The Federal Reserve announced its decision to keep interest rates unchanged on Wednesday, while also signaling two more rate hikes are likely yet this year. As the U.S. central bank continues to adjust its plan to fight inflation, farmers are dealing with interest costs that have doubled year-over-year.
Wednesday’s interest rate decision broke a streak of 10 straight meetings where the Fed announced an interest rate hike. During the two-day meeting, officials said another half-a-percentage-point hike is likely before the end of the year. The decision to pause the rate hikes this month was due to a slower decline in inflation, but also a stronger-than-expected economy.
More hikes or not, Scott Rueff, regional vice president over the north region for Ag Resource Management (ARM), says increased interest rates are having a heavy impact on operating costs today.
“We don’t have crystal balls as to what the interest rate environment is going to do in the next 12 to 18 months, but what we do know is from February of 2022 to today, we’ve seen a 500-basis-point rise in interest rates. What does that mean for the farmer? They are used to having prime at 3.25% for the last 10 years. Today, prime is at 8.25%.”
He says with a 5 percentage-point hike in rates, farmers need to evaluate the impact interest costs will have on their operations.
“What we know is that their interest cost is going to double year-over-year, and that can put significant pressure on an operation,” Rueff says. “A farmer needs to look at what the interest cost is for their operation versus what their gross income is. And really, they’ve been able to kind of build debt and not have to worry about that in recent years, and that may come back to hurt them a little bit at the end of the year.”
A Look at the 1980s
Farmers are dealing with 8.25% prime rates today, which are high for recent history. But a historical look back shows the highest prime rate was 21.5%. Rates hit the record on December 19, 1980.
Today’s prime rate is a long way from the 21.5% in 1980, but Rueff points out there are also other differences today allowing farmers to be in a better financial position than what farmers faced in the 1980s.
“I think today’s a little bit of a different environment. We’ve got government support that we didn’t have back in the ‘80s to really help these farmers who certainly are going to feel that pressure,” Rueff says. “I think there’s some institutional and outside money that I think can help keep land values propped up and help keep the market in general from getting to where we were in the ‘80s.”
While Rueff doesn’t think farmers will see a repeat of the 1980s, he says there are some valuable lessons farmers can take away from such a challenging time in agriculture.
“Buckle down, know what’s going to happen, do some research over the next 12 to 18 months, really get a good grasp of your operation in terms of the financial side, the budget side, and I think that’ll help as we navigate this,” he says. “Agriculture has cycles, and we’re potentially coming into one of those cycles.”
Rueff says it’s extremely important farmers know their bottom line, including calculating the true cost of production.
“Really know your cost of operation. That’s one of the things we see when folks do have some financial troubles or some stress is that they really don’t know their true cost of production,” Rueff says. “If they can learn that early on in their career, and really understand that, the sky is the limit for them.”
So, what is the biggest mistake some farmers make when estimating their true cost of production? Rueff says it often centers around calculating production and yields.
“One is overvaluing their ability to produce a crop and really understanding from a true basis what their actual production history, or APH, is,” he says. “Somebody may say they raised 230-bushel [per acre] corn, but history may tell me that farm only raises 185 [bu. per acre]. Budget toward what you know your farm produces, not what you think it’s going to produce, and you’re going to be OK.”
