Fed raises interest rates, adding to farmers’ costs

In a year full of rising costs, farmers face another growing expense: their loan payments.

The Federal Reserve raised interest rates by a quarter percentage point last week — the first hike in more than three years. The decision comes as inflation remains above the Fed’s 2 percent target.

The raise likely won’t affect many of the land and equipment loans farmers typically get. Farm business management instructor at South Central College Pam Uhlenkamp said those loans often have fixed interest rates over multiple years.

The bigger problem, she said, lies with operating loans for daily expenses such as feed, seeds and crop insurance.

“Those are only one-year loans, so we renew them every single year,” said Uhlenkamp. “They are subject to whatever those interest rate changes [are].”

She adds farmers will likely feel the effects of the rate hike next month and when they renew their loans for next year. The bump may not be financially detrimental if one looks at the big picture, Uhlenkamp said, but it still makes a difference.

“What happens is the cost to produce a bushel of corn goes up because we have higher fertilizer costs, higher fuel costs, which means now we need to borrow more off our operating note just to operate,” said Uhlenkamp. “Then that trickles down into if we have to borrow more, plus the interest rate is higher, it compounds our interest.”

The rate hike also presents a dilemma for farmers. Bryon Parman, an agricultural finance specialist at North Dakota State University, said farmers often pay off their annual operating loans with revenue from crop sales. But farmers could opt to instead store their crops and sell them later at a better price.

“If I’m holding it with an operating loan sitting out there at, let’s say 7 percent interest, that’s what it’s costing me every month that I don’t sell and pay off that note, because you’ve got that loan sitting out there,” said Parman.

The Federal Open Market Committee, which votes on interest rate changes, has another two meetings this year.

“A lot of the market is thinking that there might be another quarter of a percent increase before the end of the year,” Parman said. “The increase that we just experienced, plus the possibility of that one, if it does indeed occur, that’s probably going to have an impact then on operating loans into next year, or any new equipment purchases or land loans.”