Interest Rates on the Rise for Farmers

Ag bankers are slowly raising the interest rate on loans to farmers and ranchers, with the largest increases seen on operating loans, says the Federal Reserve's quarterly report on agricultural finances. The impact of higher rates on production costs is relatively small, equal to less than 1 bushel an acre for a Midwestern corn farm. "Additional increases in rates could put more pressure on some farm operations," said the report, but the delinquency rate on farm loans remains low.

Lenders charged an average rate of 4.9% on operating loans this spring, a notable increase from 3.5% during the final quarter of 2015, when rates touched historical lows. Rates on other types of loans are rising at a slower pace.

"The increase in rates on operating loans, however, is more notable because these loans account for about 60% of the volume of non-real estate loans at commercial banks," says the Fed. The report was written before the Federal Reserve raised its benchmark interest rate by one quarter point in June to keep inflation at 2%. The eight-member Federal Open Market Committee said "further gradual increases" are likely. When the Fed raises its rates, the effect trickles through to commercial lenders.

Higher interest rates typically weigh on land values, yet they were relatively steady at the start of this year, providing "ongoing stability to farm-sector balance sheets and agricultural lending," said Fed's Ag Finance Databook. Separately, the Chicago Federal Reserve Bank said ag bankers in the Midwest tightened credit standards, including requirements for higher collateral, amid higher loan demand. Farm profit margins in the Plains could improve, said the Kansas City Fed, with moderate improvement in crop prices and continued decline in land rental rates – a counterweight to higher loan rates.

Purdue economist Brent Gloy says there are storm clouds over the farm sector – trade dispute, ethanol policy, and higher interest rates among them – and if commodity prices slip, "it will again expose many farms to economic losses." But there are signs the five-year decline in farm income is slowing.

This article was produced in collaboration with the Food & Environment Reporting Network, an independent, nonprofit news organization producing investigative reporting on food, agriculture, and environmental health.