Are Farm Level Interest Rates Increasing?

By Brent Gloy

The Federal Reserve has now increased interest rates four times since late 2015.  These increases come on the heels of roughly 7- year period of maintaining their targeted rate at historical lows. The last 10 years can generally be characterized as a period of very low farm level interest rates.  Today, farm level interest rates have begun to increase ever so slightly.

Farm Level Interest Rates – Small Increases So Far

Figure 1 shows the average interest rate on all non-real estate farm loans made by commercial banks in each quarter from 2007 to 2017. As one can see, interest rates remain close the lowest levels of the last decade.  While today’s rates don’t exceed the lowest values of the decade by a great deal, they are actually greater than half of the values in the last 10 years.

farm interest rates. ag trends. agricultural economic insights

Figure 1.  Average Interest Rate on Non-Real Estate Loans, 2007-2017.  Source: Ag Finance Databook.

Farmers that have borrowed funds to finance items other than real estate will likely be impacted by increased interest rates.  The ag finance data book indicates that 77% of the non-real estate loans made in the 2nd quarter of 2017 carried floating interest rates. In other words, most non-real estate loans have exposure to higher interest rates.

We noted last November that bankers have worked to increase collateral requirements in anticipation of loan repayment challenges.  Recently, Nathan Kauffman and Matt Clark of the Kansas City Federal Reserve Bank reported that the average maturity on non-real estate loans sits at 46 months.  This is much longer than the 5-year average over the period of 2007-2014 which was 23 months.  Such a rapid and large increase in maturities  provides additional evidence of aggressive refinancing to lengthen repayment terms and improve cash flow.

Wrapping it Up

From the lowest value ever recorded in this series, 3.6% in the 4th quarter of 2015, farm level interest rates have increased by 70 basis points to 4.3%.  This is 20% increase.  However, It is important not to make too much of an issue of these small absolute increases because the practical impacts are likely still quite small.  For example, a farmer that borrows $400 per acre of operating credit for 6 months of the year would see their interest expense per acre increase from $7.20 per acre to $8.60 per acre.  This would hardly be considered a large increase in expenses.

As we have said before, at this point the cost of credit is not likely to be the big issue.  It is whether borrowers can maintain creditworthiness that is likely to be the more important issue related to credit.  The evidence of significant increases in the maturities of loans is a sign that borrowers and lenders are trying to work through issues of repayment capacity.  At present, interest rate increases are not likely to be the main driver of cash flow and credit issues.

Interested in learning more? Follow the Agricultural Economic Insights’ Blog as we track and monitors these trends throughout the years.  Also, follow AEI on Twitter and Facebook.

Photo: Flickr/Federalreserve

 

How Has Your State Fared Under the 2014 Farm Bill?

by Brent Gloy and David Widmar

The 2014 Farm Bill made several changes to U.S. farm programs.  The most notable was probably the elimination of Direct and Counter Cycle Payment (DCP) and Average Crop Revenue Election (ACRE) programs and the development of the Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC) programs.  While work is already underway on developing another farm bill, we thought it would be a good time to examine how producers in different regions have fared under the current and previous farm bills.  Continue reading

Who Hasn’t Had Big Crop Yields During the Ag Slowdown?

By Brent Gloy & David Widmar

Since 2014, U.S. farmers have managed to produce very large corn, soybean, and wheat crops. These, and large crops around the world, have weighed on prices and created a major economic downturn for U.S. farmers.  While record large crops have meant most farmers have enjoyed high yields, U.S. production takes place across a very wide and diverse geography.  As such, some producers have seen high yields while others may have been less fortunate.

This week we look at county level corn, soybean, and wheat yields to better understand how crop yields have varied across the country during the economic downturn.  Areas where yields have been particularly high should have weathered the economic downturn better than areas where yields may not have been quite so good. Continue reading