Unease remains over farm economy due to interest rates, inflation and unknown
In order to address rising inflation, the Federal Reserve introduced the first increase in interest rates for the first time in three years.
At this time, interest rates are only going up by .25%, however, rates are set to climb throughout 2022 reaching about 2% in total increases.
According to Ty Rohloff, Senior Food and Agribusiness Lending Manager for Compeer Financial, "This is a very minimal increase on the front end for short-term debt. Variable rates saw their first increase in several years. While a 25 basis point move is rather small, it’s possible the other six rate hikes over the rest of 2022 may present a much bigger impact."
Longer term fixed rates have also moved upwards and on a shorter timetable than most thought. Rohloff says, "Now the concern moves to an inverted yield curve and what that has historically indicated – a recession is on the horizon. There has been discussion about rates rising for several years and it appears that it is finally coming to fruition."
However, if you are looking at longer term loans, the increase will not make that big of an impact," Todd Van Hoose, Farm Credit Council President and CEO, said when interviewed for Agri-Pulse Newsmakers. "We remain in an era of historically low interest rates, so it is still a great time to invest in agriculture."
Uneasiness over inflation
Inflation is actually a much bigger concern for farmers than interest rates at the moment, Van Hoose said, as well as availability of inputs. Also in consideration, Rohloff says, are the affects that inflation has on rising land prices. "We’ve watched land values rise over time, but the pace and levels that they have moved over the last two years is extremely substantial. And, considering high demand, a tight supply and strong commodity prices, I would expect values to continue moving higher over the next year."
In order to minimize losses due to inflation, Rohloff says he tries to encourage and educate borrowers about risk management. "Farming is a complex operation, but overall most things in the agricultural production and processing cycle can be managed. There are a lot of tools to help manage rising costs, using crop insurance for example. The producer or processor needs to understand their costs, how they’re going to manage their risk and what their margin looks like."
Other economic impacts
Despite the fact that commodity prices remain high, all aspects of crop production are up as well, including fertilizer, chemicals, land rents and land values. Strong commodity prices this year will certainly help offset higher costs, but uncertainty over what lies ahead in 2023 causes apprehension over investments.
"There is so much variability in many areas of agriculture, but it’s the future that makes some nervous, not to mention the impacts of the geopolitical issues in Ukraine, Rohloff says."
There is still good news however, as Van Hoose says, "There is still optimism from young people in agriculture. We are still seeing demand to enter the ag industry and that is a positive for everyone."
Rohloff adds, "Encouraging folks to invest in agriculture is certainly a focus and there are a variety of programs in place to assist in that process. We love to see the enthusiasm of young people entering production agriculture and try to assist them in any way we can."