Ag economists Brent Gloy and David Widmar are fairly optimistic that any change in Federal Reserve interest rates is unlikely to create a decrease in short-term profitability. But a change could impact how producers will operate in 2016, as they already grapple with financial belt-tightening.
In a post on their blog, Agricultural Economic Insights, the economists say long-term stagnation of Federal Reserve interest rates has kept the rates low overall, and likely contributed to other trends in agriculture, like farm real estate values.
For example, the average interest rate on non-real estate loans is 4.1% -- higher than the second half of 2014 at 3.72%, but much lower than the last time rates were near 6% (2008).
The practice of using credit for seed, fertilizer, crop protection, labor, feed, feeder livestock or other purposes typically falls as farmers finance a larger portion of these needs with cash flow from the business.
With profitability slowing, credit demand is increasing, and a change in the interest rate will likely affect farmers borrowing operating credit.
Further, if interest rates rise, the economists note, farm-level impacts will rest on the size of the increase. Based on responses from FOMC participants in a June meeting, the economists estimate an increase of 100 basis points into 2016 as possible outcome.
If that comes about, a corn farmer that finances $400 per acre of operating expenses would see an additional $4 per acre of costs. If they were currently borrowing at 4%, the interest bill would increase from $16 to $20 per acre.
If spending on capital inputs like equipment, a 100 basis point increase would add $3,000 to the price of a $300,000 tractor – "something that is not likely to sit well with potential buyers who are already under significant financial pressure," the economists write.
For the full review, "From the Fed to the Farm: A Look at Farm Interest Rates," and links to expanded discussion, visit the Agricultural Economic Insights blog.