By Brent Gloy and David Widmar
There has been widespread speculation about whether the Federal Reserve will raise interest rates at the upcoming Federal Open Market Committee (FOMC) meeting. Regardless of whether they decide to raise rates or not, it certainly been some time since rates have risen. In fact, the Fed Funds rate has been held near zero since late 2008 when the financial crisis was in full swing. One has to go back even further, 2006, to observe the last time that the Fed raised the target rate. A long time indeed.
The impact of low interest rates on agriculture has been debated quite widely. We have argued for some time that low long-term interest rates have played a supporting, if not key, role in the dramatic rise in farm real estate values and we’ll provide some perspective on longer term rates in a subsequent post. While the Fed’s decision won’t necessarily impact long-term rates, any decision to increase rates may impact the shorter term borrowing rates faced by farmers. In honor of the Fed’s big decision we decided to take a look at historic farm interest rates and think about how changes in interest rates might impact the farm sector.
David A. Widmar
As farm incomes jumped in recent years, so did the interest in newer farm equipment. While the reasons producers update their equipment line can vary from increasing efficiency to managing taxable income, it’s important to understand how these changes may impact the underlying cost of production.
For a high-level look at changes in the machinery cost structure across agricultural operations, data from the Kansas Farm Management Association (KFMA) and the Illinois Farm Business Farm Management Association (Illinois FBFM Association) were used. Three components of machinery ownership were considered; depreciation, machinery investment, and machinery expense.
David A. Widmar
It’s no secret that the recent agricultural boom has fueled producer’s interest and financial ability to upgrade equipment lines. A simple drive across the countryside makes it easy to observe that producers have been plowing some of their recent profits into new equipment.* As agricultural profitability recedes many people expect equipment sales to fall dramatically.
Anecdotally we know about the trend toward newer equipment, but in order to confirm or reject our own notions we decided to take a look at the data and get a better idea of just how many new tractors and combines are out there. To answer these questions, the 1997, 2002, 2007, and 2012 USDA Censuses of Agriculture were investigated.