Higher interest rates and agriculture

Last month, Federal Reserve Chair Janet Yellen announced a rare hike in interest rates. This was only the second move higher for interest rates since the Great Recession of 2009 and there will likely be more on the way later this year.

Interest rates are mostly discussed when it comes to credit cards, mortgages and car loans, but the bump in the interest rates will heavily impact agriculture as well.

“It all depends on how farmers are financed,” said Matt Monteiro, Senior Vice President and Treasurer with Farm Credit Mid-America. “A lot of people in agriculture are going to have farm mortgages and over 50% of the time those loans are at a fixed rate so many existing loans will not be impacted, but if a farmer is in the market for additional land the rates will be a notch higher than they were but still low.”

When it comes to operating loans for inputs or feed, for example, those loans will be at a higher rate that they were at last year. Many suppliers in the recent past were offering 0% financing and that offer may be a little harder to find in 2017. It’s never a good thing when incremental costs are getting added in to a farming operation’s budget, but rates have been very manageable for a long period of time.

“Since the election, the 10-year Treasury has gone up by about a half of a percent,” Monteiro said. “A half of a percent on each $100,000 is about $500 of annual interest expense so markets are still at or near their all-time lows.”

If a farmer is looking to borrow money this year it is important to have a clean balance sheet.

“My advice would be to pay down some operating loans, if possible, to create some excess capacity for borrowing,” Monteiro said. “It’s also important to have a good game plan and understanding of their operation to be able to show their breakeven point to their lender and show that they have a good handle on their finances.”

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2 thoughts on “Higher interest rates and agriculture”

  1. Please check; but Yellan raised interest rates previously in 2016; which makes the recent hike the second increase since the downturn. Also…good comment about knowing break even point. Thank-you

    • Thanks Jack. Your comment has been researched and the correction made. Have a great day!

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