Farm Loan Interest Rates Highest Since 2007, Higher Financing Costs Impacting Business Decisions

In an update late last week from the Federal Reserve Bank of Kansas City (“Smaller Operating Loans Slow Lending Activity“), Nate Kauffman and Ty Kreitman indicated that, “Farm lending activity at commercial banks slowed further in the third quarter alongside a drop in operating loan volumes. The number of new non-real estate farm loans was flat compared with a year ago while the average size shrank by nearly 20%.

“The amount of operating loans over $1 million dropped notably and the reduction in loan size contributed to the third consecutive quarter of declines in non-real estate farm loan volumes. Lending has softened alongside nearly two years of increases in farm loan interest rates that have put considerable upward pressure on financing costs.

“The farm economy moderated in recent months as profit margins thinned alongside lower commodity prices and elevated expenses. Credit needs have increased for many borrowers alongside high input costs, but strong liquidity built up in recent years has also allowed many producers to supplement additional loan advances. Similarly, farm debt balances have grown during past quarters according to commercial bank call reports, but a sizable share of lenders have also reported subdued non-real estate loan demand in Federal Reserve District surveys. Considerably higher financing costs have likely prompted borrowers with ample liquidity to limit debt usage, but any softening in farm finances could reduce cash reserves and put upward pressure on lending demand.”

More narrowly, the Kansas City Fed update pointed out that, “Lending has softened alongside sharp increases in interest rates.

Average interest rates on all types of farm loans increased for the seventh consecutive quarter and reached the highest level since 2007.

“The quick rise in rates has pushed up financing costs considerably and likely influenced producers’ decision making related to debt usage.

“As rates have risen, the average maturity of longer-term loans has increased notably.”

And Lydia DePillis reported in today’s New York Times that, “Take agriculture. Commodity prices have been dropping, helping to bring down overall inflation, but that has depressed farm income. At the same time, high interest rates have made buying new equipment more expensive.

“Anne Schwagerl and her husband grow corn and soybeans on 1,100 acres in west central Minnesota. They’re gradually buying the land from his parents, with favorable terms making up for high interest. But their line of credit carries an 8 percent interest rate, which is forcing them to make tough decisions, like whether to invest in new equipment now or wait a year.

“‘It would be really nice to get another good grain cart so we can keep the combine moving during harvest season,’ Ms. Schwagerl said. ‘Not being able to afford that because we’re putting off those kinds of financial decisions just means we’re less efficient on our farm.'”