How to save money this fall despite high interest rates

The field wasn’t the only place on the farm feeling the heat this summer. Rising interest rates have added pressure to the farm balance sheet. Still, purchasing has remained resilient, according to various ag finance representatives. They offer tips to help farmers save money this fall. 

Interest rates have been increasing since early last year when the U.S. Federal Reserve began upping the federal funds rate. As of this writing, the Federal Reserve has increased the federal funds rate 11 times in 19 months for a total increase of 5.25 percentage points.

Cash is king

A foolproof way to avoid interest rates altogether is to pay cash. 

Tim Koch, executive vice president of business development for Farm Credit Services of America, says the agricultural lender has seen less loan activity in the past 18 months than expected. 

“Because of the higher interest rate environment, we are seeing an increased volume of cash used as part of the purchase,” he says. 

In fact, Koch says the market for agricultural land has remained stronger than expected as interest rates have increased. 

“Typically, when rates went up like they did, you would see real estate values decline, or at least be flat,” he says. “In the last 18 months, real estate prices have increased.” He says that’s because the people buying ag real estate now aren’t as sensitive to the increase in interest rates. He attributes that to three reasons: The buyers are either using a significant amount of cash for those purchases, they have a low level of debt on the other real estate they own, or any debt they have is locked in at really low rates. 

Between high commodity prices and government support payments, a strong amount of cash has permeated the market in recent years, experts say. However, Paul Schadegg, senior vice president of real estate operations for Farmers National Co., says as cash reserves run low, farmers will feel the impact of interest rates more. 

“With that, many purchases made may be leveraged,” he says. “When they’re leveraged, which the Midwestern banks are telling us they’re seeing an increase in loan activity, then we go back to the profitability question.… If you’re leveraging the land, you’ve just added an expense of interest… that is definitely going to be an obstacle for any individual or group that is purchasing land moving forward.”

The big picture 

Koch says in those instances where financing is needed, today’s interest rate environment doesn’t have to be a deterrent if the overall financial picture of the farm is strong. 

“Our tried-and-true answer is to understand the impact of additional debt on your total cost of production,” he says.

John Maman, director of sales and marketing for Nutrien Financial, says it’s also important to stay in communication with trusted advisers about an agronomic and economic plan for the year. 

“There’s the old adage, ‘It takes a village to raise a family,’ and in a small market like agriculture, it is a family-like atmosphere with those that you depend on,” he says. 

He encourages growers to plan for 2024 and then continue evaluating and adjusting throughout the year. 

Look for opportunities to save

"I think it really starts with looking at early opportunities to capitalize on the fall fertilizer market and fall input market,” Maman says. 

In preparation for the new year, there may be opportunities to lock in lower rates. Nutrien Financial and Farmers Business Network (FBN), for example, both have promotional rates this fall. FBN has an operating line rate as low as 3.99% on FBN inputs. 

“This is an option for them to still be able to make those decisions and plan for the next year, but not have it be such a hit to their balance sheet,” says Daniel English, general manager of FBN Finance. 

Promotional rates may also exist on the equipment side of the industry. John Deere Financial, for example, is offering rates as low as 0% for parts, service, and crop inputs under its Harvest Terms program.

English suggests talking with a financial adviser to learn about all financing options and how to best utilize existing assets. He also recommends shopping around for inputs and operating lines. 

“If you’ve been with the same local bank for 20 or 30 years, maybe they’re giving you a great deal because of the relationship, but they may also have not had to compete for [your business] before,” he says. “Make sure that you come to someone like us and get a second opinion as to what your rate should be.”

Time to adapt 

While today’s interest rates are high in comparison to recent years, finance professionals agree today’s rates are “historically normal.” Maman says there is potential for another rate increase before the end of the year. 

“It is unlikely that we’re going to see those historically low levels anytime soon,” says Koch. “Now, I’m not saying that we won’t drift back down to the 6% to 6.5% range, but a large majority of our existing portfolio repriced their loans at 3.5% to 4.5% prior to when the Federal Reserve began increasing rates. I think those days are probably behind us.” 

English says how much rates have gone up and the rate at which they went up caused some initial “sticker shock” with customers, but they are adjusting to the current rates. 

“The farmers we work with are realists,” says English. “They know where it’s at and are ready to figure out how to make it work and move on to what they typically love to do, which is farming, not talking about interest rates.”