After raising the benchmark interest rate just once in the last seven years (0.25 percent in December 2015), the Federal Reserve added another 0.25 percent in December 2016, and hinted three more increases may be coming in 2017.
The Federal Reserve changes interest rates in increments of “basis points,” with 100 basis points equal to a 1 percent change in the interest rate. So, the most recent increase of 25 basis points is equal to a 0.25 percent boost in the interest rate.
For variable rate loans, the correlation between the Federal Reserve interest rate actions and rates charged to farm borrowers is 1-to-1, according to Sam Miller, managing director and head of agricultural banking with BMO Harris Bank. The basis point and fixed-rate loan correlation is less directly aligned, and depends on longer-term expectations for economic growth, employment rates and inflation. At the local level, lenders set rates for individual customers as a hedge against their own costs, including how much interest they pay to depositors.
With a slightly higher cost of money, rising interest rates have an inflationary impact on producers. However, Miller said overall farm inflation shouldn’t change drastically in 2017. Fertilizer prices will be lower, while fuel prices will be higher than last year. Seed and chemical prices are expected to remain stable, while feed prices for livestock producers, particularly dairy, are expected to be lower than a year ago.
Other impacts
Other than higher interest rates as a cost of doing business, rising rates have a two-fold impact on pushing farmland prices lower, according to Gary Schnitkey, ag economist at the University of Illinois.
First, higher interest rates increase the financing costs of land purchases, making it more expensive to debt finance farmland. Second, higher rates signal higher returns on alternative investments, thereby making alternative investments more attractive than farmland.
A regional look
Federal Reserve banks in major agricultural areas report quarterly interest rates, land values and credit conditions, based on quarterly surveys in each district. Due to timing, not all quarterly reports reflected the Federal Reserve’s December 2016 interest rate increase. Here’s a look at interest rates in individual districts as of the fourth quarter of 2016.
Chicago (covers all or portions of Illinois, Indiana, Iowa, Michigan and Wisconsin)
As of Jan. 1, 2017, variable rate interest rates for all loan types were at their highest levels since the end of 2013. District-wide average interest rates and changes from the previous quarter for variable-rate loans were:
- Operating loans: 5.03 percent; +0.16 percent
- Feeder cattle loans: 5.01 percent; +0.15 percent
- Real estate: 4.71 percent; +0.14 percent
Dallas (covers all or portions of Texas, New Mexico and Louisiana).
District-wide average interest rates on fixed-rate loans compared with the previous quarter were:
- Feeder cattle: 5.98 percent, unchanged
- Other farm operating loans: 6.11 percent, +0.04 percent
- Intermediate-term loans: 6.03 percent, +0.04 percent
- Long-term farm real estate: 5.72 percent, unchanged
Average interest rates on variable-rate loans compared with the previous quarter were:
- Feeder cattle: 5.65 percent, +0.05 percent
- Other farm operating loans: 5.65 percent, +0.02 percent
- Intermediate-term loans: 5.63 percent, -0.01 percent
- Long-term farm real estate: 5.29 percent, -0.07 percent
St. Louis (covering all or parts of Arkansas, Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee)
Interest rates on fixed- and variable-rate operating loans increased more than 10 basis points (0.1 percent) from the third to the fourth quarter. However, interest rates on fixed- and variable-rate intermediate and farm real estate loans diverged.
District-wide average interest rates on fixed-rate loans compared with the previous quarter were:
- Operating: 5.6 percent, +0.11
- Intermediate-machinery loans: 5.72 percent, +0.06 percent
- Farm real estate: 5.21 percent, -0.11 percent
Average interest rates on variable-rate loans compared with the previous quarter were:
- Operating: 5.01 percent, +0.15 percent
- Intermediate-machinery loans: 5.01 percent, -0.09 percent
- Farm real estate: 4.86 percent, +0.04 percent
Kansas City (covering Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern half of New Mexico and the western third of Missouri)
Variable and fixed interest rates increased for all types of farm loans, with interest rates for variable-rate operating loans reaching the highest level since the third quarter of 2012.
District-wide average interest rates on fixed-rate loans compared with the previous quarter were:
- Operating loans: 5.74 percent, +0.08 percent
- Intermediate-term loans: 5.64 percent, +0.11 percent
- Long-term farm real estate: 5.42 percent, +0.1 percent
District-wide average interest rates on variable-rate loans compared with the previous quarter were:
- Operating loans: 5.58 percent, +0.08 percent
- Intermediate-term loans: 5.3 percent, +0.1 percent
- Long-term farm real estate: 5 percent, no change
Minneapolis (covering all or portions of Minnesota, Montana, North Dakota, South Dakota and Wisconsin)
The district’s report lacks similar surveys and is based on ag lender responses from October 2016. For the third quarter, fixed and variable interest rates barely changed for operating loans, but both fell slightly for machinery loans. Fixed real estate loan interest rates were nearly flat, while variable rates fell slightly.
District-wide average interest rates on fixed-rate loans were:
- Operating: 5.2 percent
- Machinery: 5.2 percent
- Farm real estate: 5.1 percent
District-wide average interest rates on variable-rate loans were:
- Operating: 4.9 percent
- Machinery: 4.9 percent
- Farm real estate: 4.7 percent
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Dave Natzke
- Editor
- Progressive Forage
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