Ag bankers say farmers are tapping their savings from recent boom years instead of borrowing money at what are the highest interest rates since 2007. The average operating loan issued this past summer was nearly 20 percent smaller than the average a year ago, the lenders said in surveys by regional Federal Reserve banks.
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.
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.
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 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.
The highest interest rates in years will complicate farm finances, and operators should expect higher rates to persist for several years as part of efforts to quash inflation, said a team of agricultural economists on Wednesday. Farmers will pay more when they borrow money, face higher break-even levels on investments, and feel downward pressure on the value of farmland, their largest asset.
Congress is on the cusp of overhauling the farm program but the top question among farmers about government action is interest rate policy, which lies outside the jurisdiction of the Senate and House Agriculture committees, said a Purdue University poll on Tuesday. Concern about interest rates coincided with the Federal Reserve campaign to squelch inflation through regular increases in interest rates.
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.”
Ag bankers are charging higher interest rates and asking farmers to pledge more collateral in the face of a rising demand for loans, the Federal Reserve said Thursday in its quarterly Agricultural Finance Databook.
Few farmers—only 13 percent—surveyed for the Ag Economy Barometer said they expect farm profitability to improve in the year ahead. "There remains an undercurrent of concern about the farm economy among producers," said the Purdue economists who oversee the monthly gauge of farmer confidence on Tuesday.
Commodity prices are still in a trough but U.S. farm income is on the rise for the first time since 2013 because producers are sending more crops and livestock to market than initially expected, said the USDA. It forecast net cash farm income, a measure of liquidity, of $100.4 billion this year, far stronger than the February forecast of $93.5 billion, but only three-fourths of the record set in 2013.
Farmland values tend to fall when interest rates rise, but the rate increases since the Nov. 8 presidential election “are not large enough to suggest that decreases in farmland prices need to occur,” says economist Gary Schnitkey of U-Illinois. “However, farmland prices could face downward …
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.
With sharply lower commodity prices at hand, "one of the key supports for sky high farmland values is changing rapidly," writes economist Brent Gloy at the Agricultural Economic Insights blog.
In a nationwide survey, farm lenders "are not as optimistic as they were in the fall of 2013," say Kansas State University economist.
Ag economist Jason Henderson of Purdue says "what has me a little nervous" is an upturn in borrowing as the farm sector heads into a period of lower commodity prices and farm income.