“It’s impossible to forget the exuberant interest rates of 1982.”
Many younger farmers today didn’t experience when bankers were loaning money freely, so it seems, at 18-percent interest.
Despite longevity, generations, and successes of many agriculture operations, it was impossible to operate at that rate.
Land values and commodity prices dropped dramatically. The farmers and ranchers were forced out of business by foreclosure.
Cringing feeling of those days gone by is unstoppable with recent forecasts of increasingly higher interest rates.
“Agriculture operators must expect higher interest rates to persist for several years as part of efforts to quash inflation”
That’s according to a team of agricultural economists, who admitted the highest interest rates in years will complicate farm finances.
The analysis comes from agricultural economists Gary Schnitkey and Nick Paulson at the University of Illinois and Carl Zulauf of Ohio State University.
“Farmers will pay more when they borrow money, and face higher break-even levels on investments,” they forecasted.
“Agriculture operators will feel downward pressure on the value of farmland, their largest asset,” the economists predicted.
Of course, these impacts will make the business of agriculture more difficult. However, the team pacified that claiming: “Rising interest rates will only present severe issues to a small number of agriculture firms.”
Extent of financial stress will depend on how high interest rates increase and how long they remain at elevated levels.
The Federal Reserve raised interest rates repeatedly last year to combat high inflation. The annual inflation rate was 7.1-percent at the latest count.
At the end of 2022, the federal funds rate, the overnight lending rate among banks, was 4.33-percent. Then, the economists clarified: “There are definite prospects of more increases into 2023,”
Last year’s sharp increases ended a period of low interest rates that began during the Great Recession in 2008. That was reinstituted during the coronavirus attack in 2020.
“Overall, farmers should expect higher interest rates than existed from 2008 to 2021, and should plan accordingly,” advised the economists.
As an example, they said an inflation rate of 2 to 4-percent a year would suggest a 10-year Treasury bond rate of 4 to 6-percent. That would equate into interest rates of 7 to 9-percent on agricultural debt.
The Federal Reserve has a goal of limiting inflation to 2-percent annually over the long run.
At present, the (United States Department of Agriculture) USDA’s 10-year agricultural baseline assumes a bank prime rate of 6.6-percent this year. Then running at 5.1-percent in most of the following years.
The prime rate is the interest rate that banks charge their most creditworthy customers. It is the foundation for the interest charged on loans, credit cards, and lines of credit.
Hypothetically, 3 percentage points would equate to 8-percent interest on an operating loan. The higher rate charged on $800 an acre would add $12 an acre to corn production costs.
Similarly, a 3-point increase would add $28 an acre to break-even for installing a tile line costing $1,000 an acre.
“Higher interest rates generally lead to lower asset values,” said the economists.
While farmland values could be affected, there are countervailing factors. They include profitable returns on farmland and investors’ opinion that land is a better hedge against inflation than financial assets.
“A large decline in farmland prices in 2023 is not likely,” the economists said.
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CUTLINE
Higher interest rate forecasts could mean return to tougher times for agriculture.
