Rising Interest Rates Will Add to Inflationary Stress in Agriculture

May 2018 - Tanner Ehmke

Key Points

  • Rising interest rates are adding to the cost burden of the agricultural economy, which is already struggling with other rising costs including labor, transportation, fuel, and raw materials for infrastructure.
  • The Federal Reserve’s plan to continue raising short-term interest rates is increasing the interest expense for farmers and other rural businesses such as agribusinesses and utilities.
  • The gradual rise in interest rates will discourage farmers from leveraging farmland purchases with long-term debt, which is likely to result in softer farmland values. However, rising interest expense on non-real estate debt like operating loans will likely accelerate and add cost pressure on farmers’ ability to operate.
    Farm Sector Debt
  • With farmland accounting for about 83 percent of farmers’ net worth, further drops in land values will add stress to farmers’ balance sheets. The diversity of agriculture, though, will keep the stress mostly a regional issue.
  • USDA forecasts farmers’ debt-to-income ratio at 6.5x for 2018, up from last year’s level of 6.0x, hinting at more financial stress to come at the farm level.

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