Farmers continue to feel the sting of high interest rates

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The Federal Reserve did not cut interest rates at their meeting in January, which was unsurprising to those who had been keeping a close eye on the markets. But there were some people holding out hope that those rates might dip.

“There were some who were hoping for it,” said Bryon Parman, North Dakota State University Extension agricultural finance specialist.

For farmers, the Fed’s decision is impacting short-term loans or operating loans. Parman said that while there are many farmers who have locked in a lower rate on land loans, the operating loans are another story.

Meanwhile younger farmers have had to navigate these unfavorable interest waters, forcing many to make decisions on if they should buy a piece of equipment or attempt to expand their budding operation.

“Your equipment loans and your operating loans, those are being impacted by interest rates, really, for the first time since the previous 10 to 12 years. Before that, rates were so low that interest was not a real big factor in determining, should I borrow, should I expand, should I do any of this stuff? But now it’s becoming a real, actual cost, not just a small rounding error in the budgets,” Parman said.

But interest rates are not the only thing that has risen in the ag industry. Farmers are also feeling the pain of rising input costs.

“You get to six, seven and a half percent, though that’s starting to be real, especially when you consider how much production costs have increased over the last three or four years, going up 30, 40% for certain items,” Parman said.

The Fed has a March meeting where Parman guesses the interest rates will not be cut. He expects there will be some big changes taking place at the Fed’s May meeting. The Fed’s chair, Jerome Powell, will be stepping down as his term ends.

While the federal fund rates get lots of attention, the Fed’s balance sheet does not get the same fanfare. It is equally important to monitor, according to Parman. While the federal fund rate is typically used more to influence short-term interest rates, the balance sheet is more influential on longer-term rates.

“We went through a round after COVID of quantitative easing, where the Fed was buying a lot of mortgage-backed securities and treasuries and things like that, increasing that balance sheet, which helped keep longer-term rates lower. Then, around the time that they started hiking the federal funds rate, some quantitative tightening started to happen,” he said. “The quantitative tightening period kind of ended in December &mldr; but they’ve adjusted things and gone back to some more bond buying and things like that. So we’ll see how that shakes out.”

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