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How Will The Recent Interest Rate Increase Affect Farmers And Landowners?

Nebraska Landowners

It has long been anticipated that the Federal Reserve would be raising the interest rate in the foreseeable future, and last month it finally actualized. Federal Reserve Chairwoman Janet Yellen announced in December that the interest rate would increase from 0-0.25 percent to 0 .25-0.50 percent. While not a large increase, the raise will still impact a great portion of industries across the US. How will the recent increase affect US farmers, landowners, and the agriculture industry?

First, and most obviously, the hike will increase the cost of borrowing money—something with which most farmers are well acquainted. With the current rate increase, producers borrowing money based on prime would pay 0.25 percent more interest annually on their short-term loans, including operating and vehicle loans.

Secondly, the rate increase will add to the downward pressure on the price of farmland.

Lastly, interest rate increases may also contribute to a stronger US dollar. For those in agriculture, this translates to less competitive commodity prices in the world market.

According to Jeffery Dorfman, an agricultural economist at the University of Georgia, one percentage point rise in the interest rate can translate into as much as a 6 percent drop in commodities prices. On the low end, such a move could push prices down by 2 percent, which translates into “a dime or so per bushel for corn and wheat and maybe a quarter for soybeans,” he says.

While that information is sobering, Dorfman is quick to reassure farmers.

“I would not expect the inevitable increase in interest rates to be positive for commodity prices, but the magnitude of the negative impact should be relatively small and fairly evenly spread across the major row crops.”

With all this in mind, it’s important to take into account that more increases are on the horizon. In September of 2015, Yellen said that the rate will likely rise to 1.5 % by late 2016, 2.5 % in late 2017, and 3.5 % in 2018.

The good news is that the very gradual increases will soften the blow for most producers, depending upon their current financial situation.

What is the best course of action for farmers and landowners in response to rising interest rates? It’s best to continually strive to make improvements in efficiency and productivity, both in the fields and financially. Being able to provide detailed cost projections and yield estimates to your lender will put you in a much better position to negotiate better interest rates.

Creighton University economics professor Ernie Goss has his own suggestion.

“If I were a farmer, I would protect myself against rising short-term rates by locking in these very low long-term rates. I would take out equity on the farm, understanding that I may be using the funds for operating,” Goss said.

Do you have concerns about what the interest rate hike will mean for your farming operation? Feel free to contact us with your concerns. We are glad to work with you to keep your operation running strong.

Source consulted: Anderson, Ken. “The Impact of Higher Interest Rates on Agriculture.” Brownfield Ag News. Brownfield Ag News for America. 03 Nov. 2016. Web. 21 Jan. 2016. Howard, Fran. “How a Rise in Interest Rates Could Affect Farmers.” AgWeb.com. Farm Journal. 05 Aug. 2015. Web. 21 Jan. 2016.  Rice, Allison. “If Interest Rates Rise, What Happens to Crop Prices?” Agweb.com. Farm Journal. 15 Dec. 2015. 21 Jan. 2016.

Federal Reserve Keeps Interest Rates the Same

interest ratesAmid much pre-report excitement last week prior to the Federal Reserve’s interest rates decision, many farmers and landowners faced the prospect of a possible rise in interest rates. While Federal Reserve Chairwoman Janet Yellen revealed that a no-change decision had been reached for now, she also hinted that increases were on the horizon for the next three years.

What does all of this mean for ag producers? First, that they should always operate under the assumption that interest rates won’t stay as historically low as they have since 2008. The high commodity prices and land values of the past decade have significantly leveled off, and with the rates of return from farming coming back from the stratosphere, operators need to exercise restraint when it comes to their operating decisions.

Given these prospects, analysts anticipate—and growers hope for—any changes that do develop to do so more slowly so as to alleviate financial shock. Many experts do not expect interest rates to rise as dramatically as they did in the late 70’s and early 80’s, although even a 2-3 % increase may feel dramatic after operating under so many years of declining rates. In her remarks last week, Yellen said that the rate will likely rise to 1.5 % by late 2016, 2.5 % in late 2017, and 3.5 % in 2018.

For now, though, for landowners and producers looking to buy more land, the same interest rates mean that the cost to borrow money to do so will remain low. For producers struggling to contend with lower commodity prices and rising production costs, operating loans will still be a solution, although close attention must be paid to those with larger notes, as the forecasted rising interest rates will affect their operations to a greater extent.

While analysts disagree about what last week’s Fed decision will mean for commodity prices, some worry that continued access to cheap debt could lead to a deflationary period, which could lead to lesser demand for grains and lower prices. While this may be a negative effect of continued low rates, the positives may outweigh this, at least for the time being.

What’s a producer to do? Aside from simply anticipating an eventual rise in interest rates, farmers and landowners should continue to strive for improvements in efficiency and productivity, both in the fields and financially. Being able to provide detailed cost projections and yield estimates to your lender will put you in a much better position to negotiate better interest rates.

Producers should strive for judicious use of borrowed money in order to grow, with an eye on the horizon. Prudent decision making and a continual endeavor keep financial risks to a minimum will keep a farming operation healthy.

Do you have concerns about what rising interest rates will mean for your farming operation? Feel free to contact us with your concerns. We are glad to work with you to keep your operation running strong.

Source consulted: Rice, Alison. “How the Fed’s Interest Rate Decision Affects Farmers.” Agweb.com. Farm Journal. 19 Sep. 2015. Web. 22 Sep. 2015.

 

 

 

 

 

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3 Things to Know About Rising Interest Rates

Higher interest ratesIt’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.