Getting Real with Rates

Interest rates

By Brent Gloy and David Widmar

The overall low interest rates in the U.S. economy have resulted in low farm level interest rates.  Today’s rates are among the lowest seen in many decades.  This has reduced the cost of borrowing funds to operate farms as well as to finance capital investments such as equipment and real estate.

We frequently talk about the nominal level of interest rates but we thought it would be useful to look at the real rate of interest, or the price of credit after subtracting inflation.  It is important to consider the impact of inflation when evaluating interest rates because debt is paid back with dollars impacted by inflation.  For instance, if a farmer were to borrow money at 5% and the rate of inflation were 2%, the real rate earned by a lender (and paid by the farmer) would be 3%.  In other words, the real rate of interest is a measure of the effective cost of borrowing money.  Continue reading

Farm Interest Expense: Low Rates but a Growing Expense

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by David A. Widmar

A few weeks ago we took a look at farm-level interest rates and how a rate increase might impact producers. While interest rates are important, it is also critical to keep in mind total debt and farm income, or earnings, when looking at farm financial conditions. In this post, we take a look at farm interest expense and the recent trend of higher interest expense even with historically low interest rates.  Continue reading

From the Fed to the Farm: A Look at Farm Interest Rates

FOMC Meeting

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.

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