Rising Interest Rates and the Ag Economy

As macroeconomic conditions worsen, farmers and the broader agricultural sector are beginning to feel the effects of rising interest rates and inflation. The “Farmer Sentiment” barometer is a survey conducted by Purdue University with agricultural producers across the United States. Results are released monthly, intended to gauge the attitudes of farmers and agribusiness leaders on the status of the economy. The results for September 2022 indicate a rating of 112, which is down 12 points from 124 in September 2021.

As the general attitude of the collective agricultural economy shifts, producers and others within the industry must look for strategies to mitigate the impending losses. But what drives these fears? One of the biggest drivers of increased costs for producers and businesses within the sector are rising interest rates. Rising rates on operating loans, term loans and even equipment financing are forcing individuals and businesses to make hard decisions on inputs and capital projects. Twenty-three percent of respondents to the above Purdue University survey indicated that rising interest rates are among their number one concern.

Current Challenges

Although the rising rates are not yet to the point of an industry-wide crisis, substantial increases in short-term rates are likely to create liquidity issues for a number of producers and ancillary businesses within the agricultural sector. As rates rise, operational costs for producers rise with them. Although some of this is mitigated with the relatively strong prices of key commodities over the last year, it is a concern that a future drop in commodity prices will not be accompanied by a drop in rates.

Addressing these Challenges

As rates rise and profit margins tighten, working capital constraints and liquidity issues are certain to affect both large and small operations within the agricultural sector. In the coming months, it will be important for producers and businesses to have an ongoing dialogue with their lenders. It will be vital to have conversations with lenders regarding expected working capital needs, reassessing financial covenants and the ability to refinance long-term debt. Producers should especially be proactive in discussions with their lenders in order to be certain that, in the short term, they will have adequate financing for working capital and operational needs.

Ultimately, businesses and producers need to be realistic in the upcoming months. It is very likely that higher rates and rising costs are here to stay for some time. The healthy margins that producers and businesses have experienced the last few years are likely to soon shrink up. However, most individuals and businesses are in a position to weather the storm. According to Zachary Carpenter, Executive Vice President at Farmer Mac Magazine, “The total sector debt-to-asset ratio has averaged 10-15% since the early 2000s, compared to 15-23% during the farm financial crisis.” Even with this stronger industry-wide financial position, it will be critical for individuals and business to plan properly for the upcoming months.

Borrowing & Financing Best Practice

In the near term, it will be necessary to limit borrowing as much as possible. Producers who rely on short-term financing for operating expenses should speak with their lenders and look to enter into fixed rate financing when possible. In addition, it would be beneficial for any long-term financing used for equipment and capital projects to also be at a fixed rate. Producers and agricultural sector businesses alike would be wise to consult with their accountants in order to utilize planning strategies that can limit the tax burdens, in a time when cash flow and liquidity are already concerns.

Although it is true that the path ahead for farmers and the agricultural sector as a whole is going to be a tough one, with the right planning strategy and assistance from valuable business partners, it is another challenge that can be overcome.