Financial outlook for many farmers is favorable, thanks to high commodity prices, but higher interest rates are an ongoing concern.
That’s according to ag bankers surveyed by the Federal Reserve. Interest rates on farm loans are 3.5 to 4.5 percent higher this year than at the end of 2021.
“Alongside additional increases in the federal funds rates, interest rates on farm loans rose sharply,” said the Ag Finance Update. The average rate was the highest since 2007, according to the Kansas City Fed.
“Three-fourths of new loans in the first quarter had an interest rate above 7-percent,” the report showed.
In comparison, more than half of farm loans had rates below 5-percent on average from 2011 through 2020.
The Federal Reserve has raised its federal funds rate nine times since March 2022. That includes a quarter-percent increase during March, in a drive to “quash inflation,” officials indicated.
The U.S. inflation rate dropped to 5-percent on an annualized basis in April, after topping 9-percent last June.
Higher interest rates discouraged farmers from borrowing money during the first quarter of this year, said the ag bankers.
“Softening in lending activity kept operating loan volumes at 15-percent below the average over the past decade,” officials said.
Producers applied for fewer loans and borrowed smaller amounts when they took out loans.
“Remarkably strong recent farm income has bolstered liquidity for many producers and supported historically strong farm loan performance,” officials admitted.
Outlook for farm finances remained favorable alongside elevated commodity prices. But higher interest rates, increased production costs, and drought remain key ongoing concerns.
U.S. net farm income set back-to-back records in 2021 and 2022. It is expected to be the third highest on record this year.
Cash expenses were projected to be the highest ever, but feed, fuel, and fertilizer costs should be lower than last year.
In March, the Kansas City Fed said, “Farm real estate values increased considerably in 2022. But showed signs of softening during the final months of 2022 as interest rates rose sharply.”