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.
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.
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