 1-point increase would add $3,000 to the cost of a $300,000 tractor.
Three-quarters of non-real-estate loans are made with floating interest rates, Gloy says, so many producers with existing loans would feel the ripple effect of a rate hike, not just producers seeking a new loan to cover planting expenses or to buy equipment. Interest rates are not likely to rise enough in the short term to threaten farm profitability, he claims. “The bigger question will likely be how many producers can remain credit worthy in a period of rapidly declining profitability.”