In 2022, the average interest rates on farm loans skyrocketed from record lows at the beginning of the year to decade highs by December.
While that jump is remarkable and expected to continue, a little perspective is needed.
Here’s a look at the interest rates by loan type, courtesy of the Federal Reserve Bank of Kansas City:
To end 2022, average interest rates on all types of loans were more than 100 basis points higher than the previous quarter, marking the third consecutive quarter of sharp rate hikes. As such, interest rates on farm loans reached the highest levels since 2007.
“The increase in interest rates for farm operating loans from a year ago is financially equivalent to a yield cut of about 2.5 bu. per acre for a relatively average corn farmer in the Midwest,” shares Nathan Kauffman, Federal Reserve Bank of Kansas City vice president, economist and Omaha branch executive. “Not trivial, but also not severe.”
The increase in interest rates for farm operating loans from a year ago is financially equivalent to a yield cut of about 2.5 bushels per acre for a relatively average corn farmer in the Midwest. Not trivial, but also not severe.
— Nate Kauffman (@N_Kauffman) February 16, 2023
For perspective, look at this historical chart above showing the ratio of interest expense to farm earnings. Even with a 39% increase in interest expense in 2022, the ratio of interest expense to farm earnings remains well below historical averages.
“This ratio essentially shows how much of every take home dollar gets eaten up by interest expense,” says Jackson Takach, chief economist for Farmer Mac. “In 1983, farmers and ranchers spent nearly 35¢ of every dollar earned farming on interest. Today, that figure is approximately 12¢, below the 60-year average of 15¢.”
when the ratio hits 25¢, Takach says, farmers are under financial stress. As such, he says, both farm earnings and assets appear healthy enough to absorb a reasonably volatile interest rate environment for the near future. Read more in The Feed by Farmer Mac.
Interest Rate Expenses for 2023
For this year, interest expenses are predicted to jump 22.4% from 2022, says Carrie Litkowski, senior economist in the farm income team at USDA’s Economic Research Service. She shared the data as part of USDA’s 2023 Agricultural Outlook Forum.
“This chart compares expenses by major category or item from 2021 to the 2023 forecast,” Litkowski says. “Above the line are those items where we expect spending to increase and then below where we expect spending to decrease. At the very top: interest expenses. They are expected to see the largest dollar increase.”
Time to Negotiate Rates?
With higher interest rates the new norm, it’s time to assess your debt structure and interest rate risk. Once you run your numbers, you might want to discuss a lower interest rate with your lender. To have negotiation success, you first need to understand the process, says Ashley Arrington, director of real estate for Ag Resource Management.
Each bank sets its own rate, taking competition into consideration. The prime rate is the interest rate banks use as a basis to set rates for loans and lines of credit. For instance, if your loan has a variable interest rate of “prime plus 3” and the prime rate is 3.25%, your loan will have an interest rate of 6.25%.
“You want to ask how much your loan rate is above the prime rate, as in plus 1 or plus 3,” she says. “At prime, the bank is making money and there’s wiggle room. Your lender can do a rate matrix to determine a rate for you based on variables.”
Understand, not all bankers have authority to offer you a lower rate, Arrington says: “If your loan officer tells you they have to ask someone, don’t take that as a no, they truly do have to ask somebody.”
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