With borrowing rates rising, so has the interest in the impact on agricultural producers. A couple of recent papers from district Federal Reserve banks provide some answers.
- After a decade of being historically low and stable, agricultural interest rates have risen dramatically since mid-2022, noted Tait Berg, senior agricultural coordinator with the Federal Reserve Bank of Minneapolis. Agriculture-related interest rates reported in the fourth quarter of 2022 more than doubled from the previous year. The only time loan rates increased at this pace was in the early 1980s. Writing in Elevated interest rates: How they impact producers’ cash flow and profitability, he said the higher interest rates have a greater impact on less profitable agricultural producers due to elevated per-acre debt levels.
- Farm lending activity at commercial banks slowed through the first half of 2023 as interest rates continued to push higher, according to Nate Kauffman and Ty Kreitman, economists with the Federal Reserve Bank of Kansas City. Writing in Farm lending slows as interest rates rise, they said the volume of non-real estate farm loans at commercial banks declined for the second consecutive quarter, and average interest rates on agricultural loans increased for the sixth consecutive quarter. The second-quarter drop in lending was attributed to a lower average size of loans and a fewer number of loans compared with last year.
The rise in interest rates was generally consistent across loans and lenders of all sizes, but rates remained slightly lower for bigger loans and at the largest banks. The median rate on Kansas City district non-real estate loans doubled from the beginning of 2021, and half of all new operating loans in the second quarter garnered a rate above 8.5%. Moreover, one-tenth of new farm operating loans carried an interest rate of nearly 10%. In contrast, at the beginning of 2022, more than half of all loans had a rate less than 4.5%.
Meeting in late July, the Federal Reserve Board raised interest rates by 0.25%, boosting the federal funds rate to 5.5%. The next meeting of the Federal Open Market Committee is scheduled for Sept. 19-20.
August FSA interest rates mostly higher
The USDA announced Farm Service Agency (FSA) loan interest rates for August 2023. Interest rates for operating and ownership loans (compared to July) are as follows:
- Farm operating loans (direct): 4.875%, up from 4.5%
- Farm ownership loans (direct): 5%, up from 4.875%
- Farm ownership loans (direct, joint financing): 3%, up from 2.875%
- Farm ownership loans (down payment): 1.5%, unchanged
- Emergency Loan (amount of actual loss): 3.75%, unchanged
The FSA also offers guaranteed loans through commercial lenders at rates set by those lenders.
Additionally, the FSA provides low-interest financing to producers to build or upgrade on-farm storage facilities and purchase handling equipment and loans that provide interim financing to help producers meet cash flow needs without having to sell their commodities when market prices are low. Funds for these loans are provided through the Commodity Credit Corporation (CCC) and are administered by FSA.
- Commodity loans (less than one year disbursed): 6.375%, up from 6.125%
- Farm storage facility loans:
- Three-year loan terms: 4.375%, up from 4.125%
- Five-year loan terms: 4.125%, up from 3.875%
- Seven-year loan terms: 4%, up from 3.75%
- 10-year loan terms: 3.875%, up from 3.75%
- 12-year loan terms: 3.875%, up from 3.75%
For more information, producers can contact their local USDA Service Center.
