6 Interest Rate Trends to Watch

May 9, 2018 10:36 AM
 

Interest rates continue to inch higher for farm loans, according to the Ag Finance Databook released by the Federal Reserve Bank of Kansas City. So far, these increases have had small impacts on farmers’ financial standing. 

“Following a prolonged period of historically low rates, interest rates on most types of farm loans at commercial banks have increased between 1.0 and 1.5 percentage points since 2015,” report Nathan Kauffman, assistant vice president and Omaha Branch executive, and Ty Kreitman, assistant economist. “Additional increases in rates could put more pressure on some farm operations, but delinquency rates on farm loans remained low through 2017, and the performance of most agricultural banks has remained solid.”

Here are six interest rate trends to watch in the year ahead, courtesy of the Kansas City Federal Reserve Bank report: Farm Loan Interest Rates Edge Higher.

  • Interest rates on operating loans show the biggest jump. Following historical lows in 2015, interest rates have jumped the most on current operating loans. In fact, interest rates on operating loans at commercial banks have increased from a low of 3.5% in the fourth quarter of 2015, to 4.9% in the first quarter of 2018. This increase for operating loans is notable, as these loans comprise about 60% of the volume of new non-real estate farm loans.  

Interest Rates on Farm Loans

  • New loans are starting with higher interest rates. Few loans in the first quarter of 2018 were made at an interest rate of less than 4%. In 2015, more than 40% of farm loans used to finance non-real estate purchases were originated with an interest rate of less than 4%. In the first quarter of 2018, only 21% of non-real estate loans were originated with an interest rate less than 4%. About 22% of loans had an interest rate greater than 6%.

Interest Rates on New Loans

  • Today’s interest payments cost $15 per acre. Higher interest rates are increasing farmers’ cost of production, but only to a small degree. In 2015, the annual interest expense for a hypothetical Midwest farm operation specializing in corn production was about $12 per acre for its operating loans. Today, that cost is about $3 higher per acre. 

Interest Rate Expenses

  • The ratio of farm debt to income could challenge 1980s’ levels. Leverage in the farm sector is on the rise, due to a steady increase in outstanding farm debt and expectations of lower farm income. For 2018, USDA expects farm income to drop by 7%. If farm debt at commercial banks continues to rise at the average pace of the past four quarters, the ratio of farm debt to income would rise to 3 this year—the highest since 1983.

Radio of Farm Debt to U.S. Farm Income

  • Delinquency rates remain low. Regardless of the increases in farm debt, the clear majority of farmers are still paying off their loans. In the fourth quarter of 2017, delinquency rates on both farm real estate and non-real estate loans dropped to slightly less than 2%.

 

  • Continued interest rate increases could pull down farmland values. Overall, farmland values are steady in most of the Midwest and Plains. While some areas are seeing softer values, other areas are increasing. Yet, interest rates on farm real estate loans increased in all regions in the fourth quarter of 2017. Although the increases have been minute, additional increases could put downward pressure on farmland values—which may have a more significant effect on farm finances than interest expenses directly.

Farmland Values

While interest rate increases have been minimal, $250 in most cases, they are adding to pile of expenses farmers are already learning to cope with, says Tanner Ehmke an economist at CoBank. Read more: What's Going On With Interest Rates?

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