CoBank report: Steadily rising interest rates add stress to rural economy
As if farmers and the rural economy needed more economic stress — a recent analysis finds that steadily rising interest rates are creating more financial burdens among farmers and their communities. Federal Reserve Chairman Jerome Powell told lawmakers last week that the Fed’s policy, as expected, is one that will continue to raise interest rates.
Following years of historically low interest rates and “quantitative easing” programs, which funneled money into the monetary system, the Federal Reserve began bumping interest rates upward in 2015. As the Fed continues on a new path of monetary tightening and rising interest rates, the cost of borrowing money will be added to the expense side of the ledger in rural America.
In a regularly scheduled report to Congress on July 17, Powell said that the economy’s good performance allows the Fed to reduce the measures it had been using to boost the economy during the financial meltdown and the Great Recession.
The Fed has already raised interest rates twice this year and Powell’s report left little doubt that the central bank would go forward with its plan to raise those rates two more times this year and probably several more times in 2019. Those rising interest rates will be another challenge for rural America, according to a report from CoBank, a member of the Farm Credit System.
That report noted that this higher interest expense will be added to other costly burdens “such as higher steel and aluminum prices, higher labor costs, and rising fuel and transportation costs.” Currently farm commodity prices are also being adversely affected by a tariff war and shuttered markets in foreign countries.
In his comments to the Senate Banking Committee, the Fed Chairman said that the economy is humming along and unemployment is low, but when pressed by Senators, he said the tariff and trade war runs the risk of dampening the overall economy and slowing growth if it continues for too long or if it results in permanently closed markets for U.S. goods.
As the economy stands now, he noted, inflation is at about 2 percent — the targeted rate for Fed calculations. Powell said that trade issues were one of the wild cards that could change the Fed’s projected policies.
As interest rates rise, it will become an additional burden affecting farmers’ operating loans and land purchases, the report noted. CoBank’s “Knowledge Exchange Division” which published the report – “Rising Interest Rates Will Add to Inflationary Stress on Agriculture and Rural America” – noted that the collective balance sheet of rural America will be the largest consideration related to higher interest rates.
Tanner Ehmke, manager of the Knowledge Exchange Division, said rising interest rates could have a significant impact on local land values. A 10 to 15 percent drop in real estate values would push farm debt-to-asset ratio to around 14 percent which is still manageable compared to the Farm Crisis of the 1980s, but would still not be optimal, he said.
While interest rates continue to rise, the USDA is forecasting a debt-to-income ratio for American farmers that is up from last year and at a level that raises concerns, the report notes. Together the rising interest rates and concerning levels of farm debt-to-income ratio don’t paint a picture of improving conditions in rural agribusiness, Ehmke added.
Current projections for the agricultural economy indicate rising costs, but the report shows that collectively, the agricultural industry should have the capacity to service its debt in the near term.
The analysts warn that farmland values and debt vary widely by location and sector within agriculture. Some industries have been hit harder by lower agricultural commodity prices and will see more pressure than others in an environment featuring rising interest rates. The Corn Belt and Northern Plains regions, for instance, will experience greater stress than the Pacific and Northwest regions, the report noted.
Individual farms and agribusinesses with higher debt levels, increased leverage, more short-term and variable-rate loans versus fixed-rate debt, or those with a need for larger operating loans will face more financial stress as interest rates rise, the report notes.
Headquartered near Denver, CoBank is a $133 billion cooperative bank serving rural America by providing provides loans, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. CoBank also serves as banker to Farm Credit associations serving farmers and other rural borrowers in 23 states around the country.