The Federal Reserve is fulfilling a widely-expected move, raising its benchmark interest rate on Wednesday.
This hike is the second in three months, and the Fed is signaling more hikes could be coming. It increased the short-term rate by a quarter point.
“The economy continues to expand at a moderate pace,” said Janet Yellen, Federal Reserve chair. “Solid income gains in relatively high levels of consumer sentiment and wealth have supported household spending growth. Business sentiment is at favorable levels.”
Rising interest rates will change the dynamic of the farm economy as the cost of borrowing money starts to increase. Economists, bankers and analysts are saying now is the time to pay attention.
“We’re seeing more farmers come in for operating loans, and we’re seeing operating loans a little bit larger,” said Bill Johnson, president and CEO of Farm Credit Mid America.
More borrowing means more exposure to interest rate expenses.
“Farmers are particularly conservative and a lot of them have fixed rates,” said Matthew Monteiro, vice president of finance with Farm Credit Mid America. “A lot of them are going into this environment very well prepared, and they’ve also paid down some of their loans.”
Some producers are more vulnerable than others, such as existing farmers ready to expand or younger farmers just starting. Those with fewer assets and more debt are getting a careful eye.
“A producer that’s younger is not accustomed to seeing higher interest rates,” said Charlie McConnell, senior vice president of Farm Credit of Western Arkansas. “It’s going to be very interesting to feel out what their cash flows, what their margins that they’ve budgeted for can handle in terms of interest rates.”
Bankers say rolling to fixed rates might be an option.
“That protects you against that element of risk going forward and that’s an important part, especially if someone is highly leveraged,” said Johnson. “Interest expense is a pretty big piece of overall operating expenses.”
How many rate hikes and how high they will increase is still up for debate.
“It won’t move up fast enough or high enough to have an impact, but you can see why they would do that,” said Andy Shissler of S&W Trading. “There’s so much money flowing into the U.S. We’ve blown every high out forever and it’s so overheated—it looks like a disaster waiting to happen.”