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MN FED: Higher Interest Rates Especially Hard on Smaller Producers

Rising interest rates are making things more challenging in agriculture, which is already a difficult way to make a living. Tate Berg, senior agricultural coordinator with the Minneapolis Federal Reserve, says interest rates have climbed rapidly during the past year.

“Interest rates vary depending on the loan purpose and the loan term, and then some other factors as well,” according to Berg. “Farmers do use operating money to help fund annual operating expenses. And the interest rate can vary, but what we’re seeing now ranges from eight percent to ten percent. Historically, that’s close to the long-term average. However, when you take a look back at even a year ago, even two years ago, that’s increased about four percent or 400 basis points, so that’s a pretty significant shock. And one way to put it is the interest rates have doubled.”

Conversations between a producer and ag banker are going to be a little more uncomfortable since last year.

Berg says, “At loan renewal time, when ag producers are sitting down with their banker, two years ago might have heard four-and-a-half percent interest rate for the operating loan, while this year, they might have heard eight-and-a-half to nine-and-a-half percent.”

They recently did a study that showed how interest rates were hitting smaller producers harder than larger ones. “We did some research here at the Fed recently, and we took a look at how the smaller producers versus larger ones have different operating costs, different interest expense costs, and what we found is that the smaller producers are generally the least-profitable producer,” Berg said. “And what we saw is that they pay up to two-and-a-half times more in interest expense than the most profitable producers. That’s about ten percent of the crop that goes to interest expenses per year.”

If the high interest rates continue, it will negatively impact the overall farm economy according to Berg.

He says, “The long-term implications of elevated interest rates are if we see any continued longer-term financial weakening of the producer – so for example, several years of really tight cash flow and really tight margins – we could also see some farm asset value adjustments. For example, farmland values could decrease, and farmers also thinking about okay, what really is the value of that capital improvement that I thought about doing? Do I need to do that, or do I want to do that? That type of analysis and second thinking about that investment can really slow down the egg economy.”

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