3 Things to Know About Rising Interest Rates

It’s January, and as many are setting their personal goals for 2015, farmers and agriculture economists are also keenly interested in what the new year will bring for ag producers. With 2014’s lower commodity prices in mind, farmers are paying close attention to rumors of rising interest rates in 2015.

According to Fortune magazine, the Federal Reserve will begin to raise interest rates sometime in the coming year. The rate hikes signal a tapering of the Fed’s “quantitative easing” strategy of the last several years, the goal of which was to bring down long-term interest rates in an effort to stimulate business borrowing and spur the economy during the recession. While opinions vary regarding the timing of the increases, two officials with the U.S. Central Bank said the timing will depend upon the economy, although most agree that it will take place within the next 12 months.

What do these rising interest rates mean for your farming operation? Rising interest rates can spell disaster for some farming operations, as was the case when rates spiked in the 1980s. It’s important to gauge the events on the horizon, and take steps now to cushion yourself from the effects. Here are three things to keep in mind.

The first is to consider re-financing now, even if it’s only a short-term, one-year restructuring. It’s far easier to make changes sooner than later, when farm values are still relatively high and income statements are favorable from the last several years. According to Bob Campbell, senior vice president of Omaha-based Farm Credit Services of America, “If you wait a year or two and the cost of production is higher and your cash is drained and you have no cash flow, you won’t have the strength in your balance sheet and income statement to re-finance. Now is the time to tweak your income statement to give it some breathing room.”

Another thing for producers to keep in mind heading into 2015 is to manage their taxes wisely, and ensure that they aren’t heading into a new year with no equipment write-offs and no money to pre-pay expenses—income but no deductions. Ag finance experts encourage producers to pay attention throughout the year and make the necessary decisions sooner than later.

Finally, it’s important to keep in mind the effect of rising interest rates on land values. Experts predict that a rise in interest rates, coupled with a stronger U.S. dollar and bearish commodities outlook, will drive down land values. AgriLife Extension Economist Dr. Levi Russell has this to say:

[Rising interest rates create] an incentive for landowners to sell land and buy other assets with similar risk and higher returns, such as bonds. While a rise in cash rents would mitigate this factor, increasing the return to land (through cash rent) will likely be more difficult due to a bearish commodity price outlook. Additionally, increased interest rates also strengthen the dollar relative to other currencies, which puts downward pressure on exports. This would also be bearish for commodity prices. The implication is that farmland prices will likely fall as rates begin to rise.”

Are you concerned about what higher interest rates will mean for your goals? Feel free to contact a UFARM land manager –we are happy to hear your concerns and help you form a smart strategy for your land.

Sources consulted: “Economist: Low agricultural commodity prices, potential rising rates could lead to land value declines.” AgriLife Today. Texas A&M Agrilife. 09 Oct. 2014. Web. 05 Jan. 2015. Nitchie, Don. “Rising Interest Rates Will Impact Agriculture.” University of Minnesota Extension. University of Minnesota. Web. 05 Jan. 2015. Reuters. “Two Fed officials say interest rates to rise in mid-2015.” Fortune. Time.com. 09 Oct. 2014. Web. 05 Jan. 2015.Williams, Elizabeth. “Farm Finances: Prepare Now for Rising Interest Rates.” AgFax.com.AgFax Media, LLC. 24 Oct. 2014. Web. 05 Jan. 2015.